French Wealth Tax (ISF) & the new French Exit Tax This page outlines - Taxable assets for ISF - Wealth tax rates for 2012 - Wealth Tax Optimisation - New Exit Tax   The French government made major changes to French wealth tax in 2011. A small number of areas are still awaiting decrees to clarify the precise workings (such as French wealth tax on trust assets). As a high net worth individual - either resident or with significant property in France - it is critical to understand the revised wealth tax.  Please contact us if you would like further information or assistance in wealth tax optimisation. The government also introduced in 2011 a new Exit Tax on significant individual shareholdings - focused on entrepreneurs who build up companies whilst in France and then sell with a large capital gain once safely in a tax-haven outside France. Details can be found at the bottom of this page. TAXABLE ASSETS "Non-residents" with property in France are only liable for wealth tax on assets physically situated in France (therefore excluding purely financial investments). Residency is defined by French law and is not simply a matter of being present for 183 days. If in doubt, please contact us. There is a partial exemption for five years from French wealth tax for most people moving to France. The exemption only covers assets outside France, so careful financial planning is necessary. Newcomers may prefer to choose appropriate foreign assets that fall under favourable French tax rules - but beware of the additional costs if living off foreign assets... Please contact us if you would like to discuss further. Assets must be consolidated for all members of the household. Couples must make a joint declaration whether married or not. Assets held by children below 18 years of age must also included. Assets include - Land & buildings (Principal & secondary residences, rental property, ...) - Financial investments (quoted & unquoted stocks & shares, bank accounts, ...) - Jewellery and precious stones - Furniture - Cars, Motorcycles, Boats, Aeroplanes, ... Even if you are not the owner, simply having the right to live somewhere or receive income can be enough to make you liable on the capital value. If you own shares of a property company (eg SCI), your declaration is based on the current value of the underlying property. Any loans to a SCI are also liable to French wealth tax.  WEALTH TAX RATES French Wealth Tax in 2012 is payable by those with net assets above 1.3M€ - on all their assets - evaluated as at 1st January. French residents must send in their declaration and payment by 30th June 2012 although ISF declarations below 3M€ should normally be declared on the annual income tax return in May 2012. To calculate the tax, add up the total value of assets for the household and deduct all outstanding debts and overdrafts as at 1st January. As from 2012, the rates have been reduced from the old six bands down to just two rates: 0.25% and 0.5%. The upper rate is applied if total assets exceed 3M€. These rates apply from the 1st euro. To avoid a sudden jump, a “smoothing mechanism” exists for taxpayers with total assets between 1.3 and 1.4M€ and also for those between 3.0 and 3.1M€. Net Assets (M€)         2011 ISF         2012 ISF    1.29                               2745              0    1.30                               2750              1500    1.35                               3105              2500    1.70                               5730              4250    3.00                             16555             7500    3.10                             17555           11750    3.30                             19555           16500    5.00                             39435           25000   10.00                          112540            50000   20.00                          282265          100000 All the existing reductions are maintained - including exemption for the main residence and reductions for investment in European Small & Medium sized Enterprises (see below). OPTIMISATION : HOW TO REDUCE WEALTH TAX 1. Know your rights. Don't over estimate property values, for example: - As a French resident, for your principal residence, you can deduct 30% from comparable sales value - For each rental property you can sometimes deduct up to 20% if unfurnished (and up to 40% if under a government controlled rental scheme such as de Robien or Scellier) Don't include any exempt assets used for company or professional purposes if they meet the appropriate conditions. Do deduct all allowable taxes, including: - total income tax for the previous year and any outstanding tax for previous years - property taxes (Habitation and Foncier) - television licences - the ISF for the current year (creating an interesting complexity in the calculations...) 2. Start transferring assets. One of the most effective ways to reduce ISF is to spread assets amongst your descendants. Rather than making a full gift, you can also make “temporary gifts” known as usufruit temporaire. If well organised, the family will pay lower rates or avoid ISF altogether. If badly organised, you could end up paying high levels of gift tax instead. Careful planning is required and we suggest discussing the situation with professional advisors at an early stage. Do not wait until you have reached the ISF threshold! 3. Make use of available exemptions & deductions. If your French friends have decorated their houses with antiques & works of art, it may have been for more subtle reasons than you thought! Virtually any object that you can claim to be over 100 years old - or created by hand - is normally exempt. Consider making additional investments in qualifying pension schemes. Investing in a small European companies is another method to reduce ISF. 50% of the cost is deductible - limited to 45,000€ per family. Rather than choosing a company yourself, you can use professional venture capital funds, including regional (FIP) and innovative (FCPI) funds managed by specialists. In this case, the limits are now 18,000€ and 50% of your investment. In the years after the purchase, the qualifying investments remain exempt. Please contact us for more detailed information. Also, see our page on Buying a French business. Certain types of Life Insurance policy (Assurance Vie) provide ISF exemption. However, there is no point in saving ISF if the financial performance is inferior. We regularly review the performance of such schemes and can provide advice on choosing appropriate policies and funds. Many other types of exemption exist and depend on your personal interest, your short and long term financial objectives and your appetite for risk. 5. Use of French bank loans by non-residents. Since non-residents are only assessed on net assets located in France, they should certainly consider using a mortgage when purchasing property - even if the capital is readily available elsewhere. The mortgage should be secured on the French property to ensure the debt will be subtracted from the property value when estimating your liability to wealth tax. Loans should therefore be interest only so that the debt does not reduce over time. The capital that would otherwise have been brought into France to purchase the property can be invested on financial markets outside France - thus creating the income to pay the French banks. Please contact us if you would like more information on this, or if you would like assistance obtaining a suitable loan from a French bank. EXIT TAX The government has introduced an “Exit Tax” for those leaving the country with substantial unrealised gains on shares sold after departure. This applies to departures since 3 March 2011. The tax only applies to shareholdings of a single company - or the combined value of any shareholdings above 1% - which exceeds 1.3M€. The objective is to tax the unrealised gain (valued on the day of departure) at the usual capital gains tax rate (19%) plus social taxes (13.5%). The tax would be due at the time of leaving France - unless moving to another European country (or with specific approval) - in which case the payment would be due only at the time of the disposal of the shares. The capital gain is recalculated at the final date of disposal - and any reduction in value is taken into account as well as any standard exemptions available (such as shares held for over 8 years). Any foreign taxes paid are deductible from the French tax due. If tax was paid at the time of leaving France, reimbursement occurs at the date of disposal if tax had effectively been “overpaid”. Please note that the above comments represent our current understanding of the new rules. We are still waiting for further written instructions from the tax authorities. Please contact us if you would like further information or to be kept up to date. LOANS within SCI’s held by NON-RESIDENTS Since 2011, loans by non resident individuals or companies made to French property companies (SCIs) are no longer deductible when calculating the value of the property shares for wealth tax purposes. TAX ON SECOND HOMES owned by NON-RESIDENTS Please note that in 2011 the government initially proposed a tax on second homes owned by non-residents but this proposal was rejected by the Senate. C Copyright © 2012 Cabinet Gregory                                                                     Tel:   +33 (0)1 5320 9027           Latest modification: 15 January 2012                                                             Email: info@cabinetgregory.com