Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

French Finance Bill 2018: repeal of Wealth tax (ISF) and replacement by the impôt sur la fortune immobilière (IFI)

December 10th 2017

There is currently a legislative ping-pong taking place between the French Sénat and the Assemblée on the economics of the taxation of wealth in France in the Finance Bill for 2018.

This newsflash summarises the position after the Sénat voted to repeal ISF and not to replace it by the impôt sur la fortune immoblière ("IFI") on 27th November, and sent the the emasculated Bill back to the Assemblée.

In layman's terms, the changes to the French Wealth tax or impôt de solidarité sur la fortune (ISF) and its proposed replacement by a tax on immovable property wealth of individuals: l'impôt sur la fortune immobilière (IFI) were enshrined in article 12 of the Bill initially sent up to the Sénat by the Assemblée.

To sum up, the Macron Government had proposed what amounts to the removable of movable property and movable capital, i.e. for the most part liquid capital or realisable movable capital from the ISF, retaining the tax and it structure upon direct and indirect residential property holdings, and to a lesser extent on certain types of rental activity.

That was passed by the Assemblée, the lower house, at the Bill's first reading, with some modifications.

The proposal was then roundly fustigated at the Senatorial level, the thrust being led by no less than Albéric de Montgolfier, who for the benefit of those new to this particular area, was a tough and extremely vigilant juge d'instruction in fiscal avoidance cases.

He basically stated that the ISF costs too much to control and enforce in relation to the net benefit to the state it produced (€5 milliards), and that the restriction to immovable property would make it harder to collect, owing to the difficulties of actually isolating what was taxable and what was not, the issue of whether companies and other structures owning property for their business activities were within or outside the scope of the tax, and the effect on the French economy. Heavy emphasis was laid on the adverse effect on the French construction industry and the potential loss of jobs. Hence the somewhat weak responses of the Left to his arguments, which were limited to the usual political griping about wealth and the wealthy in general.

In short, the Sénat performed its rôle as the senior house, by criticising the actual economic effect and cost of the tax to produce the €5 million which the ISF is booked into the Finance Statements as producing.  De Montgolfier was very clear that the IFI would be more expensive to administer as the definitions of taxable residential and non taxable property in the industrial, commercial, professional and agricultural sectors for economic purposes was not clear enough to avoid declarative controversy with taxpayers.  That leads to payment delays.

I stress here that no mention was made at any stage of the issues with foreign immovable property holdings of such property by French resident held directly or indirectly, at that point of the Senatorial discussion.

Even de Montgolfier had not realised that the definition abroad of residential as opposed to non-residential use is unworkable if determined according to current French definitions of industrial, commercial, professional or agricultural activity definitions for income tax. For example, agricultural user is determined under OECD principles, and general international law practice normally by the place where the land is; not by the jurisdiction where its owner and exploitant may be resident. The lex situs principle as a legal principle undergirds all tax treaties based on the OECD model. France has an insular habit of ignoring such fundamentals as niceties.

De Montgolfier's recommendation that ISF be removed and that no IFI be introduced was followed by the Sénat. The Finance Bill was then amended to reflect that and sent back across to the Assemblée, further down the Seine.

However, the version of the amended Bill which is currently on the Assemblée Nationale's website as at 28th November, contains both the IFI clauses intheir form sent to the Sénat, the repeal of ISF and the statutory modifications to include the taxes on luxury items. See link. If the senatorial amendents are to be take ninto account, they are not yet "on the table" in the Assemblée.

De Montgolfier also said that the idea of attempting to create small focused taxes on luxury items was also a waste of administrative ressources and energy, but that has not stopped the Assemblée preparing proposals for such taxation limited to luxury yachts, cars and other such politically sensitive items.

Those matters will be debated in the next Assemblée's session this month , and it remains to be seen whether onthe repeal of ISF, the Assemblée will send back the IFI proposal to attempt to force it through, or whether it will axe both and attempt to move the current income tax treatment of signs of wealth (signes extérieures de richesse) from a means of assessment for income tax on a priori evidence of undeclared income into a separate set of independent taxes.

The feeling in France at the notarial level is that the IFI will still be maintained.

The current version of the Bill on the Assemblée Nationale's website (28th November, 2011) still contains the IFI, and also introduces taxes on luxury items: see this link.   That might best be taken as an indicating that the inclusion of the new taxes alongside the IFI is what is to be debated by the Assemblée , prior to the final version being sent back to the Sénat for its vote.

Given the effect of the removal of the ISF on the Trust levy, which will then become redundant, and was removed in de Montgolfier's accepted proposal, that might enable trustees to consider investing in French financial markets. However. note that the proposal does not remove French financial assets from succession or gift duty assessments, and that there is no hint of removal of the current 2181 Trusts1 obligation to declare the acquisition of French assets of any description within one month of their acquisition. The gift and succession duty treatment of trusts with French connections is not repealed by the new Bill.

That declaration would still entail the full trusts declaration of settlors, beneficiaries, and assets, wheresoever situated.

That would remain a substantive obstacle to Mr Macron's stated aim of bringing foreign capital into France.

In other words , the French expedient of encouraging investors to place money in French companies through non-French stock markets, or those companies using overseas or offshore quoted captives or quoted designated funds to attract foreign capital might notwithstanding have to re-assess the position.

I remain at your disposal for advice and formulating safe initiatives in these areas, and for suggesting alternatives.

peter.harris@overseaschambers.com