French wealth tax - Real estate held through companies - Deductibility of debts further limited

The French Finance Act for 2024 introduces significant changes to French Wealth tax on real estate (hereinafter "Imp?t sur la Fortune Immobilière - IFI") when French property is held through a company.

I.???????????? Reminder of the situation prior to the Finance Act for 2024

In the case of direct ownership of a real estate property, only debts in relation to the real estate property (eg loans for purchase or renovation work) are deductible.?

In the case of indirect holding (through a company), a three-steps analysis had to be carried out:

• 1st step: determination of the "real estate ratio": this ratio is equal to the fair market value of the real estate property held by the company divided by the fair market value of all the company assets.
• 2nd step: determination of the fair market value of the company's shares. Although the deductibility of some debts is subject to limitations (in particular, debts towards the individual taxpayer or related family members), this value was determined by taking into account all of the company's liabilities, regardless of how they were allocated. It was therefore possible to take into account debts related to other assets than French real estate.
• 3rd step: application of the ratio to the value of the shares as determined in step 2.

This gives the taxable value of the company's shares for IFI purposes.

II.??????????? New restriction on the deductibility of debts ...

For the IFI due as of 2024 (situation at 1er January of the year), the 2nd step was modified.

The deduction of debts not related to French real estate property is excluded when determining the fair market value of the shares.

In practice, this should result in a significant increase in the value of the shares to which the real estate ratio will be applied.

III.????????? ...subject to a cap

To limit the impact of the above changes, the Finance Act for 2024 introduced a cap mechanism.

To date, the wording of such mechanism remains unclear. In our view, it should work as follows: the taxable value of the shares may not exceed:

• neither the market value of the shares (determined according to “standards” methods);
• nor the fair market value of the real estate property held by the company minus the related debts that the company has contracted in connection with such real estate (in proportion to the fraction of capital held by the taxpayer). The idea here is to put the taxpayer in the same position as if he or she had held the property directly.

As a result, the IFI taxable value of company shares would be limited to the lower of the two above-mentioned caps.

?Given the uncertainties surrounding the application of this capping mechanism, we need to wait for a formal clarification from the tax authorities.

?IV.????????? Examples

Example 1: You are a 100% shareholder in a company which holds €10M of real estate properties and €3M of financial assets. Liabilities consist of share capital of €3M, a loan for the acquisition of the properties of €6M and other loans of €4M.

Example 2: You are a 100% shareholder in a company which holds €8M of real estate properties and €14.5M of financial assets. Liabilities consist of share capital of €1M, a loan for the acquisition of the properties of €7.5M and other loans of €14 million.

?

?

?

?