The 2020 real estate wealth tax campaign for non-French tax residents

The deadline to file the 2020 return has been extended due the Codiv-19 crisis

The deadline to file the return has been extended to 12 June 2020 for non-French tax residents and for those with French taxable income filing online, the deadline is 4 June 2020.

The real estate wealth tax was introduced by the 2018 French Finance Act on 30 December 2017. Since 1 January 2018 this new tax applies to French real estate which is not used for the purposes of a business activity.

This tax mainly affects residential properties. Real estate owned by a company for the purposes of its own business activity is excluded from the scope of the tax. As far as residential properties are concerned, this might also include “para-hôtellerie” activities.

Since the legislation was passed, the French tax authorities have issued their comments and the 2019 French Finance Act has made some amendments to the initial legislation.

We will address in this briefing some important provisions which are relevant to non-French tax residents owning French residential properties.

 

Shareholder loans

Under the former wealth tax loans from shareholders to a company were not taken into account when determining the value of the shares.

The same restriction exists with the real estate wealth tax but with an exception in respect of loans created before the introduction of the tax.

When a property is purchased by a company French tax legislation provides that loans from the taxpayer or a member of his tax household to that company are not deductible. This restriction mainly covers shareholders’ loans.

However, French tax legislation also provides that this restriction does not apply if the taxpayer can prove that the shareholder loan has not been granted mainly for tax purposes (“objectif principalement fiscal”).

The French tax authorities have made comments on this part of the legislation in their tax guidelines in which they indicate that in the circumstances in which the debt was taken out prior to the introduction of the real estate wealth tax can be a reason to prove that the loan has not been granted mainly for tax purposes.

Therefore, in their guidelines the French tax authorities accept the deductibility of shareholder loans in existence before the introduction of the new real estate wealth tax legislation. This might allow some tax reductions…

 

Interest-only loans to companies

We knew from 2018 that interest-only loans are not fully deductible. The legislation provides for a formula to be used to determine the deductible annuities of the loan. A similar restriction applies to loans which do not provide for a period of time for the reimbursement of the capital.

When the new legislation was introduced this restriction only applied to loans granted to individuals. Companies were safe (but only for a year).

Indeed, as of 1 January 2019, the same restriction now applies to loans granted to companies and to loans entered into for the purchase of company shares.

Each year the deductible annuity of the loan would need to be calculated.

When a loan has no termination date, the legislation provides that the loan is deemed to have been granted for a period of 20 years. Therefore, each year, the capital outstanding of the loan is reduced by 1/20.

 

Gifts to charities 

Under French tax legislation certain charitable gifts can give rise to a tax credit against the real estate wealth tax liability. But most interestingly, taxpayers are often unaware that this tax credit can also benefit non-French tax residents providing that certain conditions are met.

The tax credit directly applies to the tax due. The tax credit is equal to 75% of the amount donated capped at €50,000 per year. If the amount of the tax credit exceeds the tax liability, the balance is permanently lost as it cannot be reimbursed or carried forward to the next year.

More importantly, as far as non-French tax resident taxpayers are concerned, the tax credit is also available for gifts made to charitable organisations established in an EU or EEA country which has been accredited by the French tax authorities.

In order to claim the tax credit, the taxpayer must file a real estate wealth tax return as normal. He must therefore disclose his taxable assets and their value. The tax credit is then claimed on the same return by disclosing the gifts made and by providing the necessary justifications (e.g. gift confirmation from the charity, nature and purpose of the charity etc).

 

Formalities

The declaration must be made in a specific Form (2042-IFI / 2042-IFI-COV).

Unlike the previous Wealth tax, the real estate wealth tax is not paid when submitting the return.

Later this year, the French tax authorities will be sending to the taxpayer a tax bill setting out the deadline to pay the tax. We know that last year they have been very late to issue the tax bills.

Payments by cheques are possible if the tax liability does not exceed €1,000. Otherwise, the payment will have to be made online.

 

We can advise and assist with these formalities. For any questions on this matter please do not hesitate to contact Frederic Mege on +377 9797 0064 or email him at fmege@mri.mc