Wealth tax in France is going through some changes, from the ISF to the IFI. Explanations.
The draft law of finance for 2018 is currently under discussion at the National Assembly, One of the key manifesto promises of President Emmanuel Macron, reform of l’impôt sur lafortune (ISF), is completing its passage through the French parliament and will become law next month. What will this reform bring? What is the new perimeter of this tax?
The new wealth tax is reoriented to cover only real estate assets.so l’impôt sur la fortune (ISF) becomes l’impôt sur la fortune immobilière (IFI). 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.
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%).
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.