Legal news

Taxation

A few days before the first round of the presidential election, Bercy launched on Thursday the last tax return campaign of the five-year term – which remains an obligation for all despite the tax at source – and has not hesitated to highlight the new provisions that can help lighten the bill of taxpayers.

This year, it is more specifically the application of the exceptional revaluation of 10% of the kilometer scale that should be closely observed by a number of households.

Those who are suffering from the explosion of fuel prices.

Announced last January by the government to reduce the cost of fuel prices, this measure provides more specifically to enhance in an “exceptional” way – of 10% – the kilometer scale.

This allows households to deduct from their taxable income, each year, expenses related to the use of their vehicle for business travels.

It is determined according to the type of vehicle and the kilometers driven.

However, in order to benefit from this significant boost due to the revaluation, households must opt for the deduction of actual expenses and therefore give up the flat-rate deduction of 10% that automatically applies.

This is difficult as the “actual expenses” option may be considered more complex.

A lot of people have an interest in switching to actual expenses, they need to take advantage of this tool.

This is the case, for example, for a 30-years-old single man whose net taxable income for 2021 is 28,000 € and who travels 50 km every day to get to work.

According to the DGFiP’s calculations, if this person opts for the flat-rate allowance of 10%, he will obtain a deduction of 2,800 € from his taxable income.

If he chooses the deduction of “real expenses”, and thus benefits from the 10% revaluation of the kilometer scale, he will have a reduction of 4,880 €.

To ensure that taxpayers choose the best option, the DGFiP has put online a simulator dedicated to the calculation of kilometer and other professional expenses.

More surprisingly, the tax authorities have even promised to automatically apply the most advantageous option for households that make a mistake…

Remote working fees

Another measure was put forward: the tax credit for households that have installed an electric vehicle charging station in their home.

More specifically, it represents 75% of the amount of expenses incurred last year within the limit of 300 euros per charging system, as specified by the tax authority.

The executive has also decided to renew in 2021 the exemption of professional expenses related to remote working.

This measure had been put in place for the year 2020 during which many employees worked from home because of quarantines and restrictions to fight against the coronavirus.

In detail, this exemption is capped at 2.50 € per day of remote working, 55 € per month and 580 € per year, slightly more than the 550 € provided in 2020.

Finally, the tax authorities are working with the Ministry of Education to improve the rate of use of school grants, which is considered “insufficient”.

Households with children in secondary school will be able to confirm their entitlement at the end of their online tax return, via a simulator.

This year, the deadlines for filling out the online returns are from May 24 to June 8, depending on the department.

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

Taxation

A few days before the first round of the presidential election, Bercy launched on Thursday the last tax return campaign of the five-year term – which remains an obligation for all despite the tax at source – and has not hesitated to highlight the new provisions that can help lighten the bill of taxpayers.

This year, it is more specifically the application of the exceptional revaluation of 10% of the kilometer scale that should be closely observed by a number of households.

Those who are suffering from the explosion of fuel prices.

Announced last January by the government to reduce the cost of fuel prices, this measure provides more specifically to enhance in an “exceptional” way – of 10% – the kilometer scale.

This allows households to deduct from their taxable income, each year, expenses related to the use of their vehicle for business travels.

It is determined according to the type of vehicle and the kilometers driven.

However, in order to benefit from this significant boost due to the revaluation, households must opt for the deduction of actual expenses and therefore give up the flat-rate deduction of 10% that automatically applies.

This is difficult as the “actual expenses” option may be considered more complex.

A lot of people have an interest in switching to actual expenses, they need to take advantage of this tool.

This is the case, for example, for a 30-years-old single man whose net taxable income for 2021 is 28,000 € and who travels 50 km every day to get to work.

According to the DGFiP’s calculations, if this person opts for the flat-rate allowance of 10%, he will obtain a deduction of 2,800 € from his taxable income.

If he chooses the deduction of “real expenses”, and thus benefits from the 10% revaluation of the kilometer scale, he will have a reduction of 4,880 €.

To ensure that taxpayers choose the best option, the DGFiP has put online a simulator dedicated to the calculation of kilometer and other professional expenses.

More surprisingly, the tax authorities have even promised to automatically apply the most advantageous option for households that make a mistake…

Remote working fees

Another measure was put forward: the tax credit for households that have installed an electric vehicle charging station in their home.

More specifically, it represents 75% of the amount of expenses incurred last year within the limit of 300 euros per charging system, as specified by the tax authority.

