The new ISF (wealth tax) provisions

Since August 2007, investment in certain FIP (Proximity Investment Funds) in accordance with the new ISF (Solidarity Task on Fortune) reduction rules enables you to deduct from your annual wealth tax 50% of the invested amounts, up to the fraction of the FIP invested in eligible companies*, within an annual limit of 10,000 €.

* For instance, if you invest 33,333 € in a "FIP ISF" that has committed itself to investing 60% of its net assets in eligible companies, you will then be able to deduct from the ISF an amount of 10,000€ equivalent to 33.333 x 50% x 60%, and limited to a maximum of 10,000 €.

The percentage of eligible assets must be set initially at the time of the authorization request filed with the AMF (Financial Markets Authority), and must appear in the fund's information notice.

Because of the specific constraints on the FIP ISF, some management companies decide to make their FIP eligible for the ISF reduction, whereas some do not. Others sometimes even plan to establish separate FIP dedicated to investors wanting to benefit from the ISF reduction.

For the FIP ISF, the resulting tax deduction may reach up to 40% if it combines the tax reduction in connection with the ISF and the income tax reduction :

A detailed explanation :

1. For an FIP ISF who undertakes to hold 60% of its portfolio in eligible assets, the ISF reduction is equal to 50% of 60% of the investment, which combines to a 30% tax reduction under the ISF.

2. Hence you can use up to 60% of your investment in FIP ISF to reduce your ISF, and at least 40% of the balance of your investment to reduce your income tax.

The combination of the 2 tax reductions (ISF + Income Tax) makes it possible to reach as high as a 40% tax reduction on your global investment.

Tax household

FIP ISF

  • Maximum investment: 44,000 €
  • maximum ISF reduction: 10,000 €
  • + maximum income tax reduction: 6,000 €


Conditions concerning the value of the acquired units

The value of the FIP units, for which subscription entitles the holder to an ISF reduction, must be of securities, to an extent of at least 20%, that have been received in exchange for subscriptions to the capitals of companies established in the past five years.

Conditions concerning the fund and the subscriber

The following conditions must meet the following requirements:

  • The individuals must undertake to keep the fund units until December 31 of the fifth year following the one of subscription ;
  • The fund must respect the initial established percentage of its assets invested in securities of eligible companies.

Upper limit on the ISF reduction

The ISF reduction for FIP units subscription may not exceed an annual limit of 10 000 €.
It may be added to a direct investment in a small or medium-sized company, without the combination of the two exceeding an amount of 50,000 € per year.

The new system also applies to direct investments in SME.

For the biggest taxpayers, direct investments in SME will be an interesting alternative to the FIP ISF. These taxpayers will therefore be able to deduce from their ISF an amount up to 75% of their payments by directly subscribing to the initial capital or the capital increases of European SME.

The amount of the ISF reduction may not exceed 50 000 € per tax year (whether the reduction comes from investments and/or gifts).

Hence the fraction of payments exceeding 66 667 € may not give rise to this advantage. (Because 66,668 € x 75 % = 50 001 €)

Effective date

These new propositions concern the payments made after June 20, 2007.
Therefore, they will concern, for the first time, the amount of the 2008 ISF.

Relation between conditions and subscriptions

To allow an ISF reduction in relation with direct investments, subscriptions to capital or to a capital increase must fulfill the following conditions: to be concluded directly by the taxpayer with the company and to make the payments in cash or in kind. The in kind payments must be made in the form of a conveyance of assets required to carry on the business other than real estate assets and securities.

Conditions related to the company receiving the payments

The company to the capital of which the taxpayer is subscribing must comply with the following 5 conditions :

  • satisfy the European definition of SME ;
  • carry on activities that are industrial, commercial, artisan, agricultural or liberal, with the exception of real-estate property management activities as defined in the article 885 O quarter of the French General Code of Taxation, particularly those entities of securities investment entities, and of real property management or rental activities ;
  • have its actual management headquarters in a country member of the European Union, in Iceland or in Norway ;
  • Not list its securities for trading on French or foreign regulated markets ;
  • and be subject to a corporation tax under the legal regulations, just as it would be following French laws if the activity were carried on in France.

Withholdings

For a given year, the taxation is based on all of the payments made between June 15 of the previous year and June 15 of the current tax year, which is the limit date to file the ISF declaration.

The ISF reduction claimed by the taxpayer will then be applied, but will require that all securities received in exchange for a subscription to the capital of an operating company be kept until December 31 of the fifth year following the year of subscription.

Subscriptions taken out through a holding company

Conditions concerning the company

Taxpayers may also deduct from their ISF an amount of 75% of their payments for cash subscriptions to the capital of a company that :

  • fulfills all the necessary conditions laid down for the exemption of direct subscriptions, with the exception of the one related to the nature of the activity. Its executive purpose is to hold interests in companies that carry an industrial, commercial, artisan, agricultural or liberal activity, except for those that concern direct private asset management, real-estate management and the rents of buildings.

Conveyances in kind do not entitle the taxpayer to the tax advantage.

Delay of securities holding

The obligation to hold the securities applies for 5 years under the same conditions as direct holdings :

  • to the taxpayer, with respect to the securities of the interposed holding company.
  • to the interposed company with respect to the securities of the SME to which it has subscribed.