Today is: 17 May 2012
Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
There has been significant coverage relating to the French Government’s proposals for a supplemental 2011 Finance Act. These proposals contain a raft of amendments to the French tax system, which, if implemented, will impact upon those living in France and those with property interests in France. The majority of coverage given to these proposals has been negative, focusing on the new tax to be levied on non-residents with holiday homes. However, this overlooks the proposals which may be beneficial to individuals with interests in France, including most notably a significant reduction in the charge to wealth tax. In any case, these are only at the proposal stage and will have to be passed by the French Parliament before they become law.
Wealth Tax rates reduced
Wealth Tax is an annual charge in France which applies to French residents on the net value of their worldwide assets and to non-French residents on the net value of their French assets. At present, this tax is payable when the assessable net wealth of a household reaches €800,000. Banded rates are then applied to the value above this threshold with the highest rate of 1.8% applying to value in excess of € 6,790,000.
The proposals seek to amend the wealth tax rates. The threshold would be increased from €800,000 to €1,300,000. A rate of 0.25% would then apply (from the first euro) to those with net wealth of between €1,300,000 and €3,000,000. Those whose wealth exceeds €3,000,000 will be charged wealth tax at 0.5% on the total net value of their assets. Although the bandings have been removed so that those individuals whose assets exceed the threshold cannot benefit from any nil rate tax band, a few examples demonstrate that the amendments are likely to be advantageous for high net wealth individuals.
Example 1
Firstly, taking the example of a long term French resident with worldwide net wealth of € 100,000,000, whose assets are not exempt from wealth tax. Under the current regime, their annual wealth tax exposure would be in excess of €1,700,000. Under the new regime, this would be reduced to €500,000.
Example 2
Secondly, a non-resident who acquires a French property worth €25,000,000 with no debt, would currently, without tax planning, face an annual wealth tax charge of €373,265. Under the new regime, this would be reduced to €125,000.
Essentially, therefore, for individuals in these brackets the wealth tax exposure would be reduced by 1/3 under the new measures.
Existing exemptions / reliefs continuing to apply
It is currently the case that when an individual first moves to France, only their French based assets are within the charge to wealth tax for the first 5 years of residency. All non-French assets are exempt for this period.
When you become resident in France, the value of your main residence is reduced by 30% when assessing the property for wealth tax purposes.
Extension of Wealth Tax exemption for ‘professional assets’
As mentioned above, French residents are taxable on their worldwide wealth. It is possible for shares in private trading companies to be exempt from wealth tax if they constitute ‘professional assets’. For this to be the case the shareholder would need to also be a director of the company and receive 50% of their professional income from this company. This was unhelpful for entrepreneurs who had shareholdings and directorships in several companies as often their income would be spread over all the companies. This meant that none of the shares could satisfy the professional assets test and would all, therefore, be taxable.
Under the proposals this would be amended so that, if the total income derived from all directorships represented more than 50% of your worldwide professional income, the shares would all constitute professional assets, and would all be exempt from wealth tax. This should assist with making France a more attractive location for high net worth entrepreneurs.
There are a number of income tax exemptions in France which should apply to entrepreneurs taking up residency, which may further reduce their overall tax exposure. Those considering an exit from their company may also wish to bear in mind that capital gains made on shares in France can benefit from taper relief so that no tax is payable on certain shares that have been held for 8 years or longer.
Removal of Wealth Tax avoidance structure
Non-residents purchasing properties in France have, to date, been able to put in place simple structure which helps to avoid an exposure to wealth tax. This involved use of a company and the funding of the purchase via a shareholder loan. This shareholder loan would reduce the value of the shares in the company, on which the wealth tax charge would be based. As such the share value would fall below the wealth tax threshold. The shareholder loan itself was not an asset which was subject to wealth tax. It has been proposed that these shareholder loans are no longer to be taken into account when assessing the value of shares for wealth tax purposes.
The full impact of this cannot be easily assessed until the draft legislation is produced on this. Once the legislation is in place, it will be possible to analyse whether it is possible to structure debt in other ways (such as via trusts or companies) to suppress the value which is assessable to wealth tax. Alternatively people may consider mortgaging their French properties, usually with a back-to-back arrangement where they will have an exposure only on the margin between the interest and the income earned on any pledged cash / other assets. Some may consider that the reduced rates of wealth tax make this type of planning unnecessary. It might be considered lower risk to simply pay a sum of wealth tax each year rather than leaving an exposure on fluctuating interest rates and on performance of assets held by the bank.
Holiday Home Tax
As has been widely publicised, the proposals suggest a new tax on all non-French residents who have a property in France which is freely available for their use. This tax will be at 20% of the “cadastral rental value” of the property or properties, which the individual has available to them. This value may not be uniform throughout France but we have obtained valuations in respect of a number of properties, producing figures which do not appear to be overly prohibitive from an investor’s perspective:
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For a maisonette flat on Cote d’Azur worth around €700,000 the Cadastral rental value is €1,400 so tax at 20% = €280 pa.
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For a villa on Cote d’Azur worth around €15M the Cadastral rental value is €3,500 so tax at 20% = €700 pa.
In any case, it is going to be interesting to see how France proposes to introduce a tax which is clearly discriminatory and acts to restrict the freedom of movement of capital within Europe by creating an additional cost for non-French residents who acquire property in France. There is already a similar tax in France (based on three times the rental value of the property) but an exemption from this applies if you are resident in the EU or in a country which has a double tax treaty with France.
It should also be noted that this tax will only apply when the French property is available for the individual to use. If the property is rented out for example, this would not apply.
Summary
Although the proposals have, in general, been received negatively due to the holiday home tax, we consider that the reduction in wealth tax is likelier to have a higher impact on the way investors view France. There is also a chance that the French Government will face difficulties in implementing the legislation for the holiday home tax. Even if this is successfully introduced the values are unlikely to pose a severe barrier to investors, particularly when considered in light of the reduction in wealth tax. The extension of assets which can benefit from the professional assets exemption from wealth tax may encourage entrepreneurs to take up residency in France.
Those individuals who have put in place the shareholder loan structure in France will need to consider their position and assess whether they will be better off mortgaging their property. When the legislation is released we will be in a position to review the options available to these individuals.
25th May 2011
David Anderson
Solicitor and Chartered Tax Adviser
Graeme Perry
Solicitor
Sykes Anderson LLP
9 Devonshire Square
London EC2M 4YF
Telephone 020 3178 3770