Wealth taxation in Europe

wealth tax europe

Wealth tax was (a little while back) much discussed in the USA. Bernie Sanders and Elizabeth Warren are both big fans it seems.

Sen. Warren’s original proposal would tax household net wealth above $50 million at a 2% rate per year and above $1 billion at a 3% rate. Sen. Warren boosted the size of the billionaire’s wealth surcharge to 6% from 3% when she released her plan to pay for Medicare for All.

In September 2019, Sen. Sanders proposed his version of a wealth tax plan: a 1% tax on wealth above $32 million for married couples ($16 million for singles) that increases to 8% for wealthier households. Net worth for joint filers between $50 million to $250 million would be taxed at 2%, $250 to $500 million at 3%, $500 million to $1 billion at 4%, $1 billion to $2.5 billion at 5%, $2.5 billion to $5 billion at 6%, $5 billion to $10 billion at 7%, and 8% on net wealth over $10 billion.

So, relatively high thresholds for each, and of course neither are the Democrats’ candidate – that accolade falling to Joe Biden. Whilst not advocating a wealth tax as such, he does propose a tax on unrealized appreciation of assets passed on at death.

So much for the USA. What is the experience in Europe?

Wealth taxation in Europe

Well, more than a dozen European countries used to have wealth taxes, but nearly all of these countries repealed them, including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, the Netherlands, Luxembourg, and Sweden. Wealth taxes survive only in Norway, Spain, Switzerland, and, in a limited way (on real estate), in Belgium and France.

Let’s have a look at what the tax looks like in those jurisdictions:

Wealth taxation: Norway

All Norwegian resident individuals are liable for wealth tax levied on the basis of the individual’s net wealth if their net wealth exceeds a certain amount. The wealth tax is paid to municipality and state. In 2019, the basic tax-free allowance was NOK1.5 million, and NOK2.960 million for spouses. Net wealth exceeding this amount was taxed at a rate of 0.85%.

Net wealth includes cash, bank deposits, shares, the value of the individual’s car, the assessed value of real estate, etc., with the deduction of debt.

The tax is computed on the basis of the net wealth owned by the taxable individual on January 1 of the year of taxation.

The taxable value of the assets is generally set at market price. Buildings and other real properties are however assessed at a lower value. Business buildings are for example normally set to 80% of imputed rent value. Further, there is a regulation applicable to houses (as primary residence) and holiday houses, which determines that the assessed value shall not exceed 25% of the fair market price. Houses being secondary residence are set at a value of 90% of the fair market value.

Listed shares are in general valued to 75% of stock price on January 1 in the taxation year. Non-listed shares are valued at 75% of the share’s proportionate amount of the limited company or public limited company’s total taxable wealth on January 1 the year before the tax year. Non-listed shares in a foreign company are valued at 75% of estimated realizable value on January 1 of the tax year.

Norwegian resident individuals are subject to Norwegian wealth tax regardless of whether the asset is located in Norway or abroad.

Non-resident individuals are liable to net wealth tax on real estate located in Norway. Debts attributable to such property are deductible.

Wealth taxation: Spain

Spain reactivated the wealth tax on a temporary basis for fiscal years 2011 to 2019 (in 2008 the Government granted a 100% relief on the tax). Residents are subject to wealth tax on their worldwide assets, while non-Spanish tax residents are subject to wealth tax only for the assets located in Spain. The taxable base is calculated as the difference between the value of the assets and debts he/she may have. There are specific valuation rules for the assets, which are not always taxed at a market price.

Tax allowances that may reduce the taxable base are a minimum of EUR500,000/700,000 for each taxpayer (depending on the Autonomous Region), and an exemption for the habitual dwelling of EUR300,000 for each taxpayer. The most important exemption contained in the law is the one referring to family businesses.

Applicable rates range from 0.2% to 2.5%, depending on the wealth. However, Autonomous Regions maintain the authority to determine tax rates, minimum tax allowances and tax credits (in Extremadura the marginal tax rate goes up to 3.75% while Madrid maintains the exemption). Therefore, it is important to know the particular legislation applicable.

All taxpayers with a positive tax liability or, in any event, whose wealth is higher than EUR2 million, will be obliged to file a tax return.

From January 1, 2015, the Wealth Tax legislation was amended to allow non-Spanish resident individuals who reside in the EU or the EEA to apply the Autonomous Region legislation where most of the relevant assets in terms of value are located. In this regard, the Spanish Directorate of Taxes specifies that it is an option for a non-resident and, in the case that a specific Autonomous Region Legislation is requested, the taxpayer has to apply all regional provisions as a whole, not only those that are beneficial.

Wealth taxation: Switzerland

Wealth taxes are levied in Switzerland at the cantonal and municipal levels, and supplement the general income tax. Swiss residents are subject to net wealth taxes on their worldwide assets, with the exception of real estate located outside of Switzerland and, in some cases, business assets in a foreign country. Non-residents are subject to a limited net wealth tax liability, namely on assets (real estate) located in Switzerland, and if they carry on a business activity in Switzerland through a Swiss permanent establishment.

Wealth taxes are levied in Switzerland at the cantonal and municipal levels, and not at the federal level. Wealth taxes are levied as a supplement to the general income tax.

In general, the totality of property owned by a Swiss resident is subject to tax, i.e. their worldwide property, with the exception of real estate located outside of Switzerland, and, in some cases, business assets in a foreign country. However, the value of foreign real estate and business property is taken into consideration for the calculation of the net wealth tax rate.

