The wealth tax substituted by the real-estate tax in France

THE WEALTH TAX SUBSTITUTED BY THE WEALTH REAL-ESTATE TAX IN FRANCE

The 2018 French Financial law has changed the taxation of wealth for all real estate whatever the form of ownership except if used for professional purposes. The real estate is defined as all properties and real estate rights as well shares companies or organizations representing real estate.

Liability condition remain the same: the property net value has to exceed 1.3 M€ and tax will be calculated from 800 000 € amount. Scale is unchanged starting from 0.5% up to 1.5 % (assets over 10M€).

French tax residents will bear this tax on all their assets or real estate rights held in France or abroad. For non-residents, the wealth tax will only cover their real estate located in France.

SOME NEW DEDUCTION RULES MAKE A BIG DIFFERENCE:

This new tax called estate wealth tax targets non-residents who own property in France owned either directly or indirectly by foreign entities. As such, new liabilities deduction rules are going to apply especially to foreign tax residents.

WHAT IS THE TAXABLE PROPERTY

The property tax base is constituted by the net value on January 1 of the year:

  1. Of all property and property rights: The calculation of assets held in France is done by considering real estate held directly (real estate regardless of their mode of ownership) and indirectly (fraction of the value of shares or shares of companies corresponding to real estate assets).

Market value of the property at 01/01/2018 – Debts (loans, reparation expenses, Property tax) = Net value

  1. Units or shares of companies and organizations established in France or outside France, for the fraction of their value representing real estate assets or rights held directly or indirectly by the company or body. For the valuation of units/shares, it will be taxable to the IFI only for the representative fraction of real estate assets or rights held directly or indirectly by the company so the below will be used:

Units/shares Market values x (Real market value of the taxable real estate held by the Company / Real market value of all assets held by the company)                                               

LIMITATION OF DEDUCTIBLE DEBTS

1)Direct ownership

Exclusion of certain tax not directly linked to the property owned (Occupancy tax, Income tax).

Exclusion of “Self- bank loan” or “Family loan” (directly or indirectly).

Exclusion of Bullet Loans (also called « In Fine » or « Lombard »)  permitting to repay the capital at the end of the contract would not allow the same deduction anymore. The liability amount deductible will be reduced each year by a fraction of the total amount.

  • Calculation details:

(Total loan amount * number of years since the loan payment) Loan total number of years

For example: 2 M€ bullet loan took out in 2017 January for a period of 20 years. Deductible amount at the 1st of January 2018: 2M€ – 2M€ * 1/20 = 1.9M€ instead of 2M€. Deductible amount at the 1st of January 2028: 2M€-2M€ * 10/20 = 1M€ instead of 2M€

The purpose is to avoid people contracting bullet loans to reduce their taxable basis to real estate tax.

2)Shares valuation

When it comes to the valuation of the shares the following are not deductible:

Exclusion of certain family debts:

  • Loans contracted directly or indirectly through one or more companies or bodies interposed with the taxpayer or a member of his tax household;
  • Loans contracted directly or indirectly through one or more companies or interposed organizations from a member of the taxpayer’s family group (other than a member of the tax household;
  • Loans contracted by the taxpayer or a member of his tax home to a controlled company.

As such, to summarize, for real estate Company (“SCI”) eligible to the IFI, the valuation of the share changes and the below debts will not be deductible:

  • Shareholder’s account as well as refinancing loan of shareholder’s account is not deductible;
  • Debts/loans between family members;
  • Debts/loans contracted by the taxpayer to a controlled company;

3)Deduction ceiling for large patrimonies

When the value of properties and real estate rights as well shares companies or organizations representing real estate exceeds 5M€ and the total personal liability deductible amount is higher than 60% of this value, the deductible amount allowed is reduced to 50% of the surplus.

  • For example: a real estate property estimated 8M€ and 6.5M€ outstanding capital, the deductible amount of liability would be 5.65M€ instead of 6.5M€ with current rules (calculation details: 4.8M€ (60% x 8M€) + 850 K€ [(6.5M€ – 4.8M€)/2]).

Please note that this is a general study and a tax specialist muste be consulted to provide with a specific approach applicable to your cas.

We remain at your service if you have any questions, feel free to contact us!

 

The wealth tax substituted by the real-estate tax in France

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