On Tuesday 24 October 2017, the French MPs (Assemblée Nationale) voted the draft of the first part of the 2018 Finance Bill, which foresees some substantial tax changes starting from 1 January 2018, particularly regarding the taxation of assets and French source income.
For the wealth tax on assets located in France/deemed French assets, the existing Impôt de Solidarité sur la Fortune (I.S.F.) will be replaced by a new Impôt sur la Fortune Immobilière (I.F.I.), which is largely inspired by the I.S.F.’s existing rules excepting, in particular, the following two major new rules.
1/ Putting a stop to the in fine loans’ never-ending and full deductibility
Under existing I.S.F. rules, in fine loans could be deductible in full, each year, provided that they met certain criteria regarding their purpose, timing, formalism and modalities. In other words, when complying with the above mentioned conditions, the full amount of unpaid capital could be offset each year against the taxable French (deemed) assets value.
The new rule, which would be codified in a new article 974 I bis of Code Général des Impôts, will introduce an amortization element in the loan, so that the deductible amount will reduce annually taking into account the years passed since the initial subscription of the loan compared to the entire loan period.
Example: on 2018, Pedro subscribes a 5MEuros in fine loan, for 5 years duration, which fulfils all I.F.I. deductibility criteria. Each year, the percentage of deductibility of the loan will decrease by 100/5 = 20% of the initial amount lent, which is 1ME less each year. Therefore, on 2019, Pedro could offset 4ME only (i.e. 80% of the amount lent), 60% on 2020 (3ME), 40% on 2021 (2ME), 20% on 2022 (1ME) and, starting from 2023, no further deduction will be allowed regarding this loan.
2/ Loans’ deductibility capped for high value taxable assets.
Under existing I.S.F. rules and provided that they meet the above mentioned criteria, the loan’s capital could be deductible in full.
The New rule, which would be codified in a new article 974 III of Code Général des Impôts, will introduce the following limitation in the loan’s capital deductibility: when the market value of French real estate/shares of real estate Company exceeds 5ME and the deductible debts exceed 60% of such market value, such debt’s excess will be deductible only to the extent of 50%.
Example: Pedro purchases a French property for 10ME on 2018, fully financed by a loan of 10ME. The amount of the debt up to 60% of the property’s market value (i.e. 6ME) is fully deductible, while the amount of the debt exceeding 60% of the property’s market value (i.e. 4ME) is only deductible for 50% (i.e. 2ME). The loan’s capital deductibility is therefore capped to 6 + 2 = 8ME.
These are only two of the major changes that would be implemented starting from 2018, for which Rosemont Consulting remains at your disposal to advise and assist.
Nicolas Trucco
Tax Manager