The executive has also decided to renew in 2021 the exemption of professional expenses related to remote working.

This measure had been put in place for the year 2020 during which many employees worked from home because of quarantines and restrictions to fight against the coronavirus.

In detail, this exemption is capped at 2.50 € per day of remote working, 55 € per month and 580 € per year, slightly more than the 550 € provided in 2020.

Finally, the tax authorities are working with the Ministry of Education to improve the rate of use of school grants, which is considered “insufficient”.

Households with children in secondary school will be able to confirm their entitlement at the end of their online tax return, via a simulator.

This year, the deadlines for filling out the online returns are from May 24 to June 8, depending on the department.

The estate tax return must be filed by persons whose estate assets exceed 1,300,000 euros as of January 1, 2021, on the same deadline as the general income tax return. In principle, it is filed with the 2042 return. In the specific case where the taxpayer has no income to declare (and therefore does not file a 2042 return), it must be accompanied by the so-called “light” return 2042-IFI-COV-K.

Overview

A brief description of the characteristics of the real estate wealth tax

The Real Estate Wealth Tax (IFI), introduced by Article 31 of Law 2017-1887 of December 30, 2017, replacing the ISF (Solidarity Tax on Wealth/Welfare), is payable by individuals whose real estate assets exceed €1,300,000.

The tax is annual

It is generated on January 1st of each year. It is on this date that it must be determined whether the conditions for the creation of the tax liability, the composition of the assets and valuation of the property, the amount owed, the situation of the tax economy, the residence of taxpayers, which determines the scope of the tax and, if applicable, the place where the return is to be filed.

Taxable Persons

The IFI applies only to individuals. Legal entities of public or private law (companies, associations, etc.) are not taxable.  IFI is only imposed on individuals whose assets include taxable property whose net value after deduction of debts exceeds €1,300,000.

Taxation by tax households

The tax limit is assessed at the taxpayer’s family level, including spouses (married, related PACS, or living in a common-law relationship) and minor children for whom they are legally managing property.

1. a) For married persons, the tax base consists, in principle, of all real property of both spouses, regardless of their marital regime, as well as minor children with respect to whom they legally administer the property.

However, each spouse is subject to IFI tax separately on his or her taxable assets and on the assets of his or her minor children if he or she legally manages their assets, in two situations:

• The spouses are separated and not living under the same roof;
• The spouses are in the process of divorce or legal separation and have permission from a judge to live separately.

In this case, the administration agrees that the assets of minor children whose parents share legal management will be divided equally between the two households.

1. b) For partners bound by a contract of civil solidarity (Pacs), the tax base consists of all of their real estate assets as well as the assets of minor children for which one of them legally administers the property.
2. c) For persons living in a common-law marriage, the tax base also consists of all of their real property assets as well as the assets of minor children with respect to which one of them legally administers the property.

It is specified that cohabitation is defined as “a de facto union, characterized by a stable and continuous life together, between two persons of different sexes or of the same sex who live as a couple” (article 515-8 of the Civil Code).

Territoriality

Individuals with permanent residence in France

Regardless of citizenship, a taxpayer whose tax domicile is in France is taxed on all his or her real estate located in or outside France. However, the tax domicile of the spouse and children must be taken into account to determine the scope of the IFI for each of these individuals.

The criteria for tax domicile meet those of Article 4 B of the Internal Revenue Code.

Persons residing outside France

If the taxpayer does not have domicile for tax purposes in France, he is taxed only on his immovable assets and rights located in France and on his shares in companies or entities (established in France or abroad) to the extent of the proportion of their value representing those same immovable assets or rights.

Effect of international treaties

If there is a bilateral tax treaty, tax residency may be assessed according to the rules set forth in the treaty.

The treaty may provide for either a division of taxation according to the category of property involved, or exclusive taxation in one or the other state.

With regard to the problems of allocating the right to tax between States and eliminating the risks of double taxation, three categories of countries should be distinguished:

1. a) countries with which there is a convention (or provision) explicitly covering wealth taxation (or former ISF or IGF): the rules contained in the conventions apply;
2. b) countries with which there is a convention containing sufficient provisions to determine the procedure for wealth taxation;
3. c) other countries: the rules of domestic law apply (with the deduction of tax paid abroad).

As the administration has stated, the treaty applicable to the ISF does not necessarily apply to the IFI. Therefore, it is necessary to consider the provisions of the specific treaty on a case-by-case basis.

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

What are the main points worth clarifying for a foreign investor who has decided to buy real estate in France?

