Following the announcement of reforms to the French tax system, a presentation of the proposed changes has now been published by the Ministry of Finance, prior to parliamentary approval. A brief outline of key issues is provided below:
Wealth Tax and shareholder’s loan accounts
A shareholder of an SCI may currently lend the SCI funds for the purchase or renovation of the property. The loan is recorded in the company accounts as a liability, so reducing the value of the shares, for wealth tax purposes, in the hands of the shareholder. Where the debt from the SCI is due to a non-resident shareholder this is effectively exempt from wealth tax.
With the intention of ending such arrangements, it is proposed that when calculating the value of the shares held in property owning companies, from January 2012, debts due to non-resident shareholders will be subject to the wealth tax regime. Shareholders will need to consider whether to replace the loans with bank financing.
A French tax resident may at present escape French tax by leaving the jurisdiction shortly before realising capital gains on the disposal of French securities. An exit tax (‘exit fiscal’) is now intended to remove this opportunity.
It is proposed that with effect from 3 March 2011 when an individual leaves France if within eight years of their departure, they realise a gain on the disposal of securities they will be subject to an exit tax. The securities must have a value in excess of €1.3 million or be in excess of 1% of the company’s share capital.
The tax due will be calculated on the gain less an allowance for the period of ownership and provision will be made to avoid double taxation, but will only be payable on realisation of the sale.
Guarantees for the payment of the tax may be required depending on the country to which the individual is emigrating.
CHANGES TO EXISTING TAXES
The top two bands of gift tax are to be increased:
- gifts from €902,838 to €1,805,677 tax rate will be increased from 35% to 40%; and
- gifts in excess of €1,805,678 tax rate will be increased from 40% to 45%;
- all other bands will remain unchanged.
Parents may make a potentially exempt transfer to their children of up to €159,325 each six years. It is proposed that the present six year period will be increased to ten years.
The current age reduction allowance on gifts will be abolished as part of the reform.
As indicated in our last Update the tax shield (‘bouclier fiscal’) will be abolished and the wealth tax system revised.
From 2011 the threshold for wealth tax will be increased to €1.3 million of net assets. The declarations will be simplified with the removal of certain annexes. The date for filing and payment of the tax has been put back to 30 September 2011.
From 2012 Tax payers will be taxed on only two bands of wealth tax –
a) Net assets from €1.3 million to €3 million will be taxed at 0.25%; and
b) Net assets in excess of €3 million will be taxed at 0.5%.
A transitional scale will be introduced for those falling within the scope of the tax with net assets from €1.3m to €1.4m and €3.0m to €3.2m. The details of the scale have yet to be published.
Individuals declaring net assets of less than €3 million will no longer be obliged to file a separate wealth tax declaration and can declare their net assets in their income tax declaration. The declaration can be made without the need to provide evidence to justify their figures, as is presently the case.
Taxation of Trusts in France
The legislator is looking to provide clarity and certainty in this difficult area, and is proposing to apply a tax on distributions, or even the effective transmission of rights on the death of a settlor. The interpretation of certain Anglo-Saxon trust instruments will no doubt prove very challenging.
In summary it is proposed that distributions from a trust would be subject to the gift or inheritance tax regime with the level of tax being determined by the beneficiary’s family relationship to the settlor.
Tax will be charged if the deceased settlor was tax resident in France or if the property placed in trust is located in France. In cases where assets are held in trust over generations, tax will be applied in the same manner to transfers between successive beneficiaries.
A new tax is proposed that would be levied on all property held in trust when the settlor and beneficiaries are French tax resident.
If the settlor and beneficiaries are not French tax resident the tax would be levied on the trust assets located in France.
Tax would be levied at the highest rate of wealth tax, ie 0.50% and payable by the trustees or in default the settlor or the beneficiaries.
The tax is not proposed to apply if the trust assets are included in the wealth tax declaration of the settlor or beneficiary.
Tax on Second Homes in France (reform not enacted)
The proposal for an annual tax of 20% on the notional rental value (‘valeur locative cadastrale’) of second homes and the repeal of the current legislation embodied in Article 164c of the General Tax Code was abandonned.