IFI Alert: Restrictions on the deductibility of debts when valuing company shares

The real estate wealth tax (hereafter “IFI”) is a tax payable by individuals whose real estate assets, assessed at the level of the tax household, exceed €1,300,000 on January^{1 of} the tax year.

Individuals domiciled in France for tax purposes are subject to the IFI on all their real estate assets and rights located in France or abroad, as well as on their shares in companies established in France or abroad up to the value representing real estate assets or rights held directly or indirectly by these companies.

Individuals domiciled outside France for tax purposes are only liable for the IFI on their real estate assets and rights located in France, and on their shares in French or foreign companies up to the fraction of their value representing real estate assets or rights located in France.

IFI taxable assets therefore include all real estate assets and rights (I), as well as units or shares in companies or organizations for the portion of their value representing these real estate assets or rights (II), not used by the taxpayer in the course of his or her business or made available to the company in which he or she carries on that business.

I. Real estate assets and rights subject to the IFI

The IFI is calculated on the market value of property and real estate rights held by members of the same household (CGI, art. 965), assessed on the date of the taxable event, i.e. January^{1 of} each year.

Several methods can be used to assess the market value of a property. However, the comparative valuation method is to be preferred. Assets are valued by comparison with sales of intrinsically similar assets prior to the event giving rise to the valuation, whenever it is possible to identify sales of comparable assets.

In addition, debts outstanding at^er Expenses incurred by one of the members of the tax household and actually borne by him or her are deductible from the market value of the taxable property, provided they correspond to certain expenses relating to a taxable asset, as listed exhaustively by law. In this respect, loans taken out to acquire taxable assets and taxes payable on taxable property, such as property tax, are deductible.

II. On company shares taxable under the IFI

Company shares and units are subject to the IFI for the fraction of their value representing real estate assets or rights held directly or indirectly by the company, regardless of the number of levels of interposition (CGI, art. 965, 2°). Similarly, all companies are covered, whatever their corporate form, tax status or place of business.

To determine the taxable value of these shares, a two-step calculation is required two steps :

1: First, the market value of the shares must be determined in accordance with the rules applicable to death duties (CGI, art. 973, I), taking into account the date of the taxable event, i.e. January^{1 of} the tax year.

If the company is listed, this value will be the last known share price or the average of the last 30 share prices (CGI, art. 759). If this is not the case, the market value of the shares is used, i.e. the market value of the company’s net assets, less the debts shown on the company’s liabilities.

2: In a second step, a real-estate coefficient is applied to the value thus determined, corresponding to the ratio between :

• The value of the taxable real estate assets and rights and, where applicable, the value of the units or shares representing these same assets;
• And the value of all the company’s assets.

Where applicable, this value must be adjusted if the company’s liabilities include debts that the law prohibits or limits from being taken into account for the valuation of the taxpayer’s shares.

The Finance Act for 2024 amended the rules for valuing shares in companies holding real estate by restricting the liabilities that can be taken into account. It is therefore worth recalling the rules applicable prior to the entry into force of the Finance Act for 2024 (A) before presenting the rules introduced by the latter (B).

• A – Reminder of the valuation method for company shares prior to January^1, 2024

Prior to the entry into force of the provisions of the Finance Act for 2024, the market value of company shares was determined by taking into account all of the company’s liabilities, subject only to the anti-abuse provisions set out in Article 973, II and III of the General Tax Code.

• The anti-abuse provisions of Article 973, II of the General Tax Code

Article 973, II of the CGI stipulates that the fraction of the taxable value of shares held by the taxpayer is, in principle, determined without taking into account debts contracted directly or indirectly by the company:

• For the acquisition of a taxable asset by the taxpayer or a member of his or her tax household who controls, alone or jointly with his or her tax household, the company ;

• To a taxpayer or a member of his or her tax household for the acquisition of a taxable asset or for the financing of expenses relating to such an asset;

• To a member of the taxpayer’s family group (other than the taxpayer’s spouse or minor children) for the acquisition of a taxable asset or for expenses related to such an asset;

• To a company controlled, directly or through several interposed companies, by the taxpayer or a member of his or her family group for the acquisition of a taxable asset or for the financing of expenses relating to such an asset.

This rule applies in particular to current account advances made by a partner. However, debts may be deducted if the taxpayer can show that the loan was not taken out primarily for tax purposes, or, in the case of a loan taken out with a member of the family group, if he can show that the loan conditions are normal (in particular, that the repayments are made on time, on budget and in full).

• The anti-abuse provisions of Article 973, III of the General Tax Code

Articles 973, III and 974 of the French General Tax Code stipulate that, for the purposes of valuing company shares, debts corresponding to term or no-term loans contracted, directly or indirectly, by a company or organization for the purchase of a taxable asset are taken into account each year up to the total amount of the loan less a sum equal to this same amount multiplied by the number of years elapsed since the loan was paid out and divided by the total number of years of the loan.

If no term is specified, they are deductible on a straight-line basis over 20 years. These rules are intended to apply only to loans taken out to acquire a taxable real estate asset.

• B – The new IFI rules introduced by the Finance Act for 2024

Since the entry into force of the Finance Act for 2024, Article 973, IV of the CGI excludes, for the determination of the taxable value of the shares held by the taxpayer, the deduction of debts contracted, directly or indirectly by the company, and which are not related to a taxable asset. In other words, this article introduces a principle of non-deductibility of debts relating to a non-taxable asset.

As a result, when valuing company shares subject to the IFI, the shareholder of a company holding real estate assets will no longer be able to take into account all the company’s liabilities. Only debts relating to a taxable asset may be deducted.

In addition, article 973, IV stipulates that the taxable value of the shares determined in accordance with the above rules may not exceed their market value or, if lower, the market value of the company’s taxable assets less the related debts it has contracted, in proportion to the fraction of the company’s capital to which the shares included in the taxpayer’s assets give entitlement.

Please note: The notion of debts relating to taxable assets is not defined by law, case law or administrative doctrine. To date, therefore, there is some uncertainty as to the content of this notion.

However, according to our analysis, advances on shareholders’ current accounts should be considered as debts relating to a taxable asset when they :

• Finance the acquisition of real estate or the completion of real estate work;
• Refinance real estate acquisition loans or loans to finance building work.

Only current account advances from associates to finance property acquisitions will be depreciable. We consider that when the partners’ current account refinances the loan used to purchase or carry out the work, it is a second contract and not one “contracted directly for the purchase of a taxable asset”. Consequently, this contract should not be amortized.

Likewise, we believe that the rule for capping the IFI taxable value is twofold, and not an alternative depending on whether this taxable value is higher or lower than the market value of the securities.

The capping rules would limit the IFI taxable value of company shares to the lower of the following two values:

• Or the market value of the company’s shares;
• Or the market value of the company’s taxable real estate assets, determined as if these assets were held directly by the taxpayer, and withheld in proportion to the taxpayer’s interest in the capital of the company holding these assets.

Lastly, to determine revalued net assets, we consider that the exclusion of non-depreciable debts should be taken into account.

Our teams will be happy to answer any questions you may have.