It is not a secret that France is often called “high-tax jurisdiction”. In reality, French taxes are ones of the highest in the world. The opportunity to buy real estate in this beautiful, full of history and nice architecture country attracts investors from around of world. However, in addition to real estate, owner gets a whole range of taxes imposed on that property.

Real estate property tax, residence tax, wealth tax is not a full list of duties that French Tax Law imposes on real estate objects.

Mediterranean Villa with Pool, CC0 1.0

In the beginning of 2018 there was one more surprise for foreign investors in form of changes in French law in regards to French taxation.

The law was signed on December 30th by French president Macron as "loi n° 2017-1837" and became effective on January 1st this year. It intends to lower the tax burden for ordinary French residents and to lower the profit taxes for corporations doing active business in France.

As always when some taxes will be lowered, the tax office looks for possibilities to compensate for potential losses by raising taxes elsewhere. And this year, the tax office's preferred target are foreign owners of valuable second-residence real-estate, where "valuable" means anything worth more than 1,3 Mio. Euros.

Here are in short the most important aspects for foreign owners of French real-estate:

1. The existing wealth tax ("Impôt de solidarité sur la fortune"; ISF) is abolished at all. This sounds very good, but in reality only French residents will really profit from this.
2. To compensate for this, a new wealth tax for residential real-estate only ("Impôt sur la fortune immobilière") is created. The calculation model and the tax rates for this new tax will be the same like for the old ISF wealth tax (stepwise progression up 1,5% per year). French residents, who use the property as their primary residence, will get a generous tax rebate on the new tax. For foreigners, who use the property as a second or even holiday residence, no tax reductions are possible.
3. But now comes the BOMB: A common scheme to reduce the ISF tax on real-estate was to establish a so-called SCI ("Société Civile Immobilière"), a special legal entity existent only under French law, which owns the real-estate property. This SCI then took a mortgage credit from a bank with an amount equal to the value of the real-estate. By this trick, the SCI had no real value, and no ISF tax was due. In reality, this credit was only "on paper" and backed by other financial assets of the beneficial owner. There was no amortization of the credit's principal, and the interest payments were pro-forma only.

While this scheme became illegal already in 2012 (and Benesteem always strongly warned against using this!), the mortage scheme becomes impossible under the new law:

• Mortgages must now be directly connected to the aquisition, renovation or modernization of the property.
• "Interest-only" loans, without any repayment of the principal, are no longer accepted.
• Even if the above two conditions are met, loans on properties worth more than 5 Mio. EUR will be only partly recognized, if the loan amount is more than 60% of the property's real market-value. Sounds complicated and is complicated. But as an example, a 15 Mio. EUR loan on a 15 Mio. EUR property will in result be counted only as a 12 Mio. EUR mortgage.

Please note: Until now, the French tax office had to somehow prove, that a mortgage was not real and for tax-saving purposes only. In many cases, this was not possible and the trick worked. Under the new rules, the loan will be simply considered as non-deductible for formal reasons, and the tax office will simply reject the wealth tax declaration. There is no more any need for the tax authorities to prove anything, the duty of proof now resides on the real-estate owner!

A little plus for those who really invest into real-estate for profit purposes: The French corporate profit tax rate (Impôt sur les sociétés (IS)) will be lowered from now 33,33% to 25%, stepwise until the year 2022.

We see that as a consequence of the new French tax legislation, the standard tax-saving scheme "SCI+mortgage" no longer works from beginning of this year. All such existing schemes will be automatically rejected by the French tax authorities, simply on formal reasons. Real-estate owners concerned about this effect should urgently look for expert advice, in order to avoid costly tax payments from the next year onwards.

For more information on this issue you can click “Ask the expert” button below.

Acknowledgement: Glagoliza News thanks Benesteem Executive Consulting Service, Switzerland for providing expert information on this issue.

Ask the Experts!