52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

NOM DE LA COMMISSION OU DU THEME PRINCIPAL

Date de la séance : ex : Jeudi 30 octobre 2008

 

TITRE DU RAPPORT

 

Jean-Jacques BATAILLON / Emmanuel DUVILLA (Cabinet Bataillon & Associés), 29 rue Fortuny, Paris, France, 01 43 18 38 00 / 01 43 18 38 01
bataillon@bataillonfrance.com

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each jurisdiction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.

Name of Author(s)

Jean-Jacques BATAILLON/Emmanuel DUVILLA

Corresponding state

France

 

Introductory remarks:

The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).

Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.

In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).

The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.

The questionnaire is split into a section (i) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.

As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 

 

 

 

Overview:

 

CIVIL LAW


TAX LAW

General Questions

Specific Questions

I- Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.

1. How is real estate property defined according to the law of the corresponding state?

Pursuant to article 517 of the French Civil Code, “Property is immovable, either by its nature or by its destination or by the object to which it applies”. For example, according to articles 518 to 526 of the French Civil Code, immovable property includes lands, buildings, windmills or watermills, fixed on pillars and forming part of a building, harvests standing by roots and the fruit of trees, pipes used to bring water into a house or other immovable, animals attached to farming, farming implements, seeds given to farmers or share croppers, pigeons in pigeon-houses, Warren rabbits, beehives, fishes of waters not referred to in Article L. 231-3 of the Rural Code and of stretches of water referred to in Articles L. 431-6 and L. 431-7 of the Environmental Code, wine pressers, boilers, stills, vats and barrels, implements necessary for working ironworks, paper-mills and other factories, straw and manure, the usufruct of immovable things, servitudes or land services or actions for the purpose of recovering an immovable.

2. Is there a public register stating the ownership of a real estate property
(land register)?

The Decree of January 4, 1955 reorganised the real estate file. This file lists all of the information contained in acts subject to registration in the “Bureau des hypothèques”.
Furthermore, there is the “cadastre” which is all documents that allow the determination of land properties of a territory. The cadastral documentation is composed of a plan that allows the location and the physical description of land ownership and a documentation that introduces for a person liable to pay tax, the list of his property with the assessment of land used for the introduction of taxes.
There is a rigorous and permanent concordance between the real estate file and the Cadastre.

3. If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

Pursuant to article 2196 of the French Civil Code, the “conservateurs des hypothèques” have to issue to every person who requests it, a copy or extract from an act subject to registration and a copy or extract from the real estate file. Consequently, every person can know the legal status of a parcel of land or of a building. Moreover, the cadastre is available for consultation by anyone who requests it, in the city hall of the town where the parcel of land or the building is situated or in the centre of land taxes.
The cadastre and the land publicity made by the “Bureau des hypothèques” have a tax value: they are used to calculate land taxes and to collect fees and taxes for recording deeds. The main role of the real estate file is not to prove but to inform ; only the act has probative force. The publicity of these acts by the “Bureau des hypothèques” makes them binding on third parties. Moreover, cadastral documentation has no legal value : registration in the cadastre as "owner" is not worth a property title.

4. Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

The real estate file is managed by the “bureau des hypothèques”. It is an administrative service depending on the General Directorate of Taxes since the decree of the 9 April 1948. The “bureaux des hypothèques” are located throughout France. They are 354. Their headquarters and their jurisdictions are set by a decree of the June 12, 1970.
Each “bureau des hypothèques” is placed under the authority of a “conservateur des hypothèques”
The term "cadastre" means also the Administration which takes charge of cadastral documentation. The cadastre is attached to the General Directorate of Taxation. There are central services, regional services and departmental or local services.

5. Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

Pursuant to article 42 of the civil law of 1924, any act by private, between alive persons, transferring or declaring a real property is obsolete if  within the six months following a deed is not signed. In France, the drafting of deeds is the monopoly of the notary. Then this deed must be subject to a land publicity to the “Bureau des hypothèques” and thus be included in the real estate file.

6. Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

The article 1123 of the French Civil Code stipulates that " any person may enter into a contract, unless he has been declared incapable of it by law.". Shall be declared incapable of contracting non-emancipated minors and  adults protected within the meaning of Article 488 of the civil Code.

7. In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

The acquisition of a property through a real civil society presents several advantages. Indeed, real civil society is a privileged tool to manage and transmit real estate property. It avoids the problems associated with the state of joint ownership. Moreover, it allows the dismemberment of the property, which facilitates the transmission assets. Finally, the property is in the patrimony of real civil society estate and not that of the physical person. 

