The Addendum to the Finance Law 2011 (the Bill) will significantly broaden exposure to French taxation.
French wealth tax
French wealth tax is currently levied at rates ranging from 0.5% to 1.80% on the portion of net assets exceeding €800,000. French tax resident individuals are subject to wealth tax on their French and foreign assets whereas non-residents pay wealth tax on their French real property assets only. The taxable assets are reduced by outstanding liabilities such as outstanding mortgages and taxes.
The Bill proposes substantial changes to the wealth tax:
The taxable threshold is increased to €1.3 M (from €800,000). The tax will be calculated at the rates of 0.25% for assets below €3 M and 0.5% for assets exceeding €3 M. Individuals with net assets valued below €3 M will no longer be required to file a specific wealth tax return as is currently the case but will indicate the value of their net wealth in their individual income tax return. A specific wealth tax filing obligation will be maintained exclusively for individuals with net assets exceeding €3 M.
Valuation of shares in real properties owned by non-residents
For the valuation of shares in real property companies owned by foreign investors, shareholder loans by the investor to property company will be ignored for wealth tax purposes.
Non French tax residents are subject to French wealth tax on their French assets, such as French properties or shares in French or foreign companies the assets of which consist of more than 50% of French properties. They are currently not taxable on their French financial investments which include income such as shareholder loans. As a consequence, foreign individuals have up to now substantially reduced the potential wealth tax liability from their French property investment by using special purpose companies (“SPV”) financed with shareholder loans. For the valuation of the SPV shares for wealth tax purposes, the foreign investor could on the one hand treat the shareholder loan as a deductible liability, leading to a lower tax base, whereas the corresponding income was on the other hand treated as exempt financial investment.
The Bill puts an end to this tax optimisation scheme. This change will apply from 1 January 2012 and will result in most foreign investors becoming liable to French wealth tax.
Changes to estate and gift taxes
French estate and gift taxes for transfers from parents to children are currently levied at progressive rates ranging from 5% to 40% (net taxable estates above approximately €1.8 M). The same rates apply to gifts among spouses or partners. There is no inheritance tax on transfers between spouses and partners.
To encourage the early transmissions of estates between generations through gifts, French legislation currently provides among other rules a reduction of the gift tax by up to 50% depending on the age of the donor. The earlier the gift, the lower the tax liability.
The Bill proposes to increase the two highest tax brackets to 40% and 45% from respectively 35% and 40%. The gift tax reductions will be abrogated with immediate effect.
New tax rules for foreign trusts
The tax regime applicable in France to trusts is uncertain as the trust concept is not recognised under French civil law. Despite several court decisions that have in the past analysed certain legal implications of foreign trusts in France, there are currently no general tax provisions regarding the use of foreign trusts.
The Bill proposes several measures aimed at enabling the French taxation of assets transferred or owned through foreign trusts. Transfers of assets to a trust will be subject to gift taxes or to inheritance taxes based on the fair market value of the assets.
The Bill imposes under certain conditions an obligation to subject assets owned through a trust to wealth tax or alternately to a tax levy of 0.50%.
The Bill imposes payment and disclosure obligations on the trustee, when the settler or the beneficiaries are French tax resident or when the trust is composed of French assets. Failure to comply with the disclosure obligation results in a tax fine that may be as high as 5% of the value of the assets held in the trusts.
The new rules will be applicable from 1 January 2012 and several practical aspects of the new tax regime are to be addressed by the Ministry of Finance by way of administrative decrees.
Introduction of an exit tax
The Bill introduces an exit tax on individuals transferring their tax residence out of France which will apply from 3 March 2011.
Under the new tax regime individuals moving their tax residence from France to a foreign country will under certain conditions be subject to tax on the latent capital gains on their shareholdings in corporations subject to corporate income tax or any equivalent tax. The taxable gain will correspond to the excess of the fair market value of the shares on the date of transfer of residence over the purchase price. The capital gains tax would be payable immediately but may under certain circumstance be suspended, if the transfer of residence occurs within the EU. The exit tax will be refunded if the shares have not been sold after 8 years of the exit from France or if the individual moves back to France.
Proposed tax on French secondary residences foreign individuals abolished
The French Government’s proposal to introduce a new tax of 20% based on the rental value, as assessed by the Land Registry Office, of the French second residence of foreign individuals was rejected by Parliament. The announcement of this legal change raised great concern among foreign individual owning private properties in France.
Amending Finance Law for 2011 as amended and approved by the Lower Chamber of the French Parliament (Sénat) on 23 June 2011;