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IFI: taxation of non-French tax residents...

 8 February 2018

IFI: taxation under international tax treaties...   

IFI: taxation of non-French tax residents under international tax treaties  

Last month, we published an initial newsletter to draw the attention of non-residents to the introduction in France of “IFI” (impôt sur la fortune immobilière – New real property wealth tax – tax on real estate assets).

Paradoxically, while IFI aims to limit the scope of the former ISF or wealth tax to real property only, IFI is likely to affect non-residents more widely than ISF did.

On this subject, we refer you to our January newsletter.

Today, we are paying particular attention to the impact of international tax treaties as applicable to IFI.

For the record, the tax base for IFI – including for non-residents – is as follows:

  • directly held real estate located in France, but also
  • real estate located in France held indirectly through any legal person (regardless of the number of structures interposed or the percentage of real estate assets held by the company).

Provision is made for certain exclusions, including:

  • assets held directly or indirectly by a an operating entity that assigns them to its business or to that of a group company;
  • property held directly or indirectly by an operating entity in which the taxpayer holds less than 10%.
  • SIIC shares where the taxpayer directly or indirectly holds less than 5%.

The concepts of “invested predominantly in real estate properties” and “majority stake”, of critical importance for non-residents under the ISF regime, are no longer applicable for the purposes of IFI.

In applying IFI, despite the exclusions under the new regime, the taxable base of non-residents’ property has been expanded.

This situation may however be alleviated should a tax treaty apply. The agreements concluded by France regarding ISF should logically cover IFI, as they apply to any similar tax introduced after their signature. 

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Some treaties do not cover wealth tax (e.g. the Franco-Belgian treaty). In such cases non-residents will be subjected in full to the IFI rules without the benefit of “favourable treatment”! A list of states having tax treaties with France appears at the end of this article.  

 

Main rules included in tax treaties

Real estate assets

As regards property held in France by non-residents, most treaties provide that the wealth represented by such property will be taxed in France.

The treaties concluded deem the concept of “real estate asset” to be defined by reference to the law of the state where the property is located. This provision concerns property (whether constructed or otherwise), buildings under construction and real estate rights.

It follows therefore that a non-resident directly owning a real estate asset in France will be subject to IFI on this property.

→The treaty therefore has no practical impact!

Shares in companies that own (directly or indirectly) property located in France

Companies trading mainly in French real estate

As noted, IFI no longer refers specifically to shares in entities predominantly invested in real estate properties. Its scope is wider since it refers to properties held directly or indirectly in France.

Nevertheless, most tax treaties allow France to tax only the shares of entities predominantly invested in French real estate.

Accordingly, if a resident owns:

  • a stake, directly or indirectly, in a company that owns a real estate asset in France, 
  • but this is not an entity predominatly invested in French real estate properties.

→Under the treaty, the resident will not be subject to IFI!

An entity predominantly invested in French real estate properties trading mainly in French real estate is one where over 50% of its assets by market value are properties located in France. In assessing whether the company is trading mainly in real estate, properties assigned by such legal person to its industrial, commercial or agricultural operations, or to carry on a non-commercial profession, will not be taken into account. 

♦ Example 1 : A is a non-resident (German) holding shares in a French entity predominantly invested in real estate  

 ♦ Example 2 : A is a non-resident holding shares in a French entity that is not predominantly invested in French real estate  

 

Companies that own properties

Some older treaties (with the Netherlands, for example) do not allow France to tax indirect holdings of properties even where this is via an entity predominantly invested in French real estate.

♦ Example 3 : B is a non-resident (Dutch) holding shares in an entity that is not predominantly invested in real estate 

Real estate leasing

Under IFI, real estate assets that are leased are included in the taxable assets of the lessee. The base is reduced by the rental payments remaining until the lease expires or until the date stipulated for exercising the option, as well as by the amount of the purchase option.

However, real estate leasing is generally not covered by tax treaties and – if a tax treaty exists – it will constitute a personal right rather than a real estate asset, non-residents should not be subject to IFI on such assets.

 →No IFI on real estate leasing for non-residents!

Life insurance contracts

For non-French tax residents, redeemable life insurance contracts are liable to IFI, on the proportion of their value representing real estate assets located in France.

However, just as real estate leasing, life insurance contracts are not real estate asset from a legal standpoint and are not covered by double taxation treaties concluded by France. Therefore, holding life insurance contracts potentially invested in French real estate assets should not be liable to IFI on such contracts!

→No IFI on life insurance contracts for non-residents ! 

List of main states that have concluded a tax treaty governing wealth tax with France

States that have concluded a treaty governing wealth tax with France

Albania

Colombia

Hungary

Malta

Russia

Vietnam

Algeria

Côte d'Ivoire

India

Mauritius

Saudi Arabia

Zimbabwe

Argentina

Czech Rep.

Indonesia

Mongolia

Slovakia

 

Armenia

Egypt

Israel

Namibia

South Africa

Austria

Estonia

Italy

Netherlands

Spain

Azerbaijan

Finland

Kazakhstan

Norway

Sweden

Bahrein

Gabon

Kuwait

Oman

Switzerland

Bolivia

Georgia

Latvia

Poland

Ukraine

Canada

Germany

Lithuania

Qatar

UAE

Chile

Guinea

Luxembourg

Quebec

USA

Cyprus

Hong Kong

Macedonia

Romania

Uzbekistan

     

 By Pierre Appremont 

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