French wealth tax (ISF and IFI) explained to non-residents

As non-residents, are you liable to the french wealth tax?

Yes, the non-resident private individuals are liable to french wealth tax for their movable and immovable properties located in France (owned directly or indirectly).

Caution: It is always appropriate to refer to the Tax Agreements which may stipulate different disposals. (Contact us to obtain any tax agreement)

Are there exceptions?

Yes, some properties are exempted from the wealth tax. For example:

• Properties used within the framework of a professional activity (main activity),
• Woods, forests and rural properties (with the commitment of doing business),
• Works of art and antiques,
• Industrial or intellectual property rights,
• Income similar to retirement pension,

Peculiarity for non-residents in France: The non-residents are also exempt from wealth tax for their financial investments in France: demand or fixed-term deposits in euros or foreign currencies, shares, bonds, warrants and securities, life insurance contracts subscribed with French companies…

What is the tax threshold?

In 2017, The wealth tax is due from the moment that the net taxable value of the assets located in France exceed 1,3 Million Euros on 1^st January of the taxation year.

Some debts and expenses are deductible, for example: property tax (taxe foncière), local residence tax (taxe d’habitation), income tax, theoretical wealth tax, etc…

Then the following scale is applied:

French Wealth Tax Threshold in 2017

Even if the taxation threshold is actually at 1,3 Million Euros, the tax scale starts at  800.000 Euros.

Example:

Mister Jones has a villa in France, the value of which is of 2,4 Million Euros. In 2016, he paid the local residence tax 1400 Euros and the property tax 2200 Euros.

Net taxable assets = 2.400.000 Euros – 1400 – 2200 = 2.396.400 Euros

Calculation of the theoretical Wealth Tax = (1.300.000 -800.000) x0.5% + (2.396.400 -1.300.000) x 0.7% = 10.175 Euros

Recalculation of the net taxable assets = 2.396.400 – 10.175 = 2.386.225 Euros

Definitive calculation of the Wealth Tax = 10.104 Euros

Are there some tax reliefs or tax cuts which non-residents could benefit from?

Indeed, there are some tips which could allow you reducing your taxation, for example:

• If you rent your property in France (furnished or unfurnished lettings), you can apply a discount rate of 10 to 20 % on property value.
• If you invest in the capital of an unlisted Small or Medium-size Enterprise: tax cut equal to 50% of the invested capital (tax cut limited to 45.000 Euros)

What is the procedure of filling in the forms and paying the wealth tax for a non-resident?

The Wealth Tax must be declared and paid spontaneously by the taxpayer; you will not receive any tax notice.

• If you are liable to income tax in France, the Wealth Tax will be reported on the same declaration: declaration and payment on 16 or 30 June according to your country of residence.
• If you are not liable to income tax in France, the Wealth Tax will have to be declared at the latest on the 15^th of July for the European residents and on the 1^st of September for the residents domiciled outside of Europe.

Tax authorities’ intervention period, delayed interests and charges

Intervention period:

In the event that the tax authorities find out that there is inadequacy in declaration, its intervention period runs until the 31^st of December of the third year following the taxation year.

In the absence of declaration, the intervention period of the tax administration runs until the 31^st of December of the sixth year following the taxation year.

Late charges :

• 10% of late charges if you declare the tax within less than 30 days after receipt of the tax administration’s formal demand.
• 40% of late charges after this deadline.

Delayed interests: 0,4% of interests for each month of delay.

From the ISF to the IFI

The draft law of finance for 2018 is currently under discussion at the National Assembly, but the flagship measure of President Macron has already been voted on Friday, October 20. What will this reform bring? What is the new perimeter of this tax? Here we discuss in detail the new aspects of the IFI, the “Tax on Real Estate Fortune“:

Taxable assets:

The new wealth tax is reoriented to cover only real estate assets. Thus, the tax base will be constituted of the following:

• All properties and real estate rights;
• Parts or shares of companies or organizations (established in France or abroad) held by the taxable person, for the fraction of their value representing property or real estate rights held directly or indirectly by this entity.

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.

Principal or main residence: No change, taxpayers can still apply a 30% discount on the market value of their principal residence.

Professional property: premises used for the taxpayer’s main professional activity remain exempt from the wealth tax. Regarding the goods used in the context of a furnished rental activity, the exemption remains applicable subject to fulfill the criteria of the LMP regime: the lessor is registered with the trade and companies register, annual revenues are greater than 23.000 € , and the tax household holds through this activity more than 50% of its income taxed in the categories salary and wages, industrial and commercial profits, agricultural profits, non-commercial profits, revenues of managers and associates referred to in Article 62, or in other words, more than 50% of their professional income.

Wood and forests: the partial exemption applicable to these goods is maintained (75%).

Deductible liabilities

The draft budget bill brings some novelties in terms of deductibility of debts.

Before the reform, the deductibility rules were simple: the debts had to exist on January 1st of the taxation year, they had to be chargeable to the taxpayer and be justified by all means compatible with the written procedure. With the introduction of the IFI, only certain debts will be deductible:

Expenditures taken into account: only debts related to the acquisition of property, repair, maintenance and improvement expenses, construction, reconstruction or enlargement of the property will be deductible.

Tax debts: From now on, only the tax debts relating to the properties will be deductible.

“in fine” loans: The subscription of loan repayable at once at the end of the contract was a practice commonly used to reduce the tax base to the wealth tax. This scheme allowed the taxpayer to ensure the deductibility of fixed-rate debt for the duration of the loan. Henceforth, these debts will be deductible only up to the total amount of the loan less a prorated amount taking into account the number of years passed over the total number of years of the loan.

Debts contracted in the family circle: Debts contracted directly or indirectly (that is through intermediary companies) from the debtor, his / her spouse or known partner, his / her partner of PACS or minor children are not deductible anymore.

Debts contracted directly or indirectly with an ascendant, descendant (except minor children), brother / sister are no longer deductible EXCEPT if the taxpayer justifies the normal nature of the transaction (loan made at market conditions).

Limitation beyond 5 million euros of assets: when the value of taxable assets exceeds 5 million euros and the amount of debts admitted as deduction exceeds 60% of this value, the portion of debt exceeding 60 % is only deductible for half of its value.

Calculation of the tax:

Tax threshold: no change, the tax threshold will be 1.3 million euros (net asset value).

Scale: again, no revaluation of the scale is planned compared to the ISF.

Tax reductions: Only the tax reduction for donations would be retained (75% of donations up to € 50,000). The “Dutreil-ISF” scheme and the reduction in favor of investment in SME’s capital have been abolished.

We are at your disposal for any questions on the subject.

Trust in professionals: Roche & Cie, a specialist advisor to non-residents

Our team composed by experimented staff (accountants, tax specialists, qualified notary) are accompanying you with the purchase/ the resale, the accounting and fiscal follow-up of your assets in France.

We can help you set up simple and cost-effective solutions to reduce the burden of the French tax system.