The current economic crisis, coupled with the urgent need to reduce its budgetary deficit, has forced the French government to adopt a number of new tax policies in recent months, several of which have direct implications for non-residents.

Wealth Tax and SCIs

The first of these relates to changes in the ‘Impôt de Solidarité sur la Fortune’ (the French ‘Wealth Tax’, also known as the ‘ISF’) and, specifically, the use of the ‘Société Civile Immobilière’ (SCI) in property purchases – hitherto a popular strategy in reducing ISF liabilities.

An SCI is, effectively, a civil law partnership that can be used for the purpose of purchasing property. Hitherto, properties could be purchased by funds being ‘lent’ to the SCI through the shareholder current account – a tax-efficient strategy for two reasons: first, such a loan was deemed to be a ‘financial instrument’ and therefore not taxable; and, second, as the net value of the shares in the SCI was reduced by the value of such loan so, subsequently, was any ISF liability.  From 1 January 2012, however, debts on the shareholder current account will no longer be deductible in calculating the net value of the shares.  With only commercial loans now being deductible in calculating the value of shares in an SCI, mortgage finance is now the only viable means of funding property purchases.

Overseas sales of real estate company shares

In a related move, from 1 November 2011 any sale of shares in a real estate company (French or foreign company whose assets are mainly composed of real estate located in France) conducted outside of the country must be recorded in a deed prepared by a French notary. This measure is intended to ensure the full payment of all fees and taxes arising from the sale of shares – e.g. transfer tax (five percent of the share value) and capital gains tax liabilities (which will be 19 % if the seller is tax resident within the European Union, or 33 1/3% if they are not).  Any deed recording the transfer of shares in an SCI outside of France must, regardless of the nationality of the parties, be registered with the relevant tax authorities in the notary’s place of residence within one month, transfer tax and capital gains liabilities becoming due at that time.

Transfer tax on share transfers

Transfer tax is now also payable on the transfer of shares in any corporate entity headquartered in France, even where such sale or transfer takes place outside France.  The tax rate has also been considerably increased with effect from 1 January 2012.

Trusts

Finally, a specific tax regime has now been adopted governing the treatment of foreign trusts. The intention here is to ensure full transparency for tax purposes, and draconian reporting obligations have been introduced to that end.

This newly introduced regulation does not differentiate between various kinds of trusts (i.e., discretionary, revocable or irrevocable), and applies where the settler or beneficiary is resident in France, or where the trust is used to hold French assets.  (Persons resident in France for less than five years are not subject to the new regulation in respect of offshore assets.)

The new regime introduces reporting requirements on the establishment of a trust, any modifications to terms, and its winding up, as well as the annual disclosure of the market value of assets held within the trust, with non-disclosure carrying a minimum penalty of €10,000.

Despite this new regulation having been adopted in July 2011 many questions remain.  In view of the new (and onerous) responsibilities incumbent upon trustees it is important that ongoing reforms be monitored closely.