The purchase of real estate in France is perhaps one of the most complex international tax transactions that an individual can be involved in. Indirect taxation is heavy, and the combination of income tax, wealth tax and capital gains tax create unavoidable costs in even the simplest of acquisitions; moreover, non-tax issues involving forced heirship requirements of public policy law in France make transactions even more complex.
These taxation issues include registration duties and estate duties derived from the acquisition or the ownership of real estate in France.
Purchase of French real estate property
The transfer of a French real estate property is normally subject to registration duties at a rate of 4.89% of the purchase price of the property being transferred (when the transfer is not within the scope of VAT); otherwise VAT at a rate of 20.6% is applicable in respect of land for development and buildings within 5 years following their completion.
If the acquisition is shares in a company owning the real estate instead of the property itself, the registration duties will be reduced (minimally) to 4.8% of the fair market value of the company if an Sarl (“Societe a responsibilite limitee”) or an unquoted SA (“Societe anonyme”); but this is even reduced further to 1% with a maximum of FF 20,000 in the case of the acquisition of shares in a quoted SA or a SAS (“Societe par action simplifie”). Nevertheless, structuring the acquisition of French property through the acquisition of shares raises complex tax issues:
i) The company owning the property should not be a “Societe Immobiliere de copropriete” as provided for by article 1655 ter of the French Tax Code (“Code General des Imp6ts” – “CGI”) since these are transparent entities for the application of reduced registration duties and income taxes.
ii) Where the real estate property has been transferred to a company which is not subject to corporate tax, the sale of the shares of this latter company will be subject to the registration duties applicable to the sale of the building (see above) if the sale occurs within 3 years of the contribution (Article 727 CGI).
iii) The structuring will have to be carefully undertaken in order to avoid a requalification under ‘the abuse of law’ procedure which is applicable when the structuring which has been carried out exclusively for tax purposes.
It is in this respect advisable to leave a reasonable period of time between the contribution of a property to a company and a sale of the shares. Provided the above mentioned conditions are met, the purchase of shares instead of a property direct could lead to significant acquisition cost savings.
The Special 3% Tax on the value of French properties owned by foreign companies
Foreign companies owning French real estate are liable to a 3% tax assessed on the gross fair market value of the properties under Article 990D CGI. This tax has been created to prevent individuals, either French or foreign, liable to the French wealth tax or gift and inheritance taxes, to avoid taxation through the use of foreign corporate vehicles. It is assessed on the gross fair
market value of the property (ie debts are not accepted as a reduction of the basis) and this could lead to significant tax costs for a foreign investor.
Article 990E CGI sets out six exclusions for the application of this tax. Among these exclusions it is worth mentioning that in order to be exempt from the tax, a foreign company owning French real estate
i) should be located in a country which has signed with France a treaty with either an administrative assistance provision to prevent tax avoidance, or a treaty with a non discrimination clause; moreover, this foreign company should disclose the names and addresses of its ultimate shareholders, or
ii) should be a company listed on a stock exchange market. It should be observed that when a French real estate property is owned through a chain of foreign companies, each of these companies will have to satisfy the above mentioned criteria. Therefore it is generally advisable to invest in French real estate either direct or through a foreign company located in a treaty country.
Where an individual, either French tax resident or not, owns an immovable asset in France, he is liable to French wealth tax on the value of this property. The minimum threshold for the application of the tax currently amounts to FF 4.7mn. However:-
i) Debts relating to the taxable property are allowed as a reduction of the taxable basis, and
ii) If the property is occupied either by a tenant or the owner himself, a reduction on the calculation of the fair market value is applicable. The French tax authorities have recently accepted not to challenge this reduction when it remains lower than 20%.
It may therefore be advisable to finance the purchase of a French property through a loan, when there exists a wealth tax exposure, in order to reduce the taxable basis. It may be noted that where interest on a loan is paid by a French entity to a foreign entity, no withholding tax applies to such interest paid when the loan agreement has been concluded abroad (Article 131 quarter of CGI).
Similarly, French inheritance taxes apply irrespective of an individual’s tax residence in respect of French real estate property. However the debts relating to such property are allowed as a reduction on the value of the taxable basis.
In structuring an acquisition of French real estate, an investor will also have to mitigate the income tax, corporate tax and capital gains taxes which might arise either during the period of ownership of the property or on disposal.
During the ownership of the property
An individual may own the property either direct, or through a “Societe Immobiliere de Copropriete” (Article 1655 ter CGI) which is basically a real estate partnership; there are no significant tax differences when the individual is French tax resident, as the SCI is fully transparent for French tax purposes.
However if the owner is an individual who is not French tax resident, he or she may be liable to a lump sum taxation assessed on the value of the property (Article 164C CGI). The taxable basis is equal to three times the rental value of the property. This lump sum taxation is not applicable:
i) When income from French sources is greater than the lump sum taxation basis, or
ii) To individuals who are resident for tax purposes in a country which has signed a double tax treaty with France, or
iii) To individuals resident in a country which has signed a treaty of reciprocity with France and who can justify that they have been subject to a tax above two thirds of what they would have been paying in France on the same basis.