А. 4 questions to answer when investing in real estate

When buying a property, an investor may be confronted with 4 questions. Dealing effectively with these issues will become increasingly important once the investment amount increases:

• How to find a property?  

This is the real estate agent’s competence.

• What taxes will apply to investors and how to minimize them (capital gains tax, wealth tax, inheritance and gift tax)? 

For foreign clients, these questions may pose many problems as they will have to deal with French law, the law of their country, double taxation agreements, international and European treaties and regulations.

In this case, it is worth contacting a tax specialist / tax attorney.

• How and through whom should the property be bought? 

Is it more correct to buy in one person’s personal name, together with a spouse, share ownership and usufruct, or use a company? In the latter case, what kind of company is it, with what shareholders or associates, what statutes, etc.

A competent attorney and notary are needed in this matter.

• How to finance the purchase? 

Buying a large property with a mortgage can have several advantages for the investor.

It is worth asking a financial advisor who will also be able to understand and take into account the very specific legal and tax aspects of international clients.

B. 7 reasons why bank financing may be beneficial to an international investor

1. Because the investor does not have enough equity capital.

2. If the property to be bought is intended to be rented out, the interest and other expenses related to the mortgage are deducted from the rental income, this minimizes the property income subject to tax in France.

3. Because the investor knows how to invest the available funds so that they bring in more than the value of the loan.

4. Because he wants to minimize the wealth tax. For information, the tax rate is gradually increasing from 0.5% to 1.5% of the value of the property located in France. For example, this tax is 15,000 euros for French properties worth 3 million euros, 50,000 euros for properties worth 6 million euros and 100,000 euros for properties worth 10 million euros.

5. When a foreign property owner in France passes away, his heirs will have to pay inheritance tax in France based on the net asset value of the property. For example, for direct heirs the rate will be 20% for assets worth between 16,000 and 552,000 euros, 30% between 552,000 and 902,000 euros, 40% between 902,000 and 1,805,000 euros and 45% over.

For investors living in a country where the inheritance tax is zero or lower than in France (and there are many such countries!), the way to avoid/minimize this French inheritance tax is to buy with financing that will still exist at the date of death.

6. When buying real estate in France, the investor living in a country “outside the euro zone” takes on double risk: the risk of change in the price of the property and the risk of change in the value of the euro against his own base currency. Buying with a 100% Euro pooled loan will avoid/limit this second kind of risk.

7. And simply because the investor wants to save as much personal capital as possible in order to invest it in an additional opportunity or to use it in his business activity.

Every investor often has several of these goals, which can be accomplished in several ways:

• through legal solutions, such as the use of a company, taking advantage of the separation of property into usufruct and bare ownership, the choice of a specific taxation option (French tax regime ” furnished accommodation rental”);

• with an appropriate financing strategy: annuity or interest-bearing mortgage, for how much, in what currency, with which securities;

• but more often it is an individual combination of several of these types of solutions.

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

Aid has been set up to support companies affected by the health crisis. Should this aid be included in the taxable income? Answer at the time of the tax returns.

Financial aid. Your company may have been able to apply for direct aid of up to €1,500 from the solidarity fund, particularly if it has been closed down by decision of the administration, or if it has suffered a loss of turnover of at least 50%. In addition, it could apply for additional aid of between €2,000 and €5,000 if it had one employee, could not pay its debts within 30 days and was refused a cash loan. Finally, the Council for the Social Protection of the Self-Employed (CPSTI) has set up an exceptional financial aid for all merchants and craftsmen, without any steps to be taken, the amount of which corresponds to the supplementary pension contributions paid on the basis of their 2018 income and can be up to €1,250. If you were not able to benefit from these aids, your company may have been able to benefit from the exceptional financial aid paid by the CPSTI to self-employed workers.

… not taxable. The cumulative amount of these aids can thus reach up to 9 250 €. And fortunately, it will not have to be included in your company’s taxable income, nor in your professional income on your income tax return.

What about the government guaranteed loan? An exceptional government guarantee is granted for loans granted from March 16, 2020 to June 30, 2021 inclusive to non-financial companies registered in France, by credit institutions and finance companies. The amount of the loan granted to your company is capped at 25% of the turnover excluding VAT in 2019 (i.e. three months of turnover). The repayment of the loan is deferred for a minimum of 12 months and then spread over a period of up to five years.

Tax treatment. The tax treatment here is the same as for any loan made by your company. The amount borrowed is not taxable and the repayments are non-deductible, except for the loan interest.

