Buying and owning a French residential property in 2015

19 minute read
29 June 2015

In this alert, we look at the tax aspects of buying and owning a property in France in 2015 in line with the most recent tax changes. We also consider some important trusts and French tax residence issues which may be relevant to purchasers.

While 2014 was a very bad year in terms of foreign private investments, 2015 seems to be more dynamic. This might be explained by the positive new development in terms of French capital gains tax for non-French tax and the weakness of the euro. These are interesting factors for non French tax residents purchasing French residential properties....

For many wealthy individuals and families, an apartment in Paris, a chalet in a ski resort or a villa in the French Riviera are essential elements of their property portfolios. An estate somewhere in the countryside may also be included; a French vineyard or a stud farm for example.

While the search for suitable properties may appear to be the priority, a potential purchaser should also take advice as to how a property should be purchased and owned in order to maximise its tax-efficiency.

As with other types of assets, it is essential to consider the tax efficiency of the acquisition structure at an early stage, and preferably before signing any pre-sale contract (even if the structuring can be implemented later, during the conveyancing process, in order to be in place before completion).

With the low rates of tax in certain countries, one could be excused for not attaching enormous importance to tax planning or thinking that the holding structure for a real estate acquisition can be safely revisited later. Sadly, the French tax environment is not so benign, and failure to adopt the right structure at the outset can have costly tax consequences.

On the French conveyancing side, as part of a French property purchase, a French notary is required to draw up the transfer deed and witness its signature. The notary is also responsible for making the usual standard enquiries, such as checking the vendor has good title to the property, the planning status of the property and for transferring good title to the buyer etc. The notary-s role is mainly limited to ensuring that the sale deed is both probative and enforceable (this is also his principal liability). He does not usually give tax advice, and this must be obtained separately from a French tax lawyer.

In this alert, we look at the tax aspects of buying and owning a property in France in 2015 in line with the most recent tax changes. We also consider some important trusts and French tax residence issues which may be relevant to purchasers.

Tax aspects

In France, in addition to stamp duty at around 5%, three main capital taxes must be considered when purchasing a residential property:

  • Inheritance Tax (IHT)
  • wealth tax
  • Capital Gains Tax (CGT).

Other taxes might also need to be addressed, depending on the purchaser's circumstances.

For instance, income tax if the property is intended to be let out, and more importantly, corporation tax when the proposed purchase is to be made through a foreign company (or other entity). In this respect, it should be stressed that specific advice should always be taken before contemplating purchasing a French residential property through a foreign company or through a trust (or similar entity), given the French tax consequences that such structuring might have.

In addition, if the company or the entity in question is situated in a country which has not signed an appropriate Tax Treaty with France, an annual tax of 3% on the market value of the French property becomes payable.

Inheritance tax (IHT)

French IHT normally applies at progressive rates. In the direct line, i.e. transfers to children and parents, the rates rise from 5% to 45% depending on the value of a beneficiary's share of the estate (the rate of 45% applies on a share exceeding €1,805,677).

Death transfers between spouses are not taxed and assets which pass to an unrelated beneficiary are taxed at a flat rate of 60% regardless of value. Broadly speaking, the rates applying to other family members vary between 35% and 55%. As explained below, IHT can also apply on assets passing through a trust at flat rates which can be very high (up to 60% in certain cases).

IHT may of course apply when a French property is owned directly (French sited asset) but the use of a foreign company to own French real estate might not necessarily help to avoid French IHT. Under French tax law, shares of foreign companies owning French real estate can also be regarded as French sited assets potentially subject to French IHT (unless otherwise provided by a relevant Double Tax Treaty).

However, the use of a company properly structured with debt can help to mitigate or avoid French IHT. Other solutions might also be considered: e.g. a Monegasque SCI, lifetime transfers, "Tontine", or a change of matrimonial regime, taking advantage of any applicable Double Estate Treaties depending on the country of residence of the purchaser (e.g. Double Tax Treaties signed by France with certain countries of the Gulf Co-operation Council), but these solutions are guided by the personal circumstances of the purchaser.

Furthermore, movable assets located in France (such as works of art, French financial assets, furniture, French registered cars, etc.) may be subject to French IHT. In certain situations, the use of a foreign company to own them might also be considered.

Wealth tax

Non-French tax residents are subject to wealth tax on their French sited assets, if the net value of these assets exceeds €1,300,000, at the following progressive rates:

Net taxable value of the French sited assets 2014 Rates
Up to €800,000 NIL
Between €800,000 and €1,310,000 0.50%
Between €1,310,000 and €2,570,000 0.70%
Between €2,570,000 and €5,000,000 1%
Between €5,000,000 and €10,000,000 1.25%
Above €10,000,000 1.50%

Settlors (and beneficiaries regarded as deemed settlors under French tax legislation) of trusts are personally liable to wealth tax on assets held in trust and failure to comply with wealth tax filing requirements and liability gives rise to a penalty of 1.5% on the trust assets.