 

8. Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

None.

 

 

 

 

II - Tax Law

 

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General Questions

2.1 Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

Mostly, real estate property in France (leased or acting as secondary residence) are indirectly acquired through a Civil real estate company (called in French “SCI”) rather than directly. This method of real estate holding presents many more tax and civil benefits than the direct holding and few drawbacks.

This mode of acquisition has several tax advantages:

  • Enables to optimize the early transmission of family patrimony by gradually involving children (through the dismemberment of shares). It facilitates the sharing of family patrimony because it is obviously easier to share shares of SCI rather than a building. In practice, it is common to transfer by donation on the children the bare-ownership of shares of an SCI (whose base of donation duties is reduced, valuated according to a legal scale depending on the age of the usufructuary / the older the usufructuary is, the higher is the value of the bare-ownership). Consequently, the parents who are usufructuaries, are able to retain potential income coming from the exploitation of the building owned by the SCI. At their deaths, the usufruct of the SCI’s shares goes to children, free of inheritance tax; this makes of the dismemberment of a property an interesting transaction fiscally.

 

  • Reduction of the taxable value of properties transmitted by the game of a tax relief. The fact that this patrimony is owned by an SCI, obviously enables to practice a tax relief of 10% to 20% on the value of this patrimony, as according to inheritance and donation duties, and pursuant to net wealth tax. In other words, social shares will be evaluated 10 to 20% less than if the real estate patrimony is held directly by an individual.
    • Take advantage of tax allowance in the direct line (151,950 € per child and per parent every 6 years) spreading the transmission of real estate patrimony in time. The transmission of shares of an SCI by gift made every 6 years enables to take advantage at best of the tax allowances predicted in favor of children and grandchildren.

 

    • The interposition of an SCI enables to divert the French rule of presumption of full ownership of the usufructuary (CGI art. 751).
      • It also enables to preserve the deferral of  payment of inheritance duties when children inherit the bare-ownership

 

    • The French SCI (liable or not to corporate income tax) owned by a foreign investor in order to hold a building in France permits to avoid French inheritance duties if the inheritor is a foreigner (according to some bilateral agreements like those signed with Belgium, Spain and Switzerland).
  • Pursuant to the Franco-Luxembourg  and Franco-Danish treaties, capital gains on transfer of shares of French  real estate companies (submitted or not to corporate income tax) would doubtfully taxed in France (nor in  Luxembourg), which will not be no longer the case  if the property is directly owned by an individual or a legal entity domiciled in Luxembourg.

 

    • In case of the subsequent sale of the real estate assets (through a transfer of social shares), the potential liabilities assumed by the SCI (most often bank loan used to finance the building and remaining to reimburse) is imputed on the market value of the real estate property for calculating the sale price of the shares of the SCI. This enables to reduce the potential taxable capital gains (which is impossible in case of direct detention ). The principle also prevails in case of a gift of securities: the cost of the transmission of shares is estimated from the transferred net assets.
    • In case of the exchange of shares of a SCI or a contribution of those same shares in favor of a French company subjected to corporate income tax (“IS”) or in favor of a foreign incorporated company subjected to a tax equivalent to the French corporate income tax, the transferor benefits from a respite of taxation.

 

    • The ownership of real estate property in a French company submitted to “IS” also enables to reduce the taxable basis of the taxable land incomes (coming from the exploitation of the building by rental). Indeed, this scheme enables to deduct from taxable land incomes the amortization for depreciation of the building, the registration duties  of acquisition and exploitation costs (as insurance, administrative expenses). Furthermore, the earnings from the rental of buildings are taxed at  a standard rate of corporate income tax (equal to 33,33%) generally lower than the marginal rate of individual income tax applicable to French investor  (if this later has substantial taxable incomes in France).
    • But the disadvantages of such a scheme will be :

 

  • the loss of the tax allowance of 1 / 10th for the year of detention beyond the 5th in case of capital gain from the direct or indirect transfer of the real estate property (thus less interesting in terms of capital gains tax there is a long detention of the building) ;
  • and the highest rate of taxation of real estate capital gains in case of disposal of the building by the company (33,33% instead of 27%).

 

 

Disadvantages of a direct holding:

  • The loss of the tax allowance of 30% on the value of the principal home taxable to net wealth tax if it is owned through a SCI. Therefore the main residence must not be put in a SCI.

