The Wealth Tax, in French Impôt de Solidarité sur la Fortune (I.S.F.), has been replaced at the 1st of January 2018 by the Impôt sur la Fortune Immobilière (I.F.I.) which has been limited to the real estate property (owned directly or through companies) and which is largely inspired by the I.S.F.’s rules excepting, in particular, the following two major new rules :
Under I.S.F. rules, in fine loans could be deductible in full, each year, provided that they met certain criteria regarding their purpose, timing, formalism and modalities. In other words, when complying with the above mentioned conditions, the full amount of unpaid capital could be offset each year against the taxable French (deemed) assets value.
The new rule, which has been codified in the article 974 II of Code Général des Impôts, has introduced an amortization element in the loan, so that the deductible amount will reduce annually taking into account the years passed since the initial subscription of the loan compared to the entire loan period.
Example : on 2018, a client subscribes a 5MEuros in fine loan, for 5 years duration, which fulfils all I.F.I. deductibility criteria. Each year, the percentage of deductibility of the loan will decrease by 100/5 = 20% of the initial amount lent, which is 1ME less each year. Therefore, on 2019, the client could offset 4ME only (i.e. 80% of the amount lent), 60% on 2020 (3ME), 40% on 2021 (2ME), 20% on 2022 (1ME) and, starting from 2023, no further deduction will be allowed regarding this loan.
Under previous I.S.F. rules and provided that they meet the above mentioned criteria, the loan’s capital could be deductible in full.
The New rule, which is codified in the article 974 III of Code Général des Impôts, has introduced the following limitation in the loan’s capital deductibility: when the market value of French real estate/shares of real estate Company exceeds 5ME and the deductible debts exceed 60% of such market value, such debt’s excess will be deductible only to the extent of 50%.
Example: a client purchases a French property for 10ME on 2018, fully financed by a loan of 10ME. The amount of the debt up to 60% of the property’s market value (i.e. 6ME) is fully deductible, while the amount of the debt exceeding 60% of the property’s market value (i.e. 4ME) is only deductible for 50% (i.e. 2ME). The loan’s capital deductibility is therefore capped to 6 + 2 = 8ME.