In broad terms, French sited assets obviously include assets such as shares in a French company (e.g. a French SCI), furniture within a French property, a French registered car or boat etc. Under French tax law, shares of foreign companies owning French real estate may also be treated as French sited assets for wealth tax purposes (unless otherwise provided by a relevant Double Tax Treaty signed by France).

As for IHT, solutions exist to avoid or mitigate wealth tax such as, for instance, using debts or splitting the ownership of the taxable assets between various owners or shareholders. In some cases, when the property has already been purchased and has substantially increased in value, restructuring the ownership and/or the debt may be envisaged to reduce future tax liabilities (wealth tax and IHT liabilities).

Capital gains tax (CGT)

At the end of last year, we had some positive and interesting changes regarding French CGT applicable to non-French tax residents.

Generally speaking, French CGT applies on a profit made on the sale of French real estate (including the sale of shares of a French or foreign company owning French real estate). Taxation applies on the net gain being determined by the difference between the acquisition price and the sale price after application of a taper relief (at various rates), which depends on the length of ownership of the property. Under the current regime, no tax is due after an extended period of ownership of 30 years. After 22 years of ownership, CGT is not due, but the social contributions remain payable (albeit with a higher taper relief available).

Since 2013, an extra tax applies on net gains (after application of the taper relief) which exceed €50,000. The rates are between 2% and 6% (the higher rate of 6% applies on gains which exceed €260,000).

Until this year, the rate of CGT tax depended on the tax residence of the seller: 19% for EU residents and residents of the European Economic Area (EEA), i.e. residents of Iceland, Norway, Liechtenstein (and in certain circumstances, when the gains are made directly, to Swiss residents due to a particular provision contained in the Double Tax Treaty signed with Switzerland); and 33.33% for residents of other states.

As of 1 January 2015, one single rate of 19% applies to all taxpayers regardless of their country of residence (except for sellers residents of one of the few countries seen by France as "uncooperative states or territories"). Taxpayers who paid the higher rate of tax of 33.33% in 2014 should make a claim before 31 December 2015 in order to ask for the reimbursement of the difference between the rate of 19% and the rate of 33.33%.

In addition to CGT, since 2012 social contributions are due at a rate of 15.5%. These contributions have been applied on (1) French rental income earned as of 1 January 2012 and (2) French capital gains on the sale, directly or indirectly, of French real estate and/or shares in companies owning French real estate on or after 18 August 2012.

In a recent case dated 26 February 2015 (Case C-623/13 Ministre de l-Économie et des Finances v Gérard de Ruyter) the Court of Justice of the European Union (CJEU) ruled that the social contributions cannot apply to individuals who are not subject to the French social legislation. In Europe, Article 13 of Regulation No 1408/71 provides that the persons to whom this Regulation applies shall be subject to the social security legislation of a single Member State only. This article lays down the prohibition against overlapping legislation.

Although this case did not concern the situation of someone selling a property in France, it could indicate that non French tax residents selling French properties should not be subject to French social contributions (as they shall only be subject to the social security legislation of their State of residence) and sellers who have paid additional social contributions in France on a sale of French property should be able to claim back from the French tax authorities any social contributions paid in the past.

This decision primarily concerns EU residents but if it is confirmed should also benefit non-EU residents, as otherwise the different tax treatment it triggers could constitute a restriction on the freedom of movement of capital, contrary to EU law. In this respect, we believe that non-EU residents should also make a claim while the delay to make such a claim has not passed.

This CGT regime only applies when the property is owned directly by individuals or by certain companies (such as a French or Monegasque SCI), provided that the SCI does not fall within the corporation tax regime (e.g. it habitually carries out furnished lettings or it is owned by a company subject to corporation tax). If the French or foreign company selling the property does fall within the French corporation tax regime, the gains would be taxed in accordance with the corporation tax rules and not as mentioned above.

Sometimes, the purchaser might have the option to buy the shares of an existing company owning the residential property rather than the property directly. In addition to some potential stamp duty savings (which can be substantial provided that the debts of the company qualify), acquiring the shares of an existing company might also bring some interesting CGT savings possibilities (on the future sale of the property by the company).

Indeed, a sale of shares would not change the ownership of the property by the company itself and the relief already available to it. However, by acquiring the shares, the potential purchaser must be aware that he will also acquire the history of the company (in particular its tax history). Undertaking an audit of the company might then become necessary.

Corporation tax

A consequence that non-French tax residents are often unaware of is that the use of a foreign company to own French residential property can trigger unpleasant French corporation tax issues.

It is not usually advisable for corporation tax to apply to residential property for two main reasons. Firstly, corporation tax is due on the deemed profits derived from the free use of the property. Secondly, and more importantly, capital gains realised by the company on the sale of the property would be computed and taxed under the French corporation tax regime which would be less favourable than the private CGT regime described above.