 

The rate of taxation of capital gains from the disposal of shares is higher if the company holding the real estate property is subject to corporate income tax (29% instead of 27%, if the transferor is an individual and 33.33% if a legal entity). This rule is not applicable if the disposal is realized by a non-resident of France.

2.2 Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

Generally the real estate assets of a business  company allocated to its exploitation are owned separately by a real estate company under the same control as the business.

This scheme enables notably to :

  • sell more easily the business company;
  • possibly retain after the cessation of all professional activity a real estate investment, source of incomes ;
  • facilitate the transfer to succession in family ;
  • and the advantage of this scheme is that the securities of the real estate company, subject to fulfilling certain conditions, can be regarded as professional properties excluded from the tax basis of the net wealth tax ;
  • also for craftsmen, merchants and professionals to separate their business assets of their private assets (real estate property), and to shelter it from professional creditors.

 

2.3 What is the definition of a transfer of real estate?

2.3.1 Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

Yes, there is a taxation in case of an operation involving a transfer of ownership like the disposal of a real estate property, its exchange, its transmission by donation or succesion, or the contribution to a company.

Several taxes can be claimed (such as capital gains tax (individual income tax or corporate income tax depending on the nature of the transferor), VAT and / or registration fees.

2.3.2 Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Yes, there is a taxation in case of operations involving an indirect transfer of ownership of real estate property such as:

  • In case of disposal of shares of a real estate company, in the case of the contribution of those same shares to another company,
  • In case of merger or demerger of a real estate company ;
  • Or at the time of the dissolution of the real estate company leading at the sharing of its real estate assets among its associates;
  • or finally at the time of the withdrawal of an associate from the real estate company.

 

Several taxes can be claimed such as capital gains tax (individual income tax or corporate income tax depending on the nature of the transferor), VAT and / or registration fees.

2.4 Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

2.4.1 Real estate capital gains tax

There is an overall exemption of capital gains taxes notably :

  • In case of direct disposal of the building occupied as a principal home or in case of disposal of the real estate property by the SCI, for the fraction (or share) of the capital gain which goes to the associate occupying the real property sold as a principal residence (provided that the building has been made freely available) or in case of the disposal of shares of the real estate company when the only real estate property, that it owns, is occupied freely by the associated assignor;

 

  • In case of transfer of the real estate property by gift and inheritance;
  • If the value of the real estate property sold is less than 15.000 €;

 

  • Partial or total exemption in case of disposal or contribution of a real estate property held for at least 5 years (reduction of 1 / 10th by year of detention beyond the 5th due on the amount of taxable capital gain - total exemption for real estate assets held for over 15 years). This measure is applicable in case of direct and indirect holding of the real estate property (by a SCI);
  • In case of contribution of securities of a real estate company to a French company liable to corporate income tax, or to a foreign company subjected  to an equivalent tax to the french IS  (through tax relief which enables to defer taxation of capital gain), ditto in case of a merger or demerger;

 

  • Exemption for certain non-residents of France, when the real estate property transferred directly or indirectly (through the intermediary of a SCI), is the residence in France of an individual EU national or an individual resident of Iceland or Norway, within the first 2 disposals, at the double condition that the transferor has been tax-resident in France continuously for at least two years at any time prior to the disposal and at the condition that he has the free disposal of the real estate property at least since January the 1st of the year preceding the disposal.

2.4.2 Corporate income tax

The transfer of ownership of real estate property can be fiscally neutral in case of a merger or demerger or partial transfer of real estate assets if it is realized for the benefit of a company itself liable to corporate income tax ;

The capital gains from disposal of real estate property or shares of real estate non listed companies are taxable at the standard rate (33,33 %) and at 15% for a fraction of their profits capped at 38.120 € (whatever the term of the holding of real estate assets sold).

2.4.3 Real estate transfer taxes

The real estate transfer tax is not due in the case of a merger of any type of company, of a partial transfer of assets for the benefit of a company liable to corporate income tax (CIT), or in case of a demerger ;

Ditto in the case of the contribution of at least 75% of the securities of a joint stock company (liable to CIT) for the benefit of a society of equal status liable to CIT (called scheme of mergers in English).

In this two hypothesis, only a fixed duty of 500 € will be due whatever the value of asstes transferred.

2.4.4 Inheritance and gift tax

  • Overall exemption in case of the transmission of the real estate property by inheritance to a surviving spouse ;

 

  • Ibid in case of the devolution of the usufruct of the real estate property or the usufruct of the shares of SCI to the bare owner (as a result of the death of the usufructuary).

