Legal news

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

Furnished rentals are the provision of furnished living quarters when they include all the furnishings necessary for a normal living situation for the tenant.

Income from renting furnished accommodations of which you are the owner and income from subletting furnished accommodations of which you are the tenant are subject to income tax in the industrial and commercial income (BIC) category, not in the property income category.

Exemption from tax on furnished rentals:

Furnished rental income earned by people who rent or sublet a portion of their primary residence before December 31, 2023, is not taxable in the following two situations:

Situation 1: when the income does not exceed €760 per year and the rental is for people for whom the rented premises are not their primary residence (bed and breakfast);

Situation 2: when the rented premises are the primary residence of the lessee or sublessee (or temporary residence if he/she is a seasonal worker), the income is also not taxable if the following three conditions are met :

• The rooms rented or sublet must be part of the landlord’s principal residence ;
• The rented or sublet rooms must be the primary residence of the renter or subletter, or their temporary residence if they are seasonal workers;
• The rental price must remain within reasonable limits.

Mode of taxation:

There are two regimes applicable in the case of furnished rentals: the micro regime and the real regime.

1. A) Micro-BIC regime

Depending on the income from the previous year and the year before, if it does not exceed €72,600 for a classic furnished rental, or €176,200 for a classic furnished tourist accommodation or guest rooms, the micro regime can be applied.

A deduction of 50% is automatically applied to the income from such rentals for classic furnished accommodation (as well as rural cottages not classified as “furnished tourist accommodation”) or 71% for classified furnished tourist accommodation and guest rooms. Its minimum amount is 305 €.

This deduction is at a fixed rate to cover all your expenses. For this reason it is not possible to deduct any expenses in order to reduce your taxable income. You must declare the total amount of rent received, including rent payments (i.e. allowances for expenses paid by the tenant).

1. B) Real regime

The other applicable regime is the real regime, which applies when income exceeds the limits of the micro BIC system or when you want to deduct the exact amount of your expenses or depreciate your assets.

The real tax regime requires accounting records to be kept.

Regardless of how taxpayers fall under the real tax regime by right or by choice, special rules apply depending on whether they are professional or non-professional landlords.

Regardless of the type of landlord, this activity is subject to registration with the Business Formalities Center (for non-professional landlords, the Commercial Court Registry).

1) Professional Furnished Landlord

The activities of a furnished accommodation landlord are professional if the following two conditions are met:

– The annual income from this activity for all family members exceeds €23,000 per calendar year;

– This income exceeds the family’s income taxable income in the categories of wages, industrial and commercial profits (except those derived from the activity of renting out furnished accommodation), agricultural profits and non-profit profits.

The activities of a professional furnished accommodation landlord are subject to registration with the Business Formalities Center.

2) Non-professional landlord of furnished housing

If one of the above conditions is not met, the landlord is considered a non-professional landlord.

A non-professional landlord of a furnished accommodation requires registration with the Business Formalities Center. This is the Commercial Court Clerk’s Office where the property to be rented is located.

The registration must be done within 15 days of the start of the rental of the property using a P0i form.

This will allow :

• obtain a SIRET number ;
• make it known that the activity exists;
• indicate the taxation system you have chosen.

Note that in the case of more than one furnished rental, the jurisdiction of the Commercial Court is the one in which the property generating the most income is located.

The difference between a professional and non-professional furnished accommodation landlord:

1. A) Differences regarding damages

1) For non-professional furnished accommodation landlords

Losses incurred as a result of a non-professional furnished rental are carried forward for the next 10 years solely on the income from the non-professional furnished rental.

Example: you are engaged in a craft activity that is taxable as a professional BIC and you rent out a furnished dwelling. Your non-professional furnished rental property results in a loss of €1,000 in year N, while the income from your craft business is €2,000. Your taxable income for income tax purposes in year N is €2,000. You cannot deduct the loss from the non-professional rental of a furnished accommodation from the result of your craft business.

In year N+1, your non-professional furnished rental generates €300 and your craft business generates a profit of €20,000. Your taxable income for income tax purposes will be €20,000 and the loss carried forward from your non-professional activity will be reduced to €700 (€1,000 – €300). You will be able to carry it forward up to N+9 on any profits made in those years. 

2) For professional landlords of furnished accommodation

Losses incurred from furnished rental activities carried out on a professional basis can be deducted from the taxpayer’s total income without any limit on the amount. If the total income is insufficient, the total negative balance so generated may be carried forward to the next 6 years.

The determination of these negative values must, of course, comply with the rules of the general tax code for deducting expenses. So, for example, losses should not arise from depreciation excluded from deductible expenses.

Example: you are a professional landlord and your spouse is an employee. In N your professional activity of renting out furnished accommodation forms a loss of €10,000, while your spouse’s taxable salary is €40,000. Therefore, your family’s taxable income would be €30,000 (€40,000 – €10,000). No loss can be carried forward to the following year.

In N+1, your business as a professional landlord of furnished premises has generated a loss of €20,000, while your spouse’s salary is €10,000. Thus, for N+1 your household’s taxable income would be zero. A total negative balance of €10,000 (€10,000 – 20,000) would arise. This total loss will be deducted from the total income of subsequent years and cannot be carried forward beyond six years.

1. B) Differences regarding capital gains from real estate

1) For non-professional landlords of furnished housing

Capital gains realized on the disposition of your furnished accommodation are taxed as private capital gains. As such, they are not subject to professional capital gains regime.

2) For professional landlords of furnished housing

Professional furnished tenants are subject to the professional capital gains system on the disposition of rented premises.

Capital gains of professional landlords, provided they have been in business for at least five years, are fully exempt from tax if the average rental income from the property in the two calendar years preceding the closing date of the fiscal year in which the capital gain is realized does not exceed the €90,000 tax-free threshold, and partially exempt if the same income ranges from €90,000 to €126,000 (tax-free).

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 brackets of the progressive scale used to calculate the 2020 income tax are revalued by 0.2% as of January 1, 2021. This revaluation is set according to the evolution of consumer prices excluding tobacco in 2020 compared to 2019. People who declare more than €10,084 in income over the year will have to pay income tax (instead of €10,064 last year). This is stated in Article 4 of the Finance Act for 2021.

The new income tax scale has revised ceilings:

• for the 2nd tax bracket, an income ceiling increased to €25,710 (instead of €25,659 for the previous year) ;

• for the 3rd bracket, an increase in the ceiling to €73,516 (instead of €73,369).

How is the income tax calculated?

The amount of tax is calculated from the net taxable income by:

• dividing the net taxable income by the number of units;

• applying to this result the progressive tax scale by bracket;

• multiplying the result obtained by the number of family quota units to obtain the amount of tax due.

For example, a married or civil union couple with two minor children has a net taxable income of €55,950.

This couple has 3 units (2 units for the couple and a half unit for each child), the net taxable income of 55 950 € is divided into 3 = 18 650 €.

The scale is then applied to the 18 650 €:

• income bracket up to 10 084 € taxed at 0% = 0

• income bracket 10 085 € to 25 710 € taxed at 11% : 8 565 € (obtained by calculating 18 650 – 10 085) x 11% = 942,15 €.