In France, since 1 January 2018, the real estate wealth tax (IFI) has replaced the solidarity tax on wealth (ISF). Who is subject to this tax? What assets are taken into account? What types of debt are deductible? Let us look at the main rules governing this tax.
Real estate assets
The real estate wealth tax (IFI) applies to French residents having real estate assets of more than EUR 1.3 million net, limiting the annual taxation of wealth solely to real estate assets. Under certain conditions, Luxembourg residents may also be subject to the IFI on real estate assets held by them in France. The IFI also applies to French non-residents having real estate assets in France in excess of EUR 1.3 million net. This is not really ground-breaking since, under the previous ISF regime, Luxembourg residents were already potentially liable for an annual tax payment based solely on their real estate assets in France.
Tax household taken into account
The France-Luxembourg treaty designates the State having the right of taxation. The taxation rules are those of domestic law.
The IFI is based on the tax household: this means the assets of the couple (including simple cohabitees) and their children must be added together. For Luxembourg residents, only assets located in France are taken into account.
Types of assets taxable
The tax liability trigger level is EUR 1. 3 million of net real estate assets at 1 January.
The following assets are taken into account in the basis of calculation :
- Real estate assets (apartments, buildings, houses, land, etc.);
- Some real estate rights (in the case of usufruct, the usufructuary has sole IFI liability for the full ownership value of the asset);
- Company shares (including those held via a life insurance policy) for the real estate portion thereof (with a few exceptions, such as real estate allocated to an operational activity or participating interests of less than 10% in investment funds having less than 20% of their assets invested in real estate).
The real estate wealth tax (IFI) is calculated by applying a progressive scale to the taxable net real estate assets.
|Taxable net value||Applicable rate|
|Up to EUR 800,000||0%|
|EUR 0.8 million to 1.3 million, inclusive||0.50%|
|EUR 1.3 million to 2.57 million, inclusive||0.70%|
|EUR 2.57 million to 5 million, inclusive||1%|
|EUR 5 million to 10 million, inclusive||1.25%|
|Above EUR 10 million||1.50%|
Calculation of the real estate’s net value and possible deductions
The real estate’s net value is obtained by subtracting debt existing on assets taxable under the IFI from the real estate’s gross value (i.e. the asset’s estimated market value). However, the deductibility of debt is subject to some rules:
- The tax deductibility of bullet loans depends on their maturity, with a limit of 20 years (this limits also applies to loans with no maturity date). Only half of a 10-year bullet loan will be deductible after five years.
- In the case of loans financing taxable assets in excess of EUR 5 million only 50% of the portion that exceeds 60% of the asset’s value is deductible. A loan of EUR 8 million financing a real estate asset with a value of EUR 10 million is fully deductible up to EUR 6 million (60% of the asset’s value).
Restrictions on the deduction of some types of debt
- Family loans are only deductible if they are made under normal lending conditions (date, term, interest rate, etc.);
- Loans taken out by companies for the acquisition of an asset belonging to a shareholder are not deductible unless their objective is not based mainly on tax considerations;
- Shareholder loans provided after 2018 (these were not deductible for non-residents under the ISF regime) unless their objective is not based mainly on tax considerations;
- Loans provided by a company controlled by the shareholder of an entity unless their objective is not based mainly on tax considerations;
- Loans provided by a member of the family of an entity’s shareholder unless they are made under normal lending conditions (date, term, interest rate, etc.);
Article co-signed by Anne-Lise Grandjean, Luxembourg tax specialist, and Romain Biron, French tax specialist.
For more information, please contact our advisers who can also put you in touch with our financial engineering and wealth planning experts to assess the implications for your personal situation.