-  There are tax allowances of € 151,950 on the value of real estate assets transferred in case of transmission by gift or inheritance in the direct line (to the children).

2.4.5 Other taxes

VAT is not due on the real estate disposal if the real estate property is completed since more than 5 years or even if it is his second mutation involved since under 5 years of its completion. But transfer duties must be paid in this case.

 

 

 

 

2.5 Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

The capital gain is taxed at the date of signing of the notarial deed establishing the disposal or the transfer of property.
The real property transfer taxes are due at the time of registration of the act establishing the disposal at the mortgage registry.

2.6 Depreciation and amortization


Depreciation and amortization of real estate.

No deductible amortization of land is accepted when the real estate property is directly owned by an individual or indirectly through a SCI not liable to corporate income tax (translucent) and it is leasing the naked building.

However, an amortization of the real  estate property for depreciation is deductible from taxable profits (resulting from the rental of the real  property) of the holding company if the latter is:

-   Either liable to Corporate Income Tax ;

  • Either if it exercises an activity of  renting of furnished space of housing (under certain conditions, if it has the tax status of rental of furnished houses (“LMP”)) ;

 

Or an activity of renting of premises equipped with the necessary equipment to operate the business.

 

III- Tax Overview

3.1 Taxes relevant to real estate taxation in the corresponding state

3.1.1 Real estate capital gains tax

 The taxable event is the direct or indirect  transfer of the real estate property (in case of sale or of contribution into a company of the real estate property or shares in capital of a real estate company).

Real estate capital gains, realized directly by a French individual resident or indirectly through a real estate company (SCI) not liable for corporate income tax, are subject to individual income tax to a special rate equal to 27 % (which includes social levies at the overall 11 % rate) and only 16 % for individual non residents of France living in EU (33 1/3 % if outside the EU).

There is a reduction factor applied : 10% for each year that you own the property after the first 5 years. So, no Real estate capital gains tax are payable if real estate is sold after 15 years of holding.

Real estate capital gains from business assets, realized by a French company liable to corporate income tax, are taxed at a standard rate  equal to 33,33 %.

3.1.2 Income tax (corporate and individual income taxes)

Dwelling in France for certain non residents / empirical assessment of individual non residents of France owning a property in France  (CGI, art. 164 C)

Non residents are obliged to make an annual return for income tax if they receive income from letting property or from bed-and-breakfast accommodation located in France.
Even, if the real estate property, held by a foreign land-owner, is not rented, the French tax authorities may seek to charge income tax with an  assessment basis equal to 3 times the land register value  (=fair market rental value) from the property only if the property owner is a tax resident of a country which has not entered into a double taxation treaty with France.

3.1.3 Real estate transfer taxes

In principle, all acts ascertaining a direct or an indirect transfer of real estate are subjected to a registration formality.

Registration Duties on sales of real property are collected when the property is transferred. In addition to tax on the registration of real property transactions, such transfer gives rise to additional local taxes.

Notably, the sale price (or market price if higher) of real estate property is subject to transfer duties at the rate of 5,09 %. These transfer duties are payable by the purchaser. The deed of transfer must be registered within the Tax Office of the place in which the building is located within a month from the conclusion of the sale deed.

In addition to these transfer duties, the purchaser also has to pay notary fees (about 1 %) and land register charges (0,10 %). 

A fixed duty of € 375 is only due in case of contribution of real estate property into a transparent real estate company (which is not subjected to corporation tax).

A contribution of a real estate property by an individual or a transparent company (e.g. partnerships or civil-law or non-trading companies which are not subjected to corporate tax), into a company subject to corporate tax, are liable to transfer taxes at the rate of 5 %.
  
- Sales of the shares of deemed real estate company, the purchasers are liable to registration duties at a rate of 5 %.   

- In case of a reorganization (mergers and spin off) involving real estate transfer, registration duties are slightly raised (€ 375 or € 500 depending whether the share capital is lower than € 225,00).

No registration duties are levied in case of succession or deed of gift involving a real estate transfer since the inheritance tax/gift taxes are due.

3.1.4 Inheritance and gift tax

Inheritance/donation of real estate may trigger the inheritance or gift tax under some conditions. The object of taxation is every transfer of ownership due to inheritance or donation. Taxpayer is generally the recipient of the inheritance or donation.

 

- Inheritance tax :

There are various allowances and exemptions that apply before the estate if the deceased becomes liable for inheritance tax. There is no liability to inheritance duties between husband and wife or between those in a French civil partnership.

