May 2011
On May 11th 2011, the French Government announced their proposed changes to the French tax regime. Parliamentary
The proposed abolishment of wealth tax has been cancelled. However the threshold for those paying wealth tax will increase to €1.3 million compared with the previous threshold of €800,000.
Those falling below the new threshold of € 1.3 Million will no longer have to file a wealth tax return effective January 2011.
Under the new regime, the previous six rate bands will be simplified to just two. Those with assets between €1.3 million and €3 million will be subject to a tax of 0.25% and for those with assets over €3 million the tax will be 0.5%.
The deadline for payment of the wealth tax has been postponed to September 30th 2011. Exoneration is immediately applicable under €1.3 million, and existing rates are still to be applied for this year for those above the threshold.
The reform aims to simplify the French tax system. The government has done away with the complex regulations of the “Bouclier Fiscal” (tax shield), reduced the number of tax bands and simplified the filing requirements. This reform helps foreign investors who wish to purchase a property in France within the €800,000 to €1.3 million bracket. This is also advantageous for homeowners who have properties that are valued at more than €1.3 million. Previously, the tax rate was capped at 1.8%, whereas now it will be capped at 0.5%.
Also the draft law will no longer permit shareholders’ loans to an S.C.I. to be deductible for the purposes of wealth tax, effective 1st January 2012. Third party loans such as bank loans will still be deductible. We are waiting for t he finalisation of the law to advise clients whether they need to restrudcture their property holdings.
It is also suggested that the current tax based on three times the annual rental value of a property owned by residents of countries which do not have a tax treaty with France, is likely to be cancelled and replaced by a tax of 20% based on the cadastral rental value. It should be noted that the cadastral rental value would probably be much lower than the current tax base of three times the annual rental value. Certain exemptions will be applied but these have yet to be defined (i.e. exemptions for French residents leaving France). The introduction of this new tax is likely to be an advantage for residents of non-tax treaty countries wishing to invest in France, but represents an additional annual tax for other foreign investors. Also it remains to be seen whether the proposals comply with the EU’s criteria for non-discrimination for EU citizens.
Regarding inheritance tax, the rates of the two higher bands within the rate tables applicable for ‘asset transfer to children’ and ‘gifts between spouses’, will increase by five points. The new rates will now be 40% and 45% and the deadline for establishing the allowances of €159,325 per child and per parent has been extended from 6 to 10 years. Taxpayers will have to wait longer in order to receive a gift or legacy from family members if not wanting to be overtaxed, and all tax reductions bound to the age of the donor have been abolished. It should be remembered that there is still no inheritance tax between spouses.
The bill also affects other taxes. For example there could be an exit tax on unrealised capital gains for French residents leaving France. This exit tax of 19% would be due only if the capital gain is realised within eight years from departure.
Finally, the government announced the wish to more clearly define the rules applicable to trusts; both regarding wealth tax and inheritance tax. The use of trusts to either own a French property or for beneficiaries wishing to move to France have benefitted from interesting case law for several years. It however always implies a degree of legal uncertainly as no clear law has ever been adopted on the subject. It would be better if the government clarified these rules, whilst taking into consideration the economical and personal circumstances behind it. This would allow us to better advise our clients on the taxation of trusts in France, especially on patrimonial issues such as wealth tax, gift tax and inheritance tax.
For more information please contact Cecile Acolas , Clive Tucker or Jean –Luc Meoli at Email: property@moorestephens-mc.com or go to Moore Stephens’s Web site www.moorestephensmonaco.com
approval of this Act is expected in June/July 2011.