This means that most of the taxpayer’s assets and rights which have a cash value are subject to the wealth tax and are usually taxed at market value. Items of property included for net wealth tax purposes are, in particular:

  1. real estate situated in Switzerland;
  2. movable capital assets;
  3. redeemable life and annuity insurances; and
  4. business assets.

Household equipment, as opposed to antiques, paintings and similar valuable goods, is generally not subject to taxation in any canton. Within a certain range, as determined by the discretion of the tax authorities, jewellery is usually considered as a part of an individual’s personal belongings and therefore not subject to wealth taxes.

Actual debts as well as personal allowances are deductible from the gross value of a taxpayer’s property.

The market value, which forms the basis for calculation of net wealth tax, is based on the market value of the property on a specific day, as decided by the canton or municipality levying the tax. The rates are generally progressive, increasing with the value of a taxpayer’s property.

Non-residents are subject to a limited net wealth tax liability, namely on assets (real estate) located in Switzerland, and if they carry on a business activity in Switzerland through a Swiss permanent establishment. In such a case, a limited tax return must be filed by the non-resident in Switzerland.

Wealth taxation: Belgium

Belgium does not, as such, impose a wealth tax. However, real estate is subject to an annual tax.

First, real estate properties are subject to the annual real property tax. The cadastral income (i.e. the deemed “annual average net income” resulting from properties) is used by the tax administration as the basis on which the annual real property tax is levied. Such income is deemed to be equivalent to the net rent that is earned by the landlord or would be earned by the landlord in the case that the building would be rented. However, the cadastral income does not in fact correspond to the actual rental income of a building and is often substantially lower than such income. The real property tax heavily depends upon the commune where the property is located and often varies between 40% to 50% of the cadastral income.

Additionally, the transfer of real property (otherwise than by gift or succession) is, as a rule, subject to tax at a rate of 12.5% (properties located in the Brussels and Walloon Regions) or 10% (properties located in Flanders). Any transfer for consideration of a dwelling located in the Walloon Region will trigger a transfer tax at a rate of 15% if it constitutes the third (and subsequent) real property acquisition of the buyer. The tax is due on the consideration contractually agreed for the transfer, or on the fair market value, whichever is higher.

Wealth taxation: France

As for Belgium , France does not impose a Wealth Tax as such . However there is a tax on real estate.

With effect from January 1, 2018, the French wealth tax was abolished and replaced by a Real Estate Wealth Tax(Impôt sur la Fortune Immobilière or IFI in French), the tax base of which is limited to real estate assets held directly or indirectly by a taxpayer.

Several characteristics of the IFI are almost the same as that for the previous wealth tax: valuation at market value of debts and assets on January 1, threshold of taxable assets at EUR 1.3 million, progressive scale of tax up to 1.5% if the net taxable value exceeds EUR 10 million, application of the capping mechanism for French tax residents, limited tax obligation for new French tax residents during five years.

The tax is assessed on a household, the scope of which is different from the household for income tax purpose, i.e., spouses, civil partners or partners and their minor dependents.

The scope of the IFI is restricted to real assets only, such as:

  1. properties and rights related to real estate assets;
  2. units or shares of companies and organizations incorporated in France or outside France, for the fraction of the value of underlying real estate assets or rights, held directly or indirectly by the taxpayer; and
  3. the redemption value of life insurance policies and capitalization contracts invested in account units, for the value of the underlying real estate assets referring to the aforementioned assets.

Certain real estate assets are exempt from real estate wealth tax, such as real estate assets held by companies having an operational activity, i.e., industrial, commercial, artisanal, agricultural or liberal activities (including active holding company as defined in Article 966 II of the French Tax Code) and of which the taxpayer holds less than 10%.

As a general rule, certain limits for the deductibility of debts of the taxpayer have been also introduced. The most important examples are the deductibility of the debts incurred by the taxpayer or a member of his/her household which may be limited in case of: (i) in fine repayable loan or loan without repayment term; and/or (ii) debts exceeding 60% of the gross value of taxable assets, if this value exceeds EUR 5 million unless it is proved that the debts were not contracted for a main tax purpose. Certain loans of the taxpayers to related family or entity may not be deductible unless it is demonstrated that the loans complied with market loan conditions. These limits have been extended from January 1, 2019 and notably the specific limit in case of in fine repayable loan or loan without repayment term has been extended, for the valuation of the shares, to loans contracted by companies to finance real estate assets.

If you are a non-resident, and a tax treaty with France is in place, your taxable assets include :

  • Property and real estate rights located in France;
  • The shares you own in real estate companies holding real estate in France;
  • The shares you own in real estate companies holding real estate in France and abroad, up to the amount of the property and rights owned in France.

Under certain conditions, if you have just transferred your tax domicile to France, after having been domiciled abroad for the previous five calendar years, you are only taxed on property and real estate rights owned in France. This system lasts until 31/12/N+5. Beyond that date, you are taxable under the conditions of ordinary law, i.e. on your worldwide property assets.

Reporting and payment obligations have been aligned with personal income tax.

To can find out more about the challenges of imposing a wealth tax in the UK, here.

It is essential , of course,  for you to obtain specialist local tax advice if any of the above taxes could be relevant to you .

Article credit: Techlink