There are also personal allowances which vary according to the relationship of the inheritor to the deceased.

Notably, there is an allowance of 20% for the main residence of the deceased, provided the property was normally occupied by the surviving spouse, and/or the children, at the time of death.

The valuation of assets is the market valuation at the date of death of the deceased, less the debts, allowances and exemptions, which are detailed below.

In the case of real estate, a valuation of the property is necessary, and is normally carried out either through the notary or an expert appointed by them. If the property is sold shortly after death, then this will be the value used, provided the tax authorities are satisfied that it has not been sold at an artificially low price.

The rates of taxation that apply depend upon the nature of the relationship of the inheritor to the deceased.
The tax is applied on a ‘sliced’ basis so that each slice of the total sum is taxed at a different rate.

- Gift tax :

The gift taxes can be reduced when the real estate property or the shares of real estate company are divided up. The higher, the age of the usufructuary is, the higher of the value of the bare owner (“nue-propriété) transmitted  is. The transmission of only the bare owner to children is particularly interesting because at the event of the death of the usufructuary, the usufruct is entrusted to the bare owner with an exemption of inheritance duties.     

Also there are tax allowances provided for gifts made between family members.

The government has recently reformed inheritance and gifts duties, and abolished inheritance duties between couples, and substantially increased the inheritance and gifts tax allowances for children (€ 151,950 for each child).

These inheritance and gifts tax allowances can be used every six years. So a gift made every six years is free of gifts tax, provided it does not exceed the exemption limits.

The limits on the amount that can be gifted free of tax depends on the relationship between the parties and, in some cases, on the age of the donor.

If the gift is larger than the allowances that are available then the recipient is liable to gifts tax on the value of the gift exceeding the allowance.

The rate of taxation applicable depends on the type of gift, and the donee. The taxable amount is then reduced by an age allowance, available to the donor.  Gifts benefit from a tax reduction of 50% if the donor is less than 70 years old, and 30% when the donor is aged over 70 up to 80 years.

The taxable amount is the sum applicable after deductions of the permitted allowance.

In addition, the tax is applied on a 'sliced' basis so that each slice of the total sum is taxed at a different rate.

3.1.5 Net wealth tax

The assessment basis of net wealth tax includes all property, rights and securities forming the property of taxable persons on 1st January of the taxation year like notably real estate and rights related to a real estate company. 

Individuals resident in France or who own therein property, and whose property's net value exceeds € 770,000 (the thresholds applicable starting to 1st January 2008) on January  1ST of the taxation year are subject to wealth tax.

Persons resident in France are taxable on property owned in and outside France.

Persons non residents of France for income tax purposes are only liable to their real estate property and shares related to real estate company situated in France and also shares of foreign companies in which more than 50 % of the assets consists of real estate situated in France.

The amount of wealth tax is determined by applying a graduated scale to the assessment basis. The rate increases with the net wealth value.

3.1.6 Special tax on immovable property

  • Special tax of 3 %.

French and foreign corporate bodies which, directly or indirectly, own one or more real property assets situated in France or hold real rights connected with such property are liable to an annual tax equal to 3 % of the market value of such real property or rights.

 

This special tax of 3 % is chargeable to legal entities, regardless of their form, on real property assets and real rights owned on 1st January of the taxation year. However, it is not chargeable in respect of property held in inventory by legal entities carrying on business as property dealers or developers.

Some exemptions are provided.

One of them concerns only legal entities resident of a country with which France has concluded a tax treaty containing a non-discrimination clause, and legal entities resident of a country with which France has concluded a tax treaty containing an administrative assistance clause. To benefit from this exemption, foreign corporate bodies liable to the 3 % tax must provide to French tax administration a special return, submitted compulsorily before 15th May, giving certain information about real estate (location and market value of real estate) and about shareholders (location of their actual residence).

Are also exempted to pay this special tax  of 3 % :

  • the companies listed on the stock exchange ;
  • the unquoted companies in which more than 50 % of the assets do not consist of real estate assets located in France.

3.1.7 Value added tax (VAT)

A special French regime exists for immovable property.

Are in the scope of real estate VAT, the real estate operations following :

  • the purchase of building land ;
  • the operations contributing to the production or supply of new immovable property ;
  • the sale of real estate or shares related to a real estate company if the sale is the first sale made within a 5 year period from the completion date of the building ;

 

The VAT (TVA) rate in France is 19.6% for all this operations above mentioned.