These rules mainly aim to subject individuals to French taxation if they are either perpetual tourists’ or resident in ‘tax havens’. The level of taxation might be important due to the high French income tax rates.
Where the owner of the French property is a company located either in France or abroad, and which is not a Societe Immobiliere de Copropriete, and the company is owned by non French tax residents, the company will be subject to French corporate tax on its rental income or its deemed rental income. Where a foreign company has not charged any rent on the property it owns and which is made available to an individual, the French Supreme Court has judged that the foreign company should be taxable on its deemed income ( Conseil d’Etat 24.2.1986, Nos 45 253 and 54 256). The shareholders of this company could then be taxed as receiving a deemed dividend subject, therefore, to a withholding tax in France of 25% unless otherwise provided for in a tax treaty.
These taxation rules apply even when the foreign company is located in a treaty country without a permanent establishment in France ( Conseil d’Etat 7.10.1988, No.82 784, concerning a Belgian Societe anonyme receiving income from a property exploited in France).
This rule however applies only to the extent that the treaty contains a provision analogous to Article 6 (4) of the OECD model convention, which treats taxation of real property income from a company as income from immovable property. Where the treaty does not follow the OECD model provisions, the taxation rules may be different and the foreign company should be taxed in France only if it has a permanent establishment in France ( Conseil d’Etat 22.5.1992, No.63 266 SPA Raffaella). In this case an Italian company had made a house available to two Italian actors without asking them for rent. The French tax authorities taxed this company to French corporate tax on the grounds that this company had received immovable property income and was therefore taxable in France, irrespective of the existence of a permanent establishment. The Supreme Court has however judged that the income was not taxable in France because as it was not considered as income from immovable property in the applicable tax treaty between Italy and France (this treaty is no longer in force since 1992), and was therefore to be considered as business profits only taxable in France if the Italian company had a permanent establishment in France.
Thus, where the acquisition of French property is made through a company, it is advisable to structure the acquisition financing in such a way that the income could be sheltered against interest payable and the property amortisation.
Disposal of the real estate property
In considering the disposal of French real estate property, the situation will greatly differ whether the seller is a resident or non-resident of France for tax purposes.
Property owned by an individual
If the sale is made by an individual who is resident in France or through a transparent Societe Immobiliere de Copropriete, the individual is not subject to capital gains tax if the property was his principal residence. The capital gain exemption is also granted, under certain conditions, to the first disposal of a French property where the seller does not own it as his principal residence. This exemption is also available to non-French resident individuals, but only to the extent that the seller has been tax resident in
France for one year prior to the sale (Article 150C CGI) provided this provision is consistent with the non-discrimination clause of an applicable treaty.
Where the capital gains tax exemption is not applicable, French resident individuals are subject to French income tax on the disposal of the property, and non residents are taxable on the gain at a rate of 33.33% (Article 244 bis A CGI). However, if a non-resident individual is engaged in a real estate business (profit realise a titre habituel) the rate of the tax is increased to 50% (Article 244 bis CGI).
Property owned by a company
As far as companies are concerned, the applicable rules are slightly different. If the company is a “Societe Immobiliere de Copropriete” (Article 1655 ter CGI) the company is transparent, and therefore the considerations applicable to its shareholders (individuals or companies) are relevant in determining the taxation rules applicable.
If the company is not a “Societe Immobiliere de Copropriete”, then the sale of the property is subject to corporate tax. Long term capital gains are taxable at a rate of 19% after two years following the acquisition, 33.33% for short term gains and up to the amortised amount of the property (not including the 10% corporate tax surcharge).
However, when an individual resident of a country which has signed a tax treaty with France sells the shares of a company instead of the property itself, the above mentioned taxes (Article 244bis and Article 244 bis A CGI) may not be applicable. If these taxes have been considered as consistent with tax treaties signed by France ( Conseil d’Etat 26.11.1975, No.93 187), the foreign individual may nevertheless be exempt from tax in France if the tax treaty does not provide specifically for taxation of shares in real estate companies similarly to the sale of immovable properties themselves. Such disposals should therefore be treated as provided for in the ‘Capital Gains’ or ‘Other Income’ articles, so that in these situations the sale is not taxed in France. Luxembourg and Belgium double tax treaties with France provide for such exemptions.
The taxes applying to non resident individuals of 33.33% or 50% if the real estate profits are made in the course of a business, are applicable to foreign companies.
Although the optimal structuring of a French real estate acquisition will mainly depend on the specific position and objectives of a client (capital gains mitigation, wealth tax avoidance, income tax reduction…), it is generally advisable for an individual taking up residence in France to acquire the property direct (or through a “Societe Immobiliere de Copropriete”) when he wants to maintain the property as his principal residence in order to eliminate a capital gains tax issue on the sale.
Where the wealth tax is an issue, it is advisable to finance the acquisition with a debt to mitigate the wealth tax payable. In any case it is inadvisable to acquire a property through an offshore company in order to avoid the 3% annual tax on the gross fair market value of the property.