The IFI replaces the ISF
As of 1 January 2018, the 2018 finance bill cancels the wealth tax (ISF) and replaces it with a wealth tax on real estate property (IFI), which is aimed only at these assets.
The IFI will apply to real estate property that is not attributed to the professional activity of the owner.
The threshold for taxation (€1,300,000), the tax brackets and the definition of taxpayers subject to the tax remain unchanged compared to the rules applicable to the ISF. Similarly, the flat 30% reduction applicable to the value of a principal residence is maintained.
The five-year exclusion of assets located outside of France from the taxable base for new French tax residents called “impatriates” is maintained. The applicable range and the taxable base for the IFI are reduced significantly; only non-professional real estate property is taxable. In parallel, the rules regarding the exemption of professional assets are redefined and re-centred on real estate.
In addition to the real estate assets that are not attributed to the professional activity of the taxpayer, included in the assets subject to the IFI are stocks in companies or entities held by the taxpayer, but only up to the fraction of the value representing real estate property held directly or indirectly, without regard to the number of intermediate levels, by the company or entity.
The law provides for an exemption, under certain conditions that are similar to those applicable to professional assets for ISF purposes, for real estate properties that are attributed to the operational activity of the company holding them or to a company within the group.
Reduced deductible expenses
The deductible expenses are limited to the debt related to the taxable real estate property, excluding income tax.
A general ceiling applies to the deduction of debt when the value of the taxable assets exceeds €5 million and when the amount of debt is more than 60% of this amount. The debt exceeding this threshold is only deductible up to 50% of the excess.
Limitations and filing obligations
The limitations applied for ISF purposes are maintained for IFI. The mechanism aims to avoid having a total IFI plus income tax due in France and abroad on the income exceeding 75% of the income realised in the prior year.
Due to the unification of the declaration processes for IFI and income tax purposes, the IFI will be collected via the issuance of a bill.
Creation of a 30% flat-rate tax on investment income from 2018
Investment income is subject to a flat-rate tax (known as PFU and beginning 1 January 2018). The PFU rate is set at 30%, including income tax at 12.8% and social surtaxes at 17.2%.
Income items subject to the PFU are, notably, the following:
All investment income (interest, distributed income, dividends, directors’ fees, and similar income), including interest earned on housing savings accounts open as of 2018. The tax regime applicable to PEA/PEA-PME is maintained, and interest from Livret A, LDD and LEP accounts is still exempt.
The flat 40% reduction applicable to dividends subject to the 30% PFU has been cancelled, unless the taxpayer chooses to be subject to the progressive tax rates. Capital gains from the sale of shares are subject to the PFU, but the taxpayer can elect for the former regime of the holding period reduction if the shares were acquired before 1 January 2018.
The application of the PFU to financial income gives rise to the following remarks:
The Exceptional Contribution on High Income (CEHR) applicable to a fraction of fiscal reference income at the 3% and 4% rates remains applicable.
Interest and dividends paid to individuals domiciled in France will be subject to withholding at source to be operated by the payers of the income (or by the individuals themselves in some cases). Earnings on contracts related to premiums paid as of 27 September 2017 will also be subject to the mandatory flat-rate withholding.
Taxpayers with low income may, if they choose, opt to tax all of the income subject to the PFU at the progressive income tax rates. In this case, the 40% reduction related to dividends still applies. It should be noted that this option is applicable to all of the income subject to the PFU without the possibility of a partial option. It will be up to the taxpayer to determine the impact of the PFU on their fiscal situation before opting for the application of the progressive rates, keeping in mind that the option for the PFU should be more favourable for taxpayers whose income reaches the 14% tax rate bracket.
The rate of withholding tax applicable to dividends and interest paid to individuals fiscally domiciled outside of France is set at 12.8%.
“Macron” free shares
For attributions of free shares from 1 January 2018, a flat 50% reduction will be applicable to the fraction of the acquisition gain which does not exceed an annual ceiling of €300,000 (value of the shares at their final acquisition date), without the need to meet a minimum holding period, contrary to the current regime. Finally, capital gains from the sale of free shares (difference between the sale price and the value at the final acquisition date) are subject to the PFU.
BSPCE (Company creation warrants)
With the creation of the PFU, the tax rate applicable to BSPCE is aligned with the PFU income tax rate of 12.8% (plus the social surtaxes), or upon opting for the progressive income tax brackets, when the beneficiary has exercised their professional activity for at least three years in the company.
When the beneficiary has exercised their professional activity for less than three years, the whole gain realised at the sale of the shares subscribed to in the BSPCE will be taxed at the flat rate of 30% (plus social surtaxes).
These new provisions are applicable to BSPCE attributed as of 1 January 2018.