Real estate wealth tax: what is its impact on non-residents?
Overview of the main provisions
Beginning on 1 January 2018, the wealth tax (ISF) will be replaced by the real estate wealth tax (IFI). At first glance, this reform does not seem to have an impact on the taxation of non-residents, who were already exempt from paying the ISF on the majority of their financial investments. The IFI, however, does have some consequences on the estates of foreign residents.
The main features of the IFI are the following:
A new tax base – The main change is related to the tax base, which will from now on be the net value on 1 January of the real estate assets and rights located in France and owned directly or indirectly by the taxpayer. Indirect ownership may involve several companies, either French or foreign, provided that the real estate assets held in this chain of ownership are located in France. In this case, it is the portion of value of shares deemed to correspond to the real estate assets that will be taken into account.
Difficulty assessing securities – The different levels of intermediary companies can render the assessment of the value of taxable securities very difficult. From now on, the foreign resident will have to carry out a methodical assessment of his or her shares by determining the nature of the assets (French real estate or other assets) held by the companies in question. If the taxpayer does not have access to the information enabling him or her to assess the taxable portion of his or her securities, a concession mechanism is introduced, which provides for an exemption if the taxpayer directly or indirectly holds less than 10% of the capital of the owning company. This good faith clause must however be used carefully, as it could be challenged by the authorities should it be abused.
Exempted assets – The exempted assets include real estate used by the taxpayer for professional activities, as well as real estate assets not used for professional purposes but included in the less than 10% interest in operating companies. The exemption also applies to shares in listed real estate companies that represent less than 5% of these companies’ capital. It would therefore be advantageous for a taxpayer who wishes to invest in companies that have real estate assets to acquire a small interest in these companies and diversify his or her investment.
Deductible debts – Not all the debts related to the taxable real property assets may be deducted from the taxable basis of the non-resident taxpayer. Particularly, the loans granted by the taxpayer itself (to the underlying French real estate owning company) or by members of his family, or by any corporate entity controlled by said persons, may not be deducted from the IFI tax basis. The deductibility character of the debt subscribed at each level shall be carefully reviewed.
International tax treaties Non-residents subject to a treaty that contains a clause related to ISF will only be taxed in France on directly held real estate assets, and on a portion of the value of shares that they own in companies which assets predominantly consists of French real property assets.
On the other hand, non-resident investors who cannot benefit from a treaty (as is the case of residents of a country that is not party to a treaty or a country whose treaty does not cover wealth tax, such as Belgium, Portugal or the United Kingdom, for example), could in some cases be more heavily taxed under IFI than they were under ISF (please see comments below on non-residents who stand to lose).
Consequences for non-residents
Non-residents who benefit from the reform
The “lucky” non-residents are the ones who were taxable on ISF on their French non-real estate assets, i.e., mainly on movable assets that did not qualify as financial securities (ISF exempted), shares in a company predominantly owning French real property assets or shares in a company that would give the taxpayer and his or her family group more than 50% of the indirect control of a French real estate asset.
Thus, taxpayers who were previously subject to ISF on French tangible movable property and securities that could not be exempted as financial investments should be able to get an exemption from IFI, unless the above securities are related to companies that directly or indirectly own non-exempted real estate assets in France.
Non-residents who stand to lose from the reform
- Non-residents who hold an interest of less than 10% in a non-operating company
Non-residents who held securities in a company that directly or indirectly owned French real estate assets could be exempted from ISF if these securities did not constitute equity securities (i.e., they represented less than 10% of the share capital of the company in question). However, this exemption did not apply to the shares in real estate companies or in the case of control, together with family group, over the company owning the underlying real estate asset (except if this latter company did allocate the real estate asset to its business).
From now on, non-residents in this situation will be taxed (subject to tax treaties), unless they evidence that they are not in a position to obtain the information necessary in order to assess the taxable portion of their securities.
- Non-residents who hold an interest of more than 10% in a foreign company that directly or indirectly owns French real estate assets
The interest held by non-residents in non-French companies was previously exempted, unless the assets of the companies mainly consisted of French real estate, or in the event of direct or indirect control by the taxpayer, along with its family group, through one or several companies, of the company that owned the underlying French real estate assets.
From now on, subject to tax treaties, non-resident shareholders who own more than 10% of a foreign company that directly or indirectly owns a French real estate asset will be systematically taxed on a portion of the value of the securities of the foreign company, unless the underlying French real estate assets are allocated to the operational activities of the company that owns them.
- Non-residents who have personally incurred debts that are no longer deductible or whose intermediary companies have incurred such debts
Until now, in the case of debt incurred directly by the taxpayer that relates to French taxable assets, this debt could normally be deducted. From now on, these deductible debts will be more strictly defined. The deductible debts are those incurred for expenses related to acquisitions, repairs, maintenance, refurbishment, construction or extension of taxable real estate assets and rights and the taxes due on real estate assets.
Furthermore, the law will from now on exclude the deduction of loans taken out directly or by the intermediary company with a view to acquiring real estate assets when the loans are taken from the taxpayer himself or from a member of his taxable household.
Moreover, some debts contracted by the intermediary company from the taxpayer, his taxable household or companies controlled by either of the above, are presumed abusive. These liabilities are only deductible if, depending on the case, the taxpayer proves that they were not subscribed mainly for tax purposes, or that they were taken out under normal conditions.
Lastly, loans contracted directly by the taxpayer or by an intermediary company from members of the family (who are not part of the taxable household) or from a company controlled by the taxpayer are deductible if they have been taken out under normal conditions.
- Non-residents who own more than 5% interest in a listed real estate investment company (SIIC)
Non-residents who held shares in a SIIC used to be exempt from ISF, as their interest was considered an exempted financial investment. From now on, subject to tax treaties, only shareholders who own, either individually or together with their taxable household, less than 5% of the share capital and voting rights of an SIIC will be able to avoid IFI.
Non-residents whose situation remains unchanged
The situation of non-residents who directly own property in France, or who own property indirectly through a chain of controlling interests that do not include any other non-real estate assets should remain unchanged under the new IFI, subject to the exclusion of certain debts (please see comments below) and the application of international tax treaties.