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

The French overestimate the amount of inheritance tax they will have to pay and have little knowledge of the mechanism.

Understanding how they are calculated in order to evaluate their importance is essential when considering the transfer of one’s estate.

Here are the instructions to follow, step by step, through the example of a couple married in community of property, with two children and a common heritage of 1 million euros.

• Identify the assets that are part of the estate

When couples are married without a marriage contract, all assets (housing, car, securities…) purchased during their union are common.

At the death of the first of them, half of these assets become part of the estate and will go to his heirs, including the surviving spouse.

The other half continues to belong to him.

The estate then includes the assets that belonged to the deceased (those acquired before the marriage or received by donation or inheritance, even afterwards).

Be careful, the income from the own property is common property. If the deceased owned a property that he rented out, the rents are common property as explained by the solicitor network.

• Assessing the value of the estate

The real estate assets are evaluated at their market value, except for the couple’s main residence which generally benefits from a 20% deduction upon the death of the first spouse.

As for the furniture (beds, tables, silverware…), it is possible to retain a flat rate of 5% which is calculated depending on all the other assets of the estate.

However, it is often preferable to estimate the furniture by making a detailed inventory (their value is often less than 5% of the value of the house).

• Calculating the share of the estate for each child

In the absence of a will or a donation to the surviving spouse, the children share either three quarters of the estate (if their surviving parent opts for one quarter of the estate in full ownership), or they share the bare ownership of the entire estate (if the survivor opts for usufruct).

This second case is, by far, the most frequent.

The spouse does not pay any duty on his or her share of the estate.

As for the value of the bare ownership of the children, it is evaluated according to a scale fixed according to the age of the usufructuary parent.

For example, on an estate valued at 500,000 €, the bare ownership is worth 400,000 € if the surviving spouse is between 81 and 90 years old (80% of 500,000 €) and is worth 450,000 € if he or she is 91 years old or older (90%).

• To abate 100,000 (E) of the deduction from which each one benefits

The value of the bare ownership is shared between the children.

From their individual share, the allowance currently fixed at 100 000 €, from which each one benefits, must be deducted.

For example: on a bare ownership of 400,000 €, each receives 200,000 € and is taxed on 100,000 € (after deduction of the allowance of 100,000 €).

This deduction is only fully effective if the deceased did not make any donation to his children in the 15 years preceding his death.

If the children have benefited from it, the 100,000 € deduction has already been used or has been used up. In this case, only the balance is available.

Example: if the children already received 70,000 € ten years before the death, only 30,000 € of the allowance remains to be deducted.

All donations made by the deceased under 15 years are taken into account, whether they are handmade or notarized, with the exception of family donations of cash, which are exempt up to 31,865 € (these are gifts of money made to a child who has reached the age of majority before 80 years).

Donations declared to the tax authorities for more than 15 years are ignored when calculating the inheritance tax.

• Apply the progressive scale

On the net taxable share of each child, the scale of inheritance tax “in direct line” is then applied.

This scale is progressive.

As the taxes are calculated child by child, the bottom of the scale (taxed at 5% and 20% up to 552 325 €) is used each time.

As a result, the more children there are, the lower the tax payable.

Example: for a taxable asset of 400,000 €, the rights to be paid are 58,194 € in the presence of an only child, 36,388 € if there are two children (18,194 € per child) and 14,582 € for three children (4,861 € per child).

• Estimating the inheritance tax on the surviving spouse’s estate

When the second spouse dies, the children are taxed on the surviving spouse’s assets.

Namely: half of the joint property he/she owned, his/her own property and, possibly, one quarter of his/her spouse’s estate which he/she inherited.

If he/she had opted for the usufruct of his estate, the children do not pay any tax on the value of this usufruct which falls to them when the surviving parent dies in turn.

Example: the children are only taxed on the 500,000 € of joint property that belonged to the survivor. The 100,000 € of usufruct will revert to them without additional tax.

If the surviving parent has not made a donation to them in the last 15 years, the children receive another 100,000 € allowance on their share and each of them benefits from the bottom of the inheritance tax scale.

• Summary for the entire estate

To find out the level of taxation of the family estate to be passed on, simply add up the taxes due by each child after the death of each parent.

Thus, according to the estimations the solicitor network, for a joint estate of 1,000,000 €, the taxes to be paid total are 136,388 € in the presence of one child, setting a tax rate of 13.64%.

With two children, this rate falls to 9.28% (92,776 €) and to 4.92% with three children (49,164 €).

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com