THE NEW DEDUCTION RULES: A REAL REVOLUTION?
The new mechanism introduced several sets of restrictions by playing on the principle of the deduction or quantum of the debt that is fiscally acceptable, in order to prevent taxpayers from reducing their taxable base abnormally.
- Definition of eligible debts. Debts are deductible for expenses relating to the acquisition of the property (or the parts or shares of the company that owns it), construction or improvement, maintenance or repair. Nothing fundamentally new compared to the ISF. On the tax side, only the property tax is now deductible, whereas previously the housing tax as well as the income tax, IR (Impôt sur le Revenu) and social charges, CSG (Contribution Sociale Généralisée) were also deductible.
- Prohibition of debts to relatives. This is the loan contracted by the taxpayer with his spouse or a member of his tax household (an individual who is taxable with the borrower). A spouse with their own property can lend to the other and the debt leads to a reduction in the taxable base of the household, the legislator is drawing here the logical consequence of the non-taxation to the IFI of the corresponding loan claim.
The deduction of other "family" loans (ascendants, adult children, brothers and sisters) is not prohibited. However, because of the suspicion that they may inspire, it is conditioned on the "normal" nature of the loan (maturity dates and effective nature of repayments). This condition enshrines the previous administrative approach based on abuse.
- Cap on aggressive debts. This is a real novelty, with the emergence of two distinct mechanisms. The first concerns loans that are repayable at the end of the contract (bullet loans or prêts in fine) and stipulates that the deduction of the debt is limited to the balance (on 1st January of the year) of the theoretical annual instalments remaining until the end of the contract - in other words, a tax amortization of the debt on a straight-line basis over the contractual term of the loan (a 5-year loan has its deductible amount reduced by 20% per year). This rule reduces or even eliminates the positive effect of these loans, which until now have made it possible to erase the taxable base over the entire duration of the loan.
The second, limited to taxable assets exceeding €5 million, concerns all deductible debts when they exceed 60% of this value and limits the deduction of the fraction above this threshold to 50% of the surplus, except where the taxpayer can justify that the debts were not contracted for mainly tax purposes. In this regard, financial considerations (difference between the cost of the loan and the financial income generated by the same amount) may be highlighted.
THE SCI: AN OPTIMIZATION SOLUTION?
With the IFI, the use of an SCI could have become a real tax optimization tool. However, the legislator has provided several safeguards to restrict the deduction of debts contracted by the company, without, however, eliminating any room for manoeuvre.
- Non-deduction of SCI's debts to shareholders or the family group. With the exemption for movable property, it is easy to see the interest for a taxpayer to interpose a SCI financed entirely by a current account or shareholder loan or a family loan, the corresponding claim on the SCI (now non-taxable) reducing the taxable value of his shares in the SCI accordingly.
In this case, the new scheme provides that the debt is not deductible in proportion to the interest held in the company by the taxpayer concerned and the members of his household (and the lender if he is also a shareholder). This rule transposes to the SCI the prohibitions referred to above in the case of direct ownership of the property, with the exception that the debt becomes deductible again if the loan was not contracted for a mainly tax purpose. It will therefore be necessary to be able to establish that the SCI (and consequently the shareholder loan) follows a patrimonial strategy (keeping the property in the family and facilitating its management), without taking into account a tax advantage.
- Supervision of "selling to oneself". This is the transaction whereby an owner who is liable to tax, sells the property to a SCI set up by him (or jointly with the members of the tax household) in exchange for a current account in the SCI or as part of a refinancing by bank loan to provide liquidity for the owner. If this is all that remains, the net value of the taxable assets, relocated to the SCI, is erased by deducting the debt owed to the shareholder or bank.
Thus, the debt in question will not be taken into account by the tax valuation of the company's shares, except again to demonstrate the absence of a mainly tax purpose of the scheme. As a first approach, it will be possible to highlight one's asset motivation (see above) and point out that the operation cannot be motivated by savings given the associated costs (transfer costs).
- Debt ceiling of the SCI. Since 2019, financing through an SCI has also been subject to the rule of tax depreciation of debts (the difference in treatment with direct holding did not appear justified). This correction of the taxable value of the shares applies to debts incurred by the company towards a bank or shareholders (amortisation over 20 years in the case of a current account with no term). However, it only concerns debts relating to the "purchase" of a property by a company, excluding the financing of maintenance or expansion work, for example, since the SCI appears to be more advantageous than direct ownership in this respect.
HOW TO REACT?
While IFI's tax yield was supposed to be less than that of ISF, the State has not given up attempts to maximise the tax take by playing on the rules for deducting liabilities, which still leaves the assessment of the auditing services (under the control of the judge) to a large extent. It is fair to assume that litigation is in the making....
Taxpayers who have financed their property by borrowing and/or through a SCI will therefore have understand that a review of their situation is necessary. The proposed buyers will be able to review their scheme so as not to sow the seeds of tax discord in the future.
For more information, please contact Jérôme Brimaud, Tax Manager at firstname.lastname@example.org
Article originaly published in Patrimoine Prive n°67 - June 2019