Cécile Schlub, Senior Associate at Maitland, discusses the new French wealth tax regime which applies to residential real estate. If French real estate is held through trust, corporate or other investment structures, non-resident owners should carry out a full review and note that wealth tax filings are due by end-May each year.
France has always been one of the most popular jurisdictions in the world for non-residents to invest in second homes. With French President Emmanuel Macon having delivered on his campaign pledge to eliminate the old wealth tax regime and with the creation of a new “wealth tax on real estate” regime, non-residents may well find themselves having to review their existing real estate holding and financing arrangements.
Wealth tax now limited to French real estate assets
With effect from 1 January 2018, the scope of the new French wealth tax is now strictly limited to residential real estate assets, including shares of companies which directly or indirectly own French real estate. This means that all other assets including luxury lifestyle assets such as art, cars, gold and yachts now fall outside the scope of wealth tax in France. This change effectively reduces the scope of application of wealth tax by more than half, and it is expected to boost investments in French businesses and other non-real estate assets.
The new wealth tax will kick in when the cumulative net market value of a person’s French real estate exceeds €1,300,000 on 1 January of any tax year. It will continue to apply on the net value of real estate assets above €800,000. The rates will still be progressive and range between 0.5% from €800,000 and 1.5% from €10,000,000 onwards.
Owning French real estate through a trust or corporate structure
Under the old regime, shares in a company owning French real estate were subject to wealth tax if:
• The market value of the underlying French real estate assets constituted less than 50% of the total market value of all underlying French assets; or
• A majority of the shares in the company were owned by members of the same family.
Under the new wealth tax regime, all shares held in companies which directly or indirectly hold French real estate are subject to French wealth tax pro rata to the value of the shares which is attributable to French real estate, subject always to the €1,300,000 de minimis threshold.
This is a significant departure from the old regime and may have the effect of bringing some non-residents within the scope of French wealth tax if they hold shares in companies whose assets are in minority made of French real estate of significant value. In cases where French real estate is owned indirectly through corporate or trust structures, it will be important to review underlying investments and identify any French real estate assets held.
This is a significant departure from the old regime and may have the effect of bringing some non-residents within the scope of French wealth tax …
Important changes in the rules on deduction of debts
The new law imposes restrictions on debts contracted from 2018 which can be deducted from the market value of the French real estate in order to determine their wealth tax value.
Firstly, in order to qualify for deduction, debts must have been contracted to acquire French real estate, or for the purpose of its repair, maintenance or improvement. Only debts taken on arm’s length terms may be deducted, and therefore loans directly or indirectly given by family members or corporate structures belonging to family members may not qualify for deduction. The debt does not need to be in the form of a bank loan, or secured by a mortgage over the French real estate to qualify for deduction.
Secondly, whereas the full outstanding amount of loan capital and interest could previously be deducted in full each year from the taxable market value of French assets, deductible term loans will now be subject to annual amortisation based on a complex formula.
Finally, when the market value of the French real estate exceeds €5,000,000, and the amount of debt exceeds 60% of such value, only 50% of the portion of debt above the 60% will be deductible for the purpose of calculating of the French real estate’s net market value. Debts will however be fully deductible if the tax payer can prove that the reason for the debt was not primarily tax reduction.
Where the taxpayer can show that the debt was not taken for tax purposes, these limits do not apply and debts are fully deductible from the market value of the real estate.
Double tax treaties
The extent to which the new wealth tax regime applies to non-French residents will vary subject to the application of a double tax treaty between France and the taxpayer’s country of residence which includes specific provisions on wealth tax.
The extent to which the new wealth tax regime applies to non-French residents will vary subject to the application of a double tax treaty between France and the taxpayer’s country of residence.
In cases where no double tax treaties apply, then the wealth tax burden may increase because of the new rules on indirect ownership, as explained above.
In other cases, double tax treaty provisions may significantly reduce the scope of the new rules. For example, the application of the new rules may be limited where a French property is owned through a chain of interposed companies, which are not predominantly real estate companies.
In many cases where French real estate is held through trust, corporate or other investment structures, owners need to carry out a full review to identify the real estate assets held, as well as their aggregate market value, and consider how much debt can be deducted under the new rules for wealth tax purposes.
Wealth tax filings for non-residents are due at the end of May each year.
Thanks to Gilles Cervoni, Consultant, for contributing expert advice on this article.
For more information, please contact
Cécile Schlub: +377 97 97 31 88 / firstname.lastname@example.org
Gilles Cervoni: +336 12 71 80 86 / email@example.com