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.