Overseas Chambers of Peter Harris

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

The new French impôt sur la fortune immobilière (IFI): some effects on non-residents and structures financing French property

January 2nd 2018

As advertised last year,  the French projet de loi pour 2018 proposed a repeal of French Wealth tax (ISF) , and the introduction of a more restricted wealth tax which would be limited to immovable property, but again only non-productive immovable residential assets. This is now known as the impôt sur la fortune immobilière or IFI.

French vineyards and agricultural holdings will remain outside the IFI net, as will property with commercial and industrial user. However residential property and chalet lettings will not escape the IFI, unless structured.

After a good deal of Parliamentary too-ing and fro-ing as to the economic legitimacy of a Wealth tax on immovable property, its effect on the French economy, and what is more the difficulty in assessing and collecting it, the measure was passed as article 31, and there is now no more ISF, but the IFI.

The Conseil constitutionnel has reviewed certain clauses of the Bill under the usual appeal procedure, and barring one blemish as to attribution of tax liability as between usufruitiers and nus-propriétaires, has confirmed that the Parliamentarians have acted within the Constitution in passing the IFI.

The law is now in force and the provisions in its article 31 are now incorporated into the Code général des impôts.

For those able to decipher the amendments in the context of the Code général des impots (CGI) a link to the text of article 31 of the Finance Act can be found here.

Put simply, the new tax rates are identical to the old ISF rates. When the net value of immovable property exceeds the threshold of €1.3 million, the IFI will be levied at progressive rates from a net value of  €800.000. The table of rates is set out at  Art. 977 which can be found at page 13 of the download.

Firstly, any trustees still involved indirectly in French property will be glad to hear that one of their French declaration requirements has disappeared, at least for trustees holding purely movable assets. Unless they are directly or indirectly holding immovables situated either in France or are French connected in terms of beneficiaries or settlors or deemed settlors, the annual declaration of assets 2181 Trust2 will no longer be applicable to them.

However, trustees are not off the declarative hook, as the succession and gift duty side of the article 792-0 bis CGI trusts régime remains unrepealed, and Event declarations n° 2181 Trust1 on modifications of French connected trusts will still be required.  Trustees will still therefore need to monitor and where appropriate declare movements of beneficaries, settors and other assets into or out of France with the same care under the same threat of penalties of €20.000 per omission.

It was frequent that expensive properties in France were funded by term loans designed to reduce the value of properties for Wealth Tax. These permanent credit arrangements have caught the eye of the French administration who can now deem the loans to be paid back in instalments, thus reducing the amount deductible over time.

Those who have taken loans from Trustees or personally owned companies to fund property purchases in France will need to review their position given the anti-avoidance provsions contaed in the law.

Whilst most of the anti-dilution measures are aimed at French methods of reducing the tax basis, such as inter family loans or loans from closely held investment companies, those anti-dilution rules will also affect certain structures used by non-residents.

Whilst one of the admitted difficulties with the law is that it will require a detailled investigation of foreign structures involving non-residents by French tax inspectors, I would advise caution before making any assumption that a complex opaque structure will shelter non-residents or residents from the new law.

Property portfolios worth over €5 million will only have 50% of the loans outstanding on the properties allowed as a deduction where the loan to asset ratio exceeds 60%.

The French legislator has taken steps to remove the advantage of term loans payable either at a given date or of an indefinite duration. The effect of these devices was in fact to reduce the ISF due by seeking to go permanently under the threshold, with a few other niceties to maintain the increasing value of property within the loan amount - with interest. Those singularly agressive methods of financing French high value property will now come under scrutiny, as the legislation assumes that any undefined term loan will be deemed fiscally amortised (repaid) by annual instalments over a 20 year period, therefore reduceing the value of the deduction annually, and, where the term date is defined, the deductible amount of the loan will be prorated and therefore reduced by deemed annual instalment repayments over the time remaining.

Further, any existing term loans are likely to be reviewed by the administration , from the mortgage register which they administer. The risk is that these might possibly even be retrospectively fiscally amortised from the date from which they were taken out, rather than as from 1st January, 2018.  There has been no administrative indication of the position on that point. If a term repayment is defined in the loan, then the loan will be deemed to be fiscally repaid by a yearly fraction calculated by reference to the length of the term and the deductibility calculated accordingly. If no repayment date is specified in the loan, these will be deemed to be fiscally amortised over twenty years.

The manner in which the rules will be applied will be set out in the Instructions to be published between now and June.

French residents will need to be very careful if they have an interest in English land held under a ToLATA 1996 trust of land. Declaring this as a trust, as opposed to land  will lead to significant and entirely unnecessary compliance obligations. Please refer to Peter for advice on this point, as he has successfully and entirely lawfully navigated English trusts of land outside the declaratory fictions of Scylla and Charybdis of the French trust régime.  A marked statutory channel leading to a functionaire's or wreckers paradise ...