Print Posted By Lost in France on 24 May 2011 in Living in France - Banking, Taxes and Finance

Proposed tax changes in France

Tax changesPlease note that tax and international law are complex subjects and you should not rely on this article without professional advice on the facts of your case. Nothing herein constitutes financial advice and if you are in any doubt as to your financial position you should consult an IFA.

The French government has proposed a series of tax changes which is expected to be passed by parliament in time to take effect in 2012. These changes will affect both French and non French residents. This article looks at the key proposed changes and their likely effects.

Holiday homes

If the proposals are ratified from January 2012 a new annual tax will be levied on non-French residents who have holiday homes in France which are freely available to them, i.e. not being rented out. The tax will be equal to 20% of the valeur locative cadastrale ("VLC"). The VLC will be a theoretical rental value of the property and will be calculated by the local tax office. More information on the calculation can be found on www.cadastre.gouv.fr

There are a few questions which have been left unanswered at this time, such as whether property owned by a French company falls within this tax bracket, and importantly, whether such a proposal breaches the EU principle on free movement of capital.

Wealth Tax

If the proposals are confirmed, the net value of an estate from which wealth tax becomes payable will increase from €800,000 to €1,300,000. Between €1,300,000 and €3,000,000 the rate will be 0.25% on the global net wealth and over €3,000,000 will be taxed at 0.5% on the global net wealth.

If your net wealth is below €3,000,000 you will no longer be required to file a wealth tax return but will instead declare your wealth on your income tax return.

Owning a house in France through a property company

Another change which has been proposed is the abolishing of an exemption available to property owners using vehicle such as SCIs or foreign companies. Currently, it is possible for non-residents to avoid wealth tax by using an SCI to buy the property and financing the purchase by a loan from the shareholder of the SCI. The shareholder, an individual, is subjected to wealth tax on the value of the shares they hold in the SCI. The value of the shares will be nil because the SCI has a debt due to the shareholder and the debt is classed as a financial investment, which, for non-French residents, is exempt from wealth tax. If the proposed change is confirmed, the value of shareholder loans will be disregarded when calculating the share value for wealth tax purposes meaning the full value of the property would be chargeable to wealth tax.

This will have a substantial impact on high net worth individuals, who have used this method to purchase their second homes to avoid getting involved with financial institutes and paying high interest rates or tying up capital with back-to-back arrangements. However, with the proposed change, wealthy individuals will need to assess whether it may be financially helpful to take mortgages out to reduce their net wealth. The potential wealth tax charge will need to be balanced against the need to pay interest to the bank and, in many cases, pledge collateral in the form of shares or cash as security. This is usually required as a mortgage on the property will usually be insufficient security for the bank.

Trusts

The proposals include a new tax to be levied on trusts at a rate of 0.5% on all their assets if the settlor and beneficiary are French residents and on French assets only if the settlor and beneficiary are not French residents.

Trusts are another method which is used by wealthy individuals when purchasing their holiday homes because they are not recognised as a legal entity by the French legal system and so their tax status has usually been ambiguous.

The assets in the trusts will not be subjected to double taxation and so if the individual settlor or beneficiary declares the trust for wealth tax purposes then there will be no further taxation. However, the difficulty will be for trustees to decide whether the assets they hold in trusts have to be disclosed to the French Revenue.

Inheritance/Gift Tax

The position on gifts made within a trust is also unclear in France for the reasons mentioned above. However, the new law will change the position by taxing gifts made during lifetime and on death on the basis of the relationship between the settlor and the beneficiary. In France the rate of tax varies according to the relationship between donor and recipient.

If it cannot be established whether a gift has been made within the trust a tax charge will still arise on the death of the settlor at rate of 60%. The tax arises if the deceased was French resident or the trusts assets are in France. Furthermore, if the trust is in a "non cooperative state" i.e. a tax haven with no treaty with France, the flat tax rate of 60% will apply.

This proposal will be difficult to administer but will tie in with the 0.5% declarations for wealth tax which trustees will now be required to make. This means that if assets are distributed to the beneficiaries, the French Revenue will know about it.

Currently, gifts made during lifetime will not be considered for inheritance tax purposes if a period of 6 years has passed from date the gift was made. The new proposal will change the position and the new period will be 10 years.

Exit Tax

With the above proposed tax changes many French residents may seek to avoid these taxes by leaving France. The government has anticipated this eventuality and are proposing to introduce an "Exit Tax".

The above proposed tax changes may be necessary for the French government to recover the countries' huge deficit. However, it is questionable whether these changes will have the desired effect.

More Info

David Anderson
Sykes Anderson LLP
Solicitors and Chartered Tax Advisers
9 Devonshire Square
London EC2M 4YF
Tel + 44 (0) 20 3178 3770
[email protected]
www.sykesanderson.com
 

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