In more detail
Article 27 of the Finance Law for 2024 modified Article 973 of the French tax code (FTC) by adding a new limit to the deductibility of debts contracted by companies for the valuation of shares subject to the French real estate wealth tax. As of 2024 wealth tax, "debts contracted directly or indirectly by an organization or company and which are not related to a taxable asset" will no longer be taken into account.
Previously, the law did not provide for any general limit regarding the object of company debts that could be taken into account. For example, if the company held movable or financial assets (in addition to real estate assets), debts incurred to finance their acquisition were deductible for real estate wealth tax purposes, and by the way were not subject to the specific limits applicable to debts contracted with shareholders and their family members, or for bullet loans.
It should be noted that, when the debt is contracted directly by the taxpayer liable for the wealth tax, Article 974 of the FTC has always provided that only debts "relating to taxable assets" are deductible. Thus, the purpose of this amendment was to harmonize the rules applicable to the deductibility of debts for the calculation of the wealth tax, whether the debt is contracted directly by the taxpayer or by the company whose shares are subject to this tax.
Although the notion of debts "relating to a taxable asset" is not defined by Article 973 of the FTC, it is certainly advisable to refer to Article 974 of the FTC on debts directly contracted by taxpayers. The latter provides that debts relating to (i) expenses for acquisition of real estate assets or rights, (ii) expenses for repairs and maintenance, (iii) expenses for improvements, construction, reconstruction or enlargement, (iv) taxes due in respect of that properties or (v) expenses for the acquisition of taxable shares are deductible.
However, it is provided for a limitation since the taxable value resulting from this new rule in Article 973, IV of the FTC cannot be "higher than the market value" of the shares, or "if lower, than the market value of the company's taxable assets reduced by the related debts it has contracted, in proportion to the fraction of the company's share capital to which the shares included in the taxpayer's assets give right". It will be necessary to analyze the impact of this limitation on a case-by-case basis in order to avoid an excessive taxation for the taxpayers. However, it is stated that this limitation will not prevent the full application of other existing limits on the deductibility of debts (debts granted by shareholders, bullet loans, etc.).
In practice, taxpayers are recommended to monitor the object of corporate debts, in order to demonstrate that those taken into account for the calculation of the French real estate wealth tax relates in fact to a taxable asset. It will therefore be recommended for company's accounting to be rigorous and adapted to the French wealth tax, particularly for shareholder loans, and for loan agreements to state the purpose of the financing.
