Developments in French wealth tax

Developments in French Wealth Tax

One of the difficulties which international property fund managers have faced in recent years when setting up funds for investment in French property whether exclusively or as part of a European fund is the incidence of wealth tax in France. The tax is an annual charge at 3% of the market value of real estate assets situated in France which are owned by the fund.
Following reform of the tax with effect from 1 January 2008, the French tax authorities have recently issued guidance on its interpretation, in particular in the area of exemptions, which may affect the plans of future funds and, indeed, the status of existing structures.

The reforms have extended the tax to non-legal entities such as partnerships and trusts, but also clarified the scope of exemptions in particular an exemption for listed funds. There is an extension of the class of stock exchanges on which a listing of a company’s shares could be effected so as to access this exemption.

Historically, listing shares in a fund vehicle on an EU regulated market such as Euronext alone would have seemed to be sufficient to obtain the wealth tax exemption. Following the recent guidance, a listed company will only be exempt from the tax provided that “significant amounts of their shares are effectively traded on a regular basis”.

The French authorities will want to see that not only do arrangements for dealing in shares exist but that there is real activity. They indicate that “significant amounts” will not be taken to be in play automatically unless 25% or more of the shares are floated. Even then, regular trading will be required to be shown. The guidelines indicate that the regular trading requirement is met where on an annualised basis, there is an average of at least one transaction a month. Accordingly, only widely held and traded shares will qualify automatically and other cases may well struggle to match the requirements. Much may depend on the attitude of the authorities in a particular case. Our connections with the French tax authorities mean we are well placed to advise on the position of such funds and on the extent and availability of other exemptions to which they might be entitled. There will nevertheless be cases where the cost of an annual wealth tax has to be borne in mind by a fund investing in French property.