The end of the Wealth tax and the creation of a new wealth tax on real estate…

24 October 2017

The draft of the French Finance Act 2018 (hereafter the "FFA draft") is currently under discussion before the French Parliament. It should be voted on before the end of this year to come into force as of 1 January 2018.

Amongst various measures (notably the introduction of a 30% flat tax rate on certain financial income), the abolition of the Wealth tax and the introduction of a new wealth tax on real estate constitutes a little tax revolution (however mainly for French tax residents).

This new tax would be codified under articles 964 to 983 of the General Tax Code.

Let us consider the main consequences of this new tax for non-French tax residents wishing to purchase, or already owners of, French residential properties. Limited to the impact of the new tax on non-residents, this article will not address the new provisions in detail.


For non-French residents, the new tax would only apply to French-sited real estate not used for the purposes of a business activity. This tax mainly concerns residential properties: secondary homes in France of non-French tax residents. The situation would not therefore change compared to the current Wealth tax.

Furnished letting activities would not be regarded as a business activity unless the property is used for the purposes of the professional activity of the taxpayer (rare situation in respect of non-French tax residents).

Unlike the current Wealth tax, any other assets located in France would be excluded (e.g. furniture within a French property, a French registered car or boat etc).

Taxation would also apply to shares of French and foreign companies owning, directly or indirectly, French residential properties (whether or not the company may be regarded as a French real estate company (this would be the case where the company's French assets mainly consist of French real estate)).

As for Wealth tax, the new tax would be due if the net value of the taxable assets exceeds the threshold of €1,300,000.

If so, the progressive tax rates would remain unchanged:

Net taxable value Rate
Up to €800,000 NIL
From €800,001 to €1,300,000 0.50%
From €1,300,001 to €2,570,000 0.70%
From €2,570,001 to €5,000,000 1%
From €5,000,001 to €10,000,000 1.25%
Above €10,000,000 1.50%

Valuation of assets

The principle should remain that taxation would apply on the market value of the real estate (with a 30% reduction for the main residence of the French resident taxpayer which is not available for non-French tax residents).

In respect of shares in companies, the conditions used to determine the value of the shares would remain unchanged. Shareholders' loans would still be ignored when assessing the net value of the shares.

Deductibility of debts

This is the area in which non-French tax residents might see the most changes as the FFA provides for more restrictions in respect of deductibility of debts. 

Only debts incurred in the acquisition, improvement, renovation, construction and renovation of taxable real estate may be allowed as a deduction.

The FFA draft provides the general conditions of deductibility of debts. In order to be deductible, a debt must, as currently, be linked to a taxable asset; exist at 1 January of the tax year; and be the personal charge of the taxpayer. Debts must also be substantiated. There are no other conditions regarding the deductibility of debts. In particular, there is nothing in the French tax legislation which says that to be deductible, a debt in the form of a bank loan, must be secured by a mortgage over the property it finances.

According to the FFA interest-only loans would no longer be fully deductible and there are provisions to provide for the non-deductibility of certain family loans and loans taken from controlled companies. Certain family loans would be deductible if they are granted under normal conditions. It is not certain that these restrictions will apply to loans granted to companies.

Furthermore, these new restrictions should also concern loans taken out as of 1 January 2018 (but this will need to be confirmed).

Finally, the FFA provides a limitation of deduction of loans when the value of the taxable asset exceeds €5,000,000 and the amount of the loan exceeds 60% of the taxable value. The part of the loan exceeding this limit would only be deductible at 50%. For instance, an individual purchases a property for €8,000,000 with a loan of €6,000,000. The loan exceeds 60% of the value of the asset, i.e. €4,800,000. The part of the loan exceeding this amount (i.e. €1,200,000) would only be deductible for an amount of €600,000. The total amount of the loan which would be deductible would then be equal at €5,400,000. This limitation should not apply in respect of loans directly granted to companies.

These are the main measures of the FFA particularly relevant to non-French tax residents. Of course, the FFA is currently being discussed in Parliament. The new tax has already been validated by the National Assembly and must now be approved by the Senate. These provisions may still be amended, but overall it is not expected that the draft principles will be fundamentally overturned.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Related   Tax