French Tax News - Further reforms - September 2011


Further Tax Reforms

On the 24th of August, the French Prime Minister, François Fillon, announced various reforms to taxation. The finance bill has been voted and adopted by the Parliament and came into force on the 21st of September.

Taxation of Capital Gains on Real Estate
Previously, second homes in France were exempt from taxation of any capital gain after fifteen years of ownership.  After five years ownership, a 10% deduction to the gain was allowed, annually. Thus, after fifteen years any gain was exempt.

With effect from 1st February 2012, the period of ownership to achieve an allowance of 100% has been increased to 30 years, and the annual allowance, after the first five years ownership has been reduced as follows:

• 0 to 5 years ownership – 0%
• 6 to 15 years ownership – 2% a year (up to 20% cumulative)
• 16 to 24 years ownership – 4% a year (up to 52% cumulative)
• 25 to 30 years ownership – 8% a year (up to 100% cumulative)

However, as a measure to prevent tax evasion, this mechanism will be applied from now on, regarding immovable assets sold to civil companies, or consisting in capital investments, in cases where the owners are the shareholders.

The existing deductions in respect of the costs of purchase and sale and works to the property are unchanged. This applies to all immovable assets, except individual principal residence, which remains exempt from capital gains tax in France.

Gift and Inheritance Tax Returns
Taxpayers are encouraged to file their gift or inheritance tax return within six months following the receipt of assets, considered as the day of the demise for inheritance tax.

In absence of a determined value in the tax return or in absence of return, if the beneficiary of the donation or the heir decides to sell the assets, their values, at the time of the transfer, taken into account to calculate Capital Gains are nil. The capital gains are therefore total.

The bill proposes to enable these taxpayers to determine the value of the assets received, even if they failed in filing their inheritance tax return.

Other proposed reforms:

• An increase of 1.2% on social charges for securities income (interests, dividends), applied to 2011 incomes.

• A reduction in tax incentives when investing in   specific real estate properties, overseas investments and ecological equipment.

• French corporate taxation of prior losses will be aligned with German corporate tax. The carry-back system would be restricted.

All these changes, added to the previous ones, which came earlier in the year, should lead to reconsidering structures recommended to non-resident owners of French property.

Capital gains reforms and non-deductibility of shareholders current account held by non-residents in companies holding a French property especially, could give rise to re-structuring.

The value of properties held since several years or which were subjected to important works in the last months, should be valued with proper comparable methods, so that the individual owners can be correctly advised concerning their current and future tax liabilities.

Finally, from an estate planning standpoint, the increase of inheritance tax rates should be an opportunity to review current ownership structures based on family evolution and estate wishes of clients.