The Real estate weath tax (REWT), which came into force on 1 January 2018, replaces the wealth tax (« ISF » in French, for « Impôt de Solidarité sur la Fortune »), whose taxable base was broader than just real estate assets.
Although the REWT is a French tax, it may be payable by any person residing in Monaco and owner in France of one or more properties held directly or through an entity.
What is the REWT?
The REWT reaches tax-households that own real estate assets with a net value (after deducting debts) of more than EUR 1,300,000.
The REWT is an annual tax: the REWT liability is analysed each year on 1 January.
The REWT is payable by individuals domiciled for tax purposes in France or outside France. While individuals domiciled for tax purposes in France are taxable on their properties located in France and abroad, non-residents are only taxable on their properties located in France.
The review of taxable assets is very subtle since the REWT base includes real estate in the broadest sense (non-exhaustive list):
- Immovable property owned directly - To be kept in mind: the concept of immovable property covers built immovable property, but also unbuilt immovable property (building land, agricultural land, etc.), buildings under construction, and real estate property rights (usufruct, right of use, etc.).
- Immovable property owned indirectly, through entities (SCI, SA, SAS, SARL, etc.)
- Taxable real estate included in the investment vehicles of life insurance policies and taxable real estate placed in a trust (included in the assets of the settlor).
It should be noted that exceptions to these principles are provided for (for real estate assigned to the taxpayer's professional activity, for real estate held through entities and assigned to their industrial or commercial activity, etc.).
Confirming their application requires an in-depth analysis, including the review of legal and accounting documentation (articles of association, accounts, contracts, etc.).
What are the possible financial consequences of the REWT?
The REWT is a tax whose financial impact can be non-negligible:
- Its rate - The REWT is calculated by applying progressive rates up to 1.5% of the net taxable assets when the latter’s value is in excess of EUR 10 million.
- The penalties applicable in case of a tax audit - Late interest and penalties ranging from 10% to 80% of the tax amount due.
- The statute of limitations is three to six years (tax audit regarding the current year and the three/six preceding years) - As a result of this statute of limitations, the French tax authorities can still perform tax audits on the ISF obligations, which has a broader tax base than just real estate! In particular, a taxpayer who would not have filed tax returns because he wrongly believed he was not liable may be audited by the French tax authorities for ISF 2014, ISF 2015, ISF 2016, ISF 2017, IFI 2018, IFI 2019 and IFI 2020 (filing of the REWT return in June).
What happens if the property is dismembered?
The principle is as follows: the usufructuary is, alone, liable for the tax on the value of the property in full ownership. That being said, the French legislator provided for exceptions.
For example, when an inheritance procedure is started, if the surviving spouse opts for legal usufruct (in accordance with Article 757 of the French Civil Code), the tax is no longer borne exclusively by the usufructuary, but also by the bare owner. Each of them is then taxed on the value of his respective rights.
It is therefore necessary for everyone - usufructuaries and bare-owners - to be assisted, both with estate and patrimonial organisation and once the succession proceedings have started.
What is « the right to be mistaken » ? (« Droit à l’erreur » in French)
In France, the right to be mistaken allows certain reductions in the penalties applicable in the event of spontaneous regularisation (before any audit or even during an audit).
It may therefore be advisable and advantageous to consider spontaneous regularisation.
An in-depth cost/benefit study will have to be carried out on a case-by-case basis in order to find the most appropriate solution for each situation.