A revolution could be afoot in France with the proposed replacement of the across-the-board ‘Wealth Tax’ with a new tax based solely on real estate.

The French parliament is currently in talks over the French Finance Act 2018 which will come into force on January 1 next year. This will be made up of numerous proposals currently under discussion, including the introduction of a 30% flat tax rate on certain financial income.

But when it comes to real estate investment – particularly that from overseas – the key issue is the replacement of the wealth tax (ISF) by a real estate wealth tax (IFI). This could result in significant changes, especially for non-French residents wishing to purchase French residential properties.

They fundamental change is how this tax would be assessed. Currently, the French wealth tax is assessed on all the assets owned by the taxpayer when net wealth exceeds a certain threshold (€1.3 million). The basis for the wealth tax includes worldwide assets for taxpayers domiciled in France and French real estate for non-resident taxpayers.

But with this change the tax would be assessed only on the French real estate owned by the taxpayer - to the extent that the value of their real estate net assets exceeds €1.3 million. This comes with a 30% reduction for the main residence of the French resident taxpayer, but this is not available for non-French tax residents.

All other assets - especially financial assets - would no longer be subject to the wealth tax. So how will this impact international investors and those looking to purchase French property?

The key areas possible investors would see effects would be in respect of deductibility of debts.

Frederic Mage from Gowling WLG says: “Under the proposed new FFA guidelines, only debts incurred in the acquisition, improvement, renovation, construction and renovation of taxable real estate may be allowed as a deduction.

“In addition, the FFA provides a limitation of deduction of loans when the value of the taxable asset exceeds €5,000,000 and the amount of the loan exceeds 60% of the taxable value.”

To put this into perspective, imagine an individual purchases a property for €8,000,000 with a loan of €6,000,000.  The loan exceeds 60% of the value of the asset - €4,800,000. Therefore part of the loan exceeding this amount (€1,200,000) would only be deductible for an amount of €600,000.

Debts must also be substantiated, be linked to a taxable asset and be the personal charge of the taxpayer.  The new tax has already been validated by the National Assembly and must now be approved by the Senate. Frederic Mage adds: “These provisions may still be amended, but overall it is not expected that the draft principles will be fundamentally overturned.”

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