Exception is the rule
Written by Professor Robert Anthony, Anthony & Cie
French Property News, August 2008
New laws granting wealth tax relief on certain investments are helping the rich to pay even less, explains Robert Anthony.
Although when it comes to wealth tax, France is following the following set by the rest of Europe, it seems Sarkozy does not have the courage to totally eliminate it. However, for those persons with French taxable assets under around € 5m, by legal tax planning most if not all wealth tax can be avoided by by careful financial– legally, of course. It is important to state there are several ways of achieving this. The French have passed laws allowing relief on capital invested in private companies and investments in private equity funds.
To comply with European lesgislation, European companies must qualify and not just French-resident companies. It is French to create such complicated schemes, typically rather than simply scrap the tax and open France to high net worth individuals and families.
How does it work?
Wealth tax is normally payable based on the market value of your assets as of 1 January each year. However, even if non resident, using you are the opportunities available could mitigate or reduce the tax payable. So how does this magical new legislation work?
There are wealth tax funds know as FIP (local investment funds) or FCPIs (innovation investment funds). These funds must comply with specific rules. For FIPs, 20% must be invested in a small or medium enterprise, which can have broader based investments but must be less than five years old. This increases to 40% for an FCPI. The FCPI generally involves much larger investments for innovation, which converts capital risk funds into private equity. Both companies have less than 250 people working for them and a turnover of less than €50 million. The company’s registered office must be in Europe and its activity subject to corporate taxes.
Tax relief for either of these two investments is allocated per household– 50% for an investment of up to €20,000, as wealth tax is calculated on a household basis and not individually. For tax residents, there is also the advantage that you can take relief pro rata for the unused investment as income tax relief, up to the limits available and rates are normally set at 25% of the sum invested.
Who Should be Interested ?
As of 1 January 2008, French residents must pay wealth tax on their worldwide assets, if their sum worth exceeds €770,000 after the deduction of debt and certain exceptions. Non French residents should bear in mind that certain tax treaties exempt certain assets, although property is rarely exempted. There are certain tax treaties that may exclude assets held by corporate entities for the residents of those countries. Wealth tax is always based on market value and not the original sum paid.
Thanks to the substantial gain in property prices in recent years, many more are now eligible to pay wealth tax. For second homes, furniture should be added as per the real invoice costs, or 5% of the market value.
Does this apply to you?
If you are liable to pay wealth tax, these exemptions will apply to you! If you are a non- resident, the maximum tax rate of 50% of your total income does not apply as you do not have French-earned income.
If you are resident, on a tax rate of less than 50%, then all reductions are useful. The deadline for investments is 15 June of each year (this article will apply to investments made after this date for the 2009 tax year). It is important to add that the earlier you invest, the more investment options there are.
You can also invest in a holding company directly; This grants greater tax relief than investing in a FIP or FCPI. A holding company can spread the risk of investments over several companies.
This is, however, generally aimed at the larger investor. The advantage is that the tax relief is fixed at 75% of up to €50,000 of the sum invested. If you have a company in the European Union that is not a property investment company which you own or with your spouse then you could increase your capital to take advantage of this exemption. Obviously the rules need to be respected and the appropriate declarations and evidence given to the French Inland Revenue.
How to I subcribe to such an investment?
If you do not have the funds readily available to invest in one or all of these schemes, you could refinance your French property by way of an equity release. Although these are relatively small investments, you should still seek advice from a qualified, certified financial planner. Since November 2007, advisors in France must be licensed by the AMF (Autorités des Marchés Financiers) and UK advisors who do not have a PSI license for France are not qualified to help.
Direct investments and their funds are controlled by the AMF in order to protect you and licensed advisors must hold civil responsibility insurance as well as be subject to external audits in order to protect their clients. Unfortunately this is not yet well known! There is a register on the internet of approved financial advisors in France.
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