Latest Tax Reforms
The 2011 Finance Act's second revision was published in the Official Journal and came into force on the 21 September.
The 2012 Finance Act provides for various tax reforms which are still under discussions.
Certain case law in 2011 also has an important impact on foreigners investing in France
Taxation of Capital Gains on Real Estate:
Previously, second homes in France were exempt from taxation of any capital gain after fifteen years of ownership. After five years ownership, a 10% deduction to the gain was allowed annually. Thus, after fifteen years any gain was exempt.
With effect from 1 February 2012, the period of ownership to achieve an allowance of 100% has been increased to 30 years, and the annual allowance, after the first five years of ownership has been reduced as follows:
• 0 to 5 years ownership – 0%
• 6 to 15 years ownership – 2% a year (up to 20% cumulative)
• 16 to 24 years ownership – 4% a year (up to 52% cumulative)
• 25 to 30 years ownership – 8% a year (up to 100% cumulative)
However, as a measure to prevent tax evasion, this mechanism will be applied from now on, regarding immovable assets transferred to civil companies, consisting in “contributions”, in cases where the owners are the shareholders.
The existing deductions in respect of the costs of purchase and sale and works to the property are unchanged. This applies to all immovable assets, except individual principal residences, this remains exempt from capital gains tax in France.
Other reforms applicable from 1st January 2012:
• A reduction in tax incentives for French tax residents, when investing in specific real estate properties, overseas investments and ecological equipment.
• French corporate taxation of prior losses will be changed. The carry-back system would be restricted and then suppressed. The carry-forward system will only apply.
• The 2012 Finance Act provides for an increase of the lower 5.5% VAT rate to 7%
All these changes, added to the previous ones, which came earlier in the year, should lead to reconsidering structures recommended to non-resident owners of French property.
Summary of the main changes which have already been passed in 2011:
• Shareholder current account held by a non-resident shareholder in a company holding French property is no longer deductible when calculating the value of his/her shares for wealth tax purposes.
• Increase of highest inheritance tax rates from 35% and 40% to 40% and 45% in direct line (parents to children). The same rates apply for gift between spouses.
• Tax treatment of Trusts in France has been substantially changed and regulated whilst it was before mostly dealt with by court cases. The law now considers the settlor of a trust who has a French “link” as being the owner of the underlying assets from a wealth tax point of view for example.
The law has also set up an annual tax which is very punitive when declarations and disclosure obligations are not respected. Trustees and clients are both liable to this tax. Specific inheritance tax rules have also been set up in the case of the demise of the settlor when the trust has French assets or French resident beneficiaries.
These rules are extremely important to take into consideration for clients who have trusts with any French connection, including those whose only connection is an investment in French assets.
Recent important court decisions which impact foreigners holding French properties:
• Administrative Court of Montreuil, 25 February 2011, regarding the non-application of the 33.33% tax rate to non-EU residents, based on free movement of capital, granted a reimbursement of the tax paid in excess (difference between 19% and 33.33%).
• Administrative Appeal Court of Versailles, 21 July 2011, regarding Swiss tax resident selling property in France, confirmed that the 19% rate CGT rate applies instead of the 33.33% applicable to non EU residents.
• Administrative Supreme Court decision of the 28 July 2011, regarding section 164 C of French Tax Code, cancelled the exemption of three times the rental value of the property, which used to benefit to EU nationals, residents in Monaco holding French property. The exemption of this tax based on European nationality is therefore no more applicable. Please request our specific tax briefing on the subject.
Our recommendations:
The market value of French properties should be valued with proper comparable methods, so that the owners can be correctly advised in view of the new rules.
Based on these real values, and the annual accounts of the property holding company, an analysis should be done to see if, the debts should be refinanced, the shares transferred or the property re structured.
All trusts having a French connection should be reviewed to understand the new obligations of the clients and trustees and eventually restructured. French assets could be located elsewhere or structured in a different way. Specific trusts could be created to separate assets benefiting French resident settlors or beneficiaries. All settlors, trustees and beneficiaries of trusts having a French connection should respect their disclosure obligation and file on time to avoid a penalty which can reach 5% of the trust’s assets from 2012.
Finally, from an estate planning standpoint, the increase of inheritance tax rates should be an opportunity to review current ownership structures based on the evolution of the family needs.