“All you need to know about IFI (Impôt sur la Fortune Immobilière – French new real estate wealth tax)" was the title of a breakfast conference organised by Rosemont Consulting on 5 April at the Metropole Hotel in Monaco. Many professionals and Monaco residents attended the presentations by Cécile Acolas Villacres, Nicolas Trucco and Ivan Yakovenko, to get a better understanding of the objectives and impacts of this new legislation, which has been in force since 1 January, on Monaco’s doorstep.
Monegasque residents that own property in France are particularly concerned by this new law.
IFI is based on the main characteristics of the ISF’s (Impôt sur la Fortune – French wealth tax); but taxpayers who expected IFI to be a simplified ISF based solely on real estate assets will be disappointed, in the sense that the IFI broadens the notion of immovable assets held and restricts the deduction of debt. Following a thorough IFI review, codified in articles 964 to 983 of the General Tax Code, Rosemont Consulting to drew attention to the following main points:
• Property dismemberment
Property ownership may be split into a life-interest (usufruct) and bare ownership. If a bare owner escaped ISF up until now, he may now become liable for tax on the real estate property interest under IFI. From 2018, dismemberments resulting from legal attribution will result in tax-sharing between the bare owner and the usufructuary. This concerns past and future inheritances. However, in the event of a will or donation between spouses, the usufructuary may remain the only person liable for tax.
As a result of this any planning to optimise IFI should also take into account the organisation of the succession planning for the owners of real estate in France and vice versa.
• Assets placed in trusts
With respect to assets held in trusts, IFI's field of application will now be limited to ownership of real estate property held directly by the trust or through underlying structures.
The settlor or the beneficiary “deemed to be the settlor” under the French interpretation, who is not resident in France will be liable for IFI, on the value of real estate assets held in France. The trustee will continue to fulfil these reporting requirements in France, with regard to all the trust’s French assets.
• The impact of tax treaties
The abrogation of ISF was accompanied by the removal in domestic law for wealth tax purposes of the concept of real estate companies (companies which main assets was a composed of French properties). .
However, the impact of international treaties can diminish the effect of the suppression of this notion, both with regard to non-residents and residents who have property abroad. The non-residents who are protected by tax treaties may therefore avoid IFI in the event of “preponderance immobilière”, given that the majority of treaties concerning taxes on wealth only allow France the right to tax on shares of companies whose assets are mainly constituted of buildings located in France.
• Valuing shares
Shares are only subject to IFI on the proportion of their representative value of immovable property or rights held directly or indirectly by the company or entity. It is necessary to determine the real estate ratio applicable to each company within a chain of ownership. It should be noted that "professional" real estate property or rights are excluded from the ratio calculation. Thus the taxable value of shares will be established by comparing the value of the company's shares with the real estate ratio. This calculation leads to a dilutive effect by taking into account debt which may be linked to other assets of the company (bank accounts, car, works of art, etc).
• Deductibility of debt
The amount of IFI will be intrinsically linked to the deductibility of any loans. This is one of the reasons why practitioners are focusing all their attention on the deductibility of certain debts. Legislators have made a distinction in this regard, in the sense that the treatment of debt is not the same according to whether it was contracted directly by a tax payer or contracted by a company.
In the case of debts incurred by the taxpayer, legislators list what they consider to be deductible debts in a very comprehensive manner. They mainly relate to debts associated with the acquisition of the building and works. However, such deductibility is limited in the case of an interest only loan (“prêt in fine”) by creating tax depreciation that reduces the amount of deductible debt each year.
The General Tax Code limits debt deductibility to the debts owed to a member of the partner’s household, to a taxpayer or his family group. The same type of limit is prescribed in the case of a company borrowing from these persons. However, the possibility of deducting these so-called 'family' debts is made possible in cases where the taxpayer can prove that the loan is not carried out with a primarily fiscal objective or if he/she proves the normal nature of the lending conditions.
Finally, IFI has set a cap on the total amount of debts deductible by holders of assets exceeding €5 million, whose debts above 60% of the value of the property will be deductible at a rate of 50%.
The legislator only excludes certain debts from the valuation of shares. Many other debts contracted by the company will not be affected by these limitations.
Thus, the use of a company may reduce the scope of exclusions and benefit from certain debts in the calculation of the value of taxable shares subject to IFI. The administration will certainly comment on these provisions and deliver its recommendations in the future. Non-residents who are subject to IFI will nevertheless have to decide and file their tax returns no later than 22 May this year.
Rosemont Consulting will be happy to help you and advise you on this new measure both for properties owned or to be purchased.
This article is published in issue 25 of MONACO БИЗНЕС (Monaco Business) Magazine -
Rosemont Consulting SARL assists clients to achieve their estate planning objectives through other alternative legitimate compliant structuring of their assets. Please feel free to contact us.
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Cécile Acolas – Partner firstname.lastname@example.org