The 3% tax and the concept of beneficial owner

5 minute read
08 February 2017


Under Article 990 D of the French tax code, companies and other entities (notably such as trusts and private foundations) which own French real estate, directly or indirectly, are subject to an annual 3% tax applied to the market value of the real estate.

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

In respect of entities not endowed with legal personality, it must be checked that the applicable treaty expressly covers such entities. In this respect, trusts are deemed to be established in the state or territory whose law applies to them.

The exemption is not, however, available as an automatic right. In order to benefit from it, the companies/entities in question must comply with certain filing requirements and provide to the French tax authorities certain information, in particular the identity of the owner of the real estate sited in France.

For certain entities such as bearer share companies, trusts or foundations, the tax authorities have indicated that it is the true owner of the French real estate that must be disclosed. This should be understood as the identity of the beneficial owner. However, this concept is not defined by French domestic law and can sometimes appear as suspicious for the tax authorities, particularly when the identity of the beneficial owner does not appear anywhere in the constitutional documents of the entity concerned.

In respect of the 3% tax, the obligation to provide information is based on the principle of a simple declaration. It is therefore enough to disclose the identity of the owner or beneficial owner in order to benefit from the exemption. However, in the course of a tax audit, the tax authorities can always ask for additional information in order to verify that the individual disclosed as the beneficial owner can effectively be considered as such. This is where things can get complicated…

Indeed, as we have seen in the tax litigations we have been dealing with, the tax authorities may be particularly demanding as to the nature of the documents justifying the identity of the beneficial owner. Without necessarily calling into question the veracity of the documents provided, in order to deny the benefit of the exemption, the tax authorities will set aside those which they consider insufficient, thus making proof impossible. However, in this matter, proof can be given by any means and the taxpayer is always presumed to act in good faith. The position of the tax authorities is against the law and the judges of the French Supreme Court have recently sanctioned them in a decision dated 18 October 2016.

This case concerned a Luxembourg company, the shares in which were owned by nominees, which owned a property in France through a French SCI. Instead of disclosing the identity of its shareholder nominees, the Luxembourg company disclosed the identity of the individual for whom the nominees were holding the shares. The French tax authorities denied the benefit of the exemption because the Luxembourg company did not provide enough evidence in order to prove that the individual designated as beneficial owner could indeed be considered as the true owner of the company.

In order to prove the identity of the beneficial owner, the Luxembourg company provided three documents which had not been rejected by the tax authorities but which were put aside for being deemed insufficient. The following documents were provided:

  1. a bank attestation regarding the beneficial ownership;
  2. a report from the audit company; and
  3. an attestation from the nominee company identifying the beneficial owner.

The court ruled that "these three elements, precise, concordant and not discussed" well identified the identity of the individual as the sole beneficial owner of the Luxembourg company. The Luxembourg company therefore complied with its obligation and could benefit from the exemption.

This decision is particularly welcome! It recognises for the first time that the concept of beneficial owner can be understood as the owner of the assets. Furthermore, it retains the applicable rules in respect of proof and provides precision regarding the nature of documents which can verify the identity of the beneficial owner. The tax authorities have been told to soften their position for the benefit of taxpayers.


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