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2012 Wealth Tax Update
Wealth Tax Reform
Beginning in 2012, if your net wealth in France exceeds €1.3m, the total value is subject to wealth tax. Previously €800K could be exempted, but not anymore. If your property is valued at less than €1.3M no wealth tax reporting is required. The good news is that taking a mortgage to keep under this threshold is one way to ensure protection. Only mortgage debt and presumably other valid third party debt may be taken into account.
Starting in 2012 there are only two tax rates that apply: 0.25% on net wealth valued starting at €1.3M up to €3M, and 0.5% on net wealth of €3M and above. So, for example, if your wealth is €1.3M the 0.25% rate is imposed on that full amount or €3,250 per year.
Wealth Tax Reform and SCI Ownership
One important change affects the popular strategy of holding French real estate in an SCI. Going forward, when valuing the shares of a real estate holding company, such as an SCI, shareholder debt may no longer be taken into account. This neutralizes a typical planning strategy, namely, designating a significant share of the cost of the real estate on the books of the SCI (or other form of holding company set up for that purpose, such as an LLC), as “shareholder loan”.
Before the advent of the New Law, the shareholder loan was considered debt in valuing the shares of the holding company, usually resulting in a negative value for the SCI shares and hence no wealth tax on those shares. This strategy is no longer effective since only legitimate debt, such as a mortgage, is now allowed. This change is retroactive, so real estate holding companies (defined as companies whose assets consist predominantly of real estate) set up in prior years must be revalued when determining the value of the holding company for wealth tax purposes. For more information see the memo on our blog.