Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

French Projet de loi de Finances 2018: Repeal of ISF and the new IFI. How it affects Trusts

October 5th 2017

The French Government has tabled its Finance Bill for 2018 before the French Parliament for debate.

Given the majority held, it is likely to pass through with few amendments, but its implementation will be technically complex, and trustees and individuals owning French immovable property held directly or indirectly will need to be aware of the regulatory changes involved.

The removal of l'impôt de solidarité sur la fortune  (ISF)  and its replacement by the proposed impôt sur la fortune immobilière (IFI) will mean significent changes for non-resident trustees in particular.

The annual levy return n° 2181 Trust2 will be significantly modified, in that article 990J has been curtailed and restricted to immovable property held directly and indirectly, thus excluding movable investment portfolios from that declaration.  Trustees or their investment managers with an interest in French investment exposure should therefore be looking carefuly at this propitious opening, given Président Macron's stated aim of encouraging liquid capital investment in France, at least until the next shift in French political economic policy.

The fundamental point is the the annual wealth tax tax basis will change from a gross value declaration to a declaration of net value. That means that subject to certain capping and exclusion issues which I will adress further down, mortagage liabilities will be deductible and declarable to arrive at the overall net value of the immovables assets held by the individual taxpayer concerned.  Whilst the threshold remains fixed at €1.3 mllion, and the rates will not change,  those will be based on net values.

Trustees therefore will still need to liaise with settlors and beneficiaries where these are caught by the proposed tax to ensure that the imovables are being declared, otherwise the trustee "prélèvement" will continue to be levied at a rate of 1.5%. There have been successful constitutional challenges to the administrations's policy of double charging ISF and the prélèvement, please contact Peter for details and explanations.

However, trustees should remember that the trusts régime in place is not simply directed to Wealth tax, but also to gift and succesion taxation. The trusts régime on those taxes will remain  unchanged as will the basic  fundamental travesty of a definition in article 792-0 bis CGI.  That means that the "événement" or event declarations 2181 Trusts1 will continue to be requred on a gross asset basis for any constitution, modification, or termination of a trust  as perceived by the French.  That is opposed to the new net asset basis which will become applicable under the new IFI to the 2181 Trusts2.  The devil or,  depending on your perspective, the angel  will be in the details of the decree modifications and the forms.  Peter does not think that the event declaraion will be modified to a net basis, as  the inclusion of debts in any succession declaration will be a matter for the declarants in France.  It is at that point that detailled advice on how to include or exclude a trustee's assets or liabilities in a French succession becomes necessary.  Taken in the round, the ensuing legislation will be very weak on this point in its final form as, whilst it requires only assets to be declared in a settlor's or deemed settlor's succession, there must therefore be an economic right and also la egal right to include the liabliities undertaken by a trustee in any integration of the corresponding asset into the succession declaration, whether movable or immovable.  It is at that point, where fiscal fiction collides with reality  that the positivist French fallacy may fall apart. However the documentation of such liabilities and thei imputatio to the French taxpayer will be a difficult matter

Back to the IFI.  The one point to bear in mind is that the well worn but aggressive pratice of financing high value French property acquisitions through 100% bullet / term repayment mortages will cease to be as attractive. Such mortgages or affectations hypothécaires will no longer be deductible for IFI in their totality, but will only be deductible on a pro rata temporis basis by reference to the amount to capital remaining outstanding on a deemed amortisement basis,  if article 12 of the PLF is passed as it is.  Attention also where no interest is actually "paid" in a purely captive context, as put simply, that roll-up into debt coupled with non-amortissement of the capital may be construed as either the French equivalent of a sham ("transaction fictive") or an "abus de droit" if coupled with non-repayment of any capital during the term of the loan.

Also, where the value of immovable property as a whole exceeds €5 million, then, to the extent that the total debt  exceeds 60% of the value of the total value of immovable property declared, there will be a cap applied as to 100% deduction.  Only 50% of the balance of the debt over the 60% cap will be fully deductible.  This will be of general application, not just to trustees, and is an attempt by the Government to recover tax where it would otherwise be eluded.

Peter has set out his initial synopsis of the changes at the following link to our Resources page, so please read it  and contact him for further information and assistance in any matter concerning the Finance Bll (version as tabled before L'assembléé nationale) and what it entails.