Finance Bill for 2018: IFI and flat tax for individuals!

5 January 2018

The Finance Bill for 2018 aims at encouraging individuals, through targeted measures, to invest their savings in the economy. The cancellation of wealth tax combined with the significant decrease of taxation on passive income increases the attractiveness of France as a place to live and invest.

Wealth tax is repealed and replaced by a real property wealth tax“, dubbed IFI (Impôt sur la Fortune Immobilière)

IFI retains most of the wealth tax characteristics, including its threshold, rate scale, periodicity, evaluation rules (subject to certain exceptions) and payments methods.

Scope: whereas wealth tax was assessed on all the assets owned by the taxpayer when net wealth exceeded a certain threshold (€ 1.3 million), IFI only applies to real estate held directly by the taxpayer, along with shares in property-owning companies in proportion to the value of the property rights they own, wherever the companies or the properties are located, provided the value of the taxpayer’s real estate net assets exceeds € 1.3 million.

All other assets (especially financial assets) are excluded from IFI, including shares in companies not holding real estate assets. Certain real estate or real estate rights (those deemed used for professional purposes, under very strict conditions and criteria) are also excluded from IFI.

Main residence: no change, taxpayers still benefit from the 30% abatement.

Five year exemption for property held outside France for new French tax residents: no change.

Territoriality rules: no change. French tax residents, whatever their nationality, are taxed on their worldwide real estate whereas non-residents are taxed on their real estate assets located in France.

Main drawbacks:

Shares held by non-residents: financial investments made by non-residents used to be excluded from wealth tax. The Finance Bill has repealed this exemption. Thus, non-residents are subject to IFI on their shares in proportion to their value which corresponds to real estate unless they hold less than 10% of the share capital or the voting rights of the company and the company carries out an industrial, commercial, artisanal, agricultural or professional activity.

Fortunately most tax treaties provide that non-residents are only subject to wealth tax (and this will apply to IFI) on shares of real estate companies i.e. companies the assets of which are mostly made up of French real estate. However, in case no treaty applies to IFI, the tax burden of non-residents may be heavier now than prior to January 1st, 2018.

Limited deduction of debts: debts are still, in general, deductible from the tax basis. However, certain family loans and loans taken from controlled companies are excluded.

Furthermore, for loans refundable at the end, theoretical annual repayments are computed by dividing the amount of the loan by its number of years and only the fraction of these repayments which correspond to the number of years still left are deductible.

Moreover, when the value of the taxable assets exceeds € 5 million and the amount of the loan exceeds 60% of this value, the part of the loan exceeding this limit is only deductible up to 50%. For instance, if an individual owns taxable real estate worth € 8 million with a loan of € 5 million, the part of the loan which exceeds € 4.8 million i.e. € 200,000 is only deductible up to 50% i.e. € 100,000.

30% flat tax

Currently, financial income earned by individuals is taxed at the progressive rate of personal income tax (up to 45%) plus social taxes at a cumulative rate of 15.5%.

Dividends benefit under certain conditions from a 40% abatement which is applicable only for personal income tax i.e. not for social taxes, whereas capital gains deriving from the sale of shares benefit from an abatement of 50% if shares are held for more than two years but less than eight years and an abatement of 65% if shares are held for eight years or more.

The Finance Bill for 2018 introduces a flat tax, dubbed PFU, on capital income (interest, dividends, capital gains, director fees and carried interest), which is levied at the rate of 30%. This rate includes personal income tax at the rate of 12.8% and social taxes at the cumulative rate of 17.2%. Abatements are repealed.

However, taxpayers may elect to be taxed at the progressive rate of personal income tax (for capital gains, this election applies to shares acquired prior to January 1st, 2018). This election is annual and global i.e. it applies to all financial income collected during the year of taxation. In this case, the aforementioned abatements on dividends and capital gains are applicable.