In April 2023, the Direction générale des Finances publiques published a statistical study on the wealth tax currently existing in France called 'Impôt sur la Fortune Immobiliére' or IFI for short.
This study is of considerable interest as it shows in detail the information collected by the French tax authorities for the year 2022 in relation to this tax, which shows a significant increase of 10% in the number of taxpayers making this declaration.
Furthermore, the French State recently introduced new declaration obligations for owners of real estate in France due to the fact that the taxe d'habitation will be abolished for principal residences as of 2023.
In order to determine precisely which owners are still subject to the taxe d'habitation (secondary residence, rented accommodation), the Direction générale des finances publiques (DGFiP) is asking all owners of a main residence, secondary residence or rented accommodation to submit a supplementary declaration to the tax authorities by 1 July 2023.
With this new information provided by taxpayers, the French tax authorities will thus be in possession of the necessary data to determine which taxpayers are or are not obliged to pay this dwelling tax.
According to the DGFIP, 34 million owners for 73 million homes in France are affected.
New needs for the French tax authorities
This increase in obligations falling on property owners in France goes hand in hand with the intensification of controls that the French tax authorities have recently been carrying out.
Indeed, new technologies increase the results of tax audits, as technological developments allow important progress to be made on this front.
Bercy, headquarters of the French tax authorities, has made information gathering a priority in the fight against tax evasion and fraud.
The main objective is to detect fraudulent mechanisms, but also to collect and centralise information dispersed across regional departments.
By way of illustration, in 2021 alone, almost 11 billion € was recovered thanks to the tax checks carried out.
Among the taxes subject to this intensification of controls, there is also the IFI - Impôt sur la Fortune immobiliére, the regulation of which will be discussed in more detail below.
Overview of French wealth tax
The Wealth tax, commonly known by its abbreviation IFI, is a wealth tax that has existed in France since 1 January 2018.
This tax has replaced the ISF and, although it has similarities, it has slightly different rules.
This tax concerns real estate assets held in France or abroad, directly or indirectly, by tax residents or non-residents of France.
For residents, taxation is levied on real estate assets held both in France and abroad, whereas for non-residents, the scope of the law is limited to real estate located on French territory.
Scope of the law
The IFI is payable by natural persons whose real estate exceeds, on the basis of its market value on 1st January of each year, a net value of € 1,300,000.
In any case, in addition to the valuation of the real estate, other elements must be taken into account in order to correctly assess taxability and quantify the tax due, including
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tax residence ;
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family situation ;
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existence of debts ;
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use of the property and the way in which the property is held.
In certain cases, real estate may be excluded from the scope of application of the law, but only if certain conditions detailed in the French tax legislation are met, e.g. professional assets or historical residences.
Legal persons are never taxable, only natural persons may be.
However, companies do not escape taxation as shares and company quotas are, except in cases of exclusion, taxed in the hands of natural persons (CGI Art. 965).
Another aspect that must be emphasised is the fact that the tax base is determined at the level of the household, the composition of which is assessed on 1 January of the tax year: married couples, regardless of their marital status, are subject to joint taxation for IFI.
How does the property valuation work?
The taxpayer must therefore declare his real estate assets each year and value the properties that form part of his assets, attributing a real market value to them.
The rules for the valuation of real estate are the same as for the French inheritance and gift tax: taxable assets must be assessed according to their real market value on 1 January.
As you can imagine, the determination of the market value to be declared is one of the most delicate aspects, since one may possibly be exposed to a challenge by the authorities on the declared value, and the value itself has the function of determining the taxpayer's tax base.
Debts related to taxable real estates
The IFI is calculated on the value of the assets, net of debts. It should be noted that only debts relating to taxable assets are deductible from the declared market value, and only debts with a specific purpose, such as bank loans used to purchase the property.
The law establishes a restrictive list in order to prevent taxpayers from "artificially" reducing their tax base by creating debts with a primarily or exclusively tax purpose and reducing or even escaping any form of taxation (BOI-PAT-IFI-20-40-10 n° 150).
How is the French wealth tax calculated?
The tax threshold is set at 1,300,000 € so those with a taxable net worth less than or equal to that amount are not subject to IFI.
Those with assets greater than 1,300,000 € are taxed at rates ranging from 0.5% to 1.5%.
The possibility of a tax audit
The administration may ask the taxpayer for clarifications and justifications on the composition of the assets and liabilities of the assets declared to the tax authorities.
The request may concern, for example, discrepancies or anomalies in the declaration (inconsistencies in values, underestimation of the valuation compared to the previous year, etc.).
In the event of failure or late submission of the annual declaration, the amount due is increased by 10% with the addition of interest on arrears.
From a tax control point of view, two different scenarios may arise.
1. If the declaration has been made, but in the declaration anomalies regarding values or other aspects are verified by the tax authorities, a short limitation period of 3 years will apply, since the taxpayer has brought to the attention of the administration the assets he owns directly or indirectly;
2. In the event of non-declaration or omission of any of the assets that should have been declared, the administration will have to carry out additional investigations and thus the longer limitation period of 6 years will apply.
It should be noted that such acts by means of which the French tax authorities may know the value or existence of an asset may also consist of declarations of inheritance, transfers of shares in civil partnerships or other acts whose registration in France is compulsory.
On the basis of the above, the IFI appears to be a tax that potentially includes a large number of taxpayers, in 2022 alone approximately 163,000 persons received an 'Avis d'impot' -Tax payment request from the French tax authorities and generated revenues of approximately 1.8 billion €.
Furthermore, although property values are generally falling due to the well-known geopolitical and financial factors, the value of property on the Côte d'Azur and in more desirable areas has remained fairly stable.
For instance, in Saint-Jean-Cap-Ferrat, where prices per square metre are on average among the highest in France, it is theoretically sufficient to be the owner of a property of only 71 m2 in order to be susceptible to taxation.
In conclusion, it is becoming more and more important to carry out a correct valuation and declaration of the assets, always with the help of professionals, so as to comply with the declaration obligations imposed by French legislation on the one hand and to avoid incurring heavy penalties on the other.