France is planning to introduce a number of changes regarding taxation of property. A draft legislation has just been presented to the Parliament and is expected to be enacted by July 2011. Some of the proposed measures are to enter into force as early as 2011. Below we present some of the most important amendments proposed.
1. Wealth Tax
In 2011 the taxpayers owning assets worth less than EUR 1.3 million will not be subject to the wealth tax (no changes for other taxpayers in 2011).
As of 2012, the wealth tax would be reduced as follows:
- for assets worth between EUR 1.3million and EUR 3 million, a rate of 0.25%, and
- for assets worth more than EUR 3 million, a rate of 0.5% would apply, as follows.
Once the above thresholds are passed the applicable rates would apply to the total assets, but a rule preventing threshold effects would be put in place.
In return, the tax shield (that currently prevents taxpayers to be subject to income tax, social contributions, property tax and wealth tax exceeding in aggregate 50% of taxable income) will be abolished.
Non residents are subject to wealth tax on real estate held in France. When real estate is held indirectly through real estate companies, the wealth tax is calculated on the value of the participation in the intermediary company. Until now when the acquisition of the real estate by the company was financed from a shareholder loan, the non-residents could reduce the tax liability: the debt owed by the company reduced the value of the participation, but the corresponding receivable of the non-resident shareholder was not subject to wealth tax. As of 1 January 2012, indebtedness due from real estate companies to a non-resident will no longer be deductible for the purpose of valuation of the participation.
2. Residential property owned by non-residents: new tax
As of 1 January 2012, non-resident individuals owning residential property in France will be subject to a new property tax, unless more than 75% of their worldwide income is derived from French sources. (Simultaneously, the current property tax concerning certain non-residents will be abolished.) Indirect ownership through real estate companies will also be subject to taxation.
The tax will be due on those properties which are at the free disposal of the owner (i.e. not rented out), with the tax base being the deemed annual rent and the tax rate being 20%. Expatriates leaving France that were domiciled in France for at least a continuous period of three years in the ten year period before they leave would be exempted for a period of up to six years.
3. Exit tax
It is proposed that the unrealised capital gains in respect of shares and other securities owned at the time of the transfer of the fiscal residence out of France, will in general be subject to income tax and social contributions. According to the proposal such exit tax would concern transfers of residence as of 3 March 2011.
Shareholdings will be subject to exit tax if they represent at least 1% in a French or foreign company subject to corporate income tax (SICAVs are not concerned) or if the value of the shareholding in such company is above EUR 1.3 million.
Although in principle the tax is due at the time of transfer, for individuals relocating to an EU or EEA country with a treaty on administrative assistance as well as on mutual assistance with recovery, an automatic suspension of the payment obligation will be granted until actual disposal takes place. Individuals transferring to third countries may receive suspension upon demand and provision of appropriate guarantees (no guarantee would be required if the third country has signed a treaty with France on administrative assistance as well as mutual assistance with recovery and if the individual justifies that his relocation takes place for professional reasons.)
For the purposes of calculating the tax due, tax allowances for length of holding as provided by the French Tax Code will apply (according to the French Tax Code, upon the expiry of an eight year holding period, capital gains are exempted from income tax but not from social contributions of 12.3% - holding period before 1 January 2006 is not taken into account). In particular, if the shares are not sold during the eight years following the transfer, the income tax deferred is automatically annulled (or refunded if it has been paid upon transfer) while the social contributions remain due and suspended until the actual disposal of the shares. Exchange, donation and death are not considered as disposal for the purposes of the exit tax. Taxpayers retransferring their fiscal residence to France will be treated as if they had never left.
In case the actual capital gain upon disposal is lower than the one calculated upon transfer of residence, the income tax will be appropriately reduced. Capital gains tax paid in the country of residence upon actual disposal can be credited against the tax payable in France.
4. Property and rights transferred to a trust
The draft legislation changes the applicable tax treatment of transactions realized through a trust established in accordance with foreign legal rules as well as to introduce new rules for certain specific situations. Rules relating to trusts would come into effect from the publication of the law.
4.1 Gift and inheritance tax
The draft confirms that whenever the transfer of goods through a trust can be considered as a donation or succession the existing gift and inheritance tax rules shall apply at that time. Whenever this rule does not apply, a new rule will ensure that upon the death of the settlor, inheritance tax will be due when the deceased was resident in France as well as for any property situated in France transferred to a trust.
If, at the time of the death of the settlor no succession can be identified, inheritance tax will be levied at that time and paid by the trustee at 60%, except if the beneficiaries are identified (in that case, the special rates for family transfers will apply instead). The 60% will apply in any case for trusts constituted in non-cooperating countries or if the settlor was resident in France at the time of establishment of the trust.
When the settlor has died before entry into force of the law, the deemed settlor of the trust is beneficiary. Whenever the trust exits for several generations, the taxation will operate in the same way for the successive beneficiaries.
4.2 Wealth tax
The settlor and beneficiaries will be subject to a 0.5 % wealth tax payable by the trustee on all type of assets transferred to a trust, unless in particular if they have already been included in the assets of the beneficiaries for the purposes of the wealth tax (the latter being in certain cases more favourable).
By Stéphane Austry, Partner, and Florent Ruault, Lawyer