In addition to the fact that no taper relief would apply, depreciation of the property will need to be taken into account. Given the effects of the depreciation rules, the longer the company owns the property the higher the corporation tax liability, at a current rate of 33.33%, on any future sale would be. For long term ownership, the application of corporation tax might not be favourable (but it might be for short term ownership given the current high CGT rates as explained above).

Finally, the application of corporation tax triggers the need to comply with more formalities and tax filing requirements (e.g. additional running costs).

Before using a foreign company (or other entity) to purchase a French residential property, the tax treatment of that company in France must always be checked. Furthermore, it should also be noted here that if the foreign company (or entity) is situated in a state which has not signed an appropriate Tax Treaty with France, it might be liable to an annual tax of 3% on the market value of the French property.

3% tax

Under French tax law, French or foreign companies (including a French or Monegasque SCI) or entities (such as trusts and private foundations) which own French real estate, directly or indirectly, are potentially subject to an annual 3% tax applied on the market value of the real estate, unless an exemption can apply.

A number of exemptions do apply, particularly to foreign companies or entities located in a country which has signed a Treaty with France which either provides an appropriate administrative assistance provision to prevent fraud and tax avoidance between both countries or contains a non-discrimination clause.

Generally speaking, even if the company or entity is situated in an appropriate Treaty jurisdiction, in order to benefit from the exemption it must either send an annual 3% tax form (form 2746) to the French tax authorities disclosing certain information, or give the undertaking to provide this information at the request of the French tax authorities.

Furthermore, a foreign company (or entity) not considered to be a French real estate company is not subject to this tax, regardless of where it is incorporated or located.

Non-French real estate companies

Generally speaking, non-French tax residents fall within the ambit of the French tax legislation when they own French sited assets (or when they earn French source income).

The shares of a foreign company are not regarded as French sited assets. However, as it would be easier for non-French tax residents to avoid French taxation by interposing a foreign company to own a French property, French tax anti-avoidance legislation provides that shares of foreign companies whose assets consist mainly of French real estate are treated as French sited assets for French tax purposes, particularly in respect of French IHT, wealth tax, CGT and stamp duty.

These rules only concern so-called French real estate companies. Therefore, subject to certain conditions (in particular, the tax residence of the ultimate owner of the shares of the foreign company and the provisions of the relevant Double Tax Treaty) and other French tax provisions, the shares of a foreign company which does not meet the definition of a French real estate company are not treated as French sited assets. When feasible, this can permit some interesting tax planning opportunities.

French property held in trust

French tax legislation does not prohibit the ownership of French properties through a trust. Legally speaking it is possible to have a French asset owned by a trustee. In broad terms the ownership of a French property (directly or indirectly) might have the following principal consequences:

  • The settlor would still be regarded as the owner of the property held in trust, as if the trust did not exist, for French wealth tax and French IHT purposes. On her death, the beneficiaries of the trust will be deemed to be the new settlors of the trust if the assets remain in trust;
  • For other tax purposes, in particular French corporation tax, the trust arrangement would be disregarded. The corporate trustee (if any) would be regarded as the true owner of property (or the shares of the company owning the property). The situation and the French tax consequences of a French property being owned directly or indirectly by a corporate company (instead of individuals) have to be considered, in particular in respect of the French corporation tax issues;
  • The trustees of the trust owning French sited assets will have to comply with specific filing requirements by disclosing the trust to the French tax authorities. Failure to comply with this will give rise to a high penalty of 12.5% of the total assets held in trust;
  • The ownership of French real estate through an offshore company or a trustee also triggers 3% tax issues.

Potential risks to French residence status

The mere ownership of a French residential property by a non-French tax resident is not enough for this individual to be regarded as a French tax resident. However, it is how the residential property is used by the individual and his family that might trigger French tax residence issues.

Broadly speaking, the French tests of residence can be easily met. Among the various tests (which include carrying out a professional activity in France or having the centre of economic interests in France), the French tax legislation provides for a "Foyer" or "family home" test which should be considered carefully.

Under this test an individual could be regarded as a French tax resident merely because his close family (spouse/partner and/or children) habitually live in France regardless of how many days he actually spends in France (even if it is only a few months per year). Under French tax law the mere presence of someone's family in France can often be enough to meet one of the French tests of tax residency.

Of course, the French tests of tax residency can be and often are overridden by the application of a Double Tax Treaty. However, such a Treaty might not grant protection in all circumstances and specific advice should always be taken to avoid unintended French tax consequences.

Furthermore, in respect of residents of countries which have not signed a Double Tax Treaty with France, the French domestic tests apply without restriction and it is sufficient for them to satisfy any one of the French domestic tests of residence to be regarded as and taxed as French tax residents (i.e. on worldwide income and assets).

For further information please contact: Frederic Mege, Partner, Tax & Private Capital

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