Proposed French Tax Changes: Non-French Residents

The 2011 Budget proposes some tax changes for non-French tax residents who own French property. Tax on Second Homes Owned by Non-French Residents – The government

The 2011 Budget proposes some tax changes for non-French tax residents who own French property.

Tax on Second Homes Owned by Non-French Residents

The government had proposed a new annual 20% tax rate on the letting value of second homes in France owned by non-resident (regardless of nationality or where they live) and available for their use. It was widely criticised by both French and foreign property owners and would have been scrutinized by the European Court of Justice. Although it was voted on by the National Assembly is has now been reported that the government has bowed to pressure and scrapped the idea completely.

The levy was intended to contribute to the financing of the wealth tax reform. Instead it is now reported that the government is looking at abolishing some of the tax deductions available on capital gains derived from the sale of non-developed land.

There is a proposal to abolish the tax on the ?three times letting value? under the penal Article 164C of the French Tax Code from 2012. This tax affects individuals who are resident in a country which does not have a double tax treaty with France. The abolition of this tax was to be compensated for by the introduction of the 20% second home tax. Now that the 20% second home tax proposal has been scrapped, it is not clear whether Article 164C will still be abolished or whether it will be retained in its actual form. If it is scrapped, this is likely to encourage second home purchasers from the Far East, Monaco, Channel Islands, Caribbean etc who hitherto have faced very high taxes under 164C, and there could be a boost to the second home French property market.

The capital gains tax exemption on gains after 15 years of ownership, and reduced tax payable after year 6, is untouched.

Shareholders Loans and Wealth Tax

Currently, shareholder loans to a French property holding company are deductible against the value of the underlying property for wealth tax purposes. The loan itself is not liable to wealth tax for non-French tax residents. From 2012, it is proposed that the value of such loans will be disallowed as a deduction against the value of the underlying property for French wealth tax purposes, and this measure will catch all existing shareholders? loans. These draft proposals are aimed at real estate holding companies regardless of their nationality. They would thus clearly affect SCIs in France or Monaco which are commonly used to hold French real estate.

Residence? An Opportunity?

Strangely enough, these changes might tip the balance for individuals who are currently in France for quite a bit of time and would really like to live in France, but mistakenly believe that the tax rates are excessive. In fact, with careful planning, France can be an unexpected tax haven for the newcomer. There is a five year wealth tax holiday for non-French assets; any gain on your French home is tax free; any gain on second homes owned for more than five years receive a 10% deduction such that after 15 years they are tax free (and free of social charges). Further tax benefits include moving your UK pension into an offshore structure to avoid UK PAYE and also pay tax based on as little as 20% of your pension (not a tax rate of 20%, but receiving up to 80% of your pension tax free).

There are also some excellent structures whereby you can save considerable tax on your investments, whilst avoiding both UK and French succession taxes on your death regardless as to whether you are a UK domicile or a French domicile. If you have a second home in France, but have no real protection under a suitable Double Tax Treaty, or spend more time in France than in any other single country, then now is the time to plan your move into the French tax system. You can genuinely become a French tax resident whilst paying taxes at a more than acceptable level if you plan it right. No more sleepless nights.

Contact Blevins Franks to see how you can take advantage of these changes.

By David Franks, Chief Executive, Blevins Franks

7th June 2011, updated 23rd June 2011

Note that at the time of writing the tax reforms are still being debated by parliament and so changes are possible. Any statements concerning taxation are based upon our understanding of current / proposed taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.