The tax payer of VAT is always the seller (except in case of purchase of building land).  

When the purchase of real estate is subject to VAT, real estate transfer are not due. But, notary fees (1 %), land registration charges (0,1 %) and property transfer tax  (0,715 %) are due.
All this registration duties are assessed on the sale price and due by the purchaser.

3.1.8 Other taxes

- Real property tax on developed and undeveloped land (ou « taxe foncière sur les propriétés bâties et non bâties »). This tax is payable by the owner of a French real estate.
Unlike the “taxe d'habitation” (mentioned below), at the time of purchase apportionment can be made between the buyer and seller, although it needs to be stated in the contract for sale.
The tax is also payable on undeveloped land.
There are exemptions for agricultural land and the owners of new property are granted limited exoneration.

- Residence tax (ou « taxe d’habitation »). This tax is payable by the occupier of a French residential property, who was occupying the property on 1st January. Even if the property was empty, if it was 'capable' of occupation, the tax is also payable. 

There is an exemption if the property is incapable of occupation due to it needing extensive renovation.

The property tax is due by the owner, resident or non-resident, individual or corporation, whereas the dwelling tax is due by the occupier of the property.

4. Double Taxation Treaties (DTT)


4.1 Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

All double taxation treaties concluded by France, in conformity with the article 6 of OECD model convention, assign the right of taxation income, derived from real estate, to the state where the real property is situated.

This provision applies to individuals and legal entities and whatever the exploitation mode of real estate

4.2 Which State is entitled to levy a net wealth/ net equity tax on immovable property?

When the double tax treaties provide for net wealth tax, it confirms that immovable property are taxable in the state where the real property is situated.

Concerning shares or titles of deemed real estate company, the situations are more complex.  If the convention does not provide expressly the right of taxation, because it provides only for immovable property and not the holding through a deemed real estate company, in this case France cannot liable to net wealth tax these shares or titles held by non residents of France. If propertes are not considered as immovable property, they are, in principle

4.3 Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

In most cases, real estate capital gains derived from the alienation of immovable properties are taxable in the state where the real estate is situated. 

Concerning shares or titles of deemed real estate companies, the situations is more complex. Most  double tax treaties concluded by France include a disposition providing the taxation in France of capital gains resulting from the sale shares in a French deemed real estate company (e.g. DTT with UK, Turkish, Holland, Spain, Italy, USA). When such a disposition is not provided, capital gains are taxable in the state of the residence of the shareholder (e.g. DTT with Belgium).

4.4 Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

France applies either the exemption method to income derived from immovable properties (especially concerning income tax and capital gains) or the tax credit equal to French tax (especially concerning the net wealth tax).

Concerning individuals, the exemption method is generally combined with the rule of progressive rate.  The income derived from real estate (exempted in France) is even taken into account to assess the rate of the individual income tax due on other incomes taxable in France. 

Specific Questions

Introduction/ Instructions:

Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

 

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

 

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".

The 12 cases have been put into the following three sub-sections:

  • Real estate is part of private wealth of an individual: Cases 1 –4.
  • Real estate is a business asset of an individual: Cases 5 – 8.
  • Real estate is an asset of a legal entity: Cases 9 – 10.

 

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.

Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

 

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate


Real estate capital gains tax

The transfer of the ownership of real estate is subjected to real estate capital gains tax.
However, if the residential property is the individual's main residence, the sale of this property is exempted from real estate capital gains tax.
The rate of this tax is equal :

  • to 27 % (which includes social levies at the overall 11 % rate) for tax residents of France ;
  • and only 16 % for individual non residents of France living in EU (33 1/3 % if outside the EU).

 

There is a reduction factor applied : 10% for each year that you own the property after the first 5 years. So, no Real estate capital gains tax are payable if real estate is sold after 15 years of holding. These allowances apply for French tax residents as well for non residents of France.

The real estate capital gains are taxed at the date of the deed ascertaining the sale of real estate.

Income tax

See Section III- 1.2.

Real estate transfer tax.

If the transfer of the ownership of real estate property is not in the scope of the VAT, transfer duties should be paid according to terms and conditions above mentioned  (see page into the part “Tax overview”).

The sale price (or market price if higher) of real estate property is subject to transfer duties at the rate of 5,09 %.

Inheritance and gift tax

Inheritance and gift duties are due if the real estate is situated in France whatever the country of residence of the deceased (or donor) and whatever this one of the inheritor (or the donee).

There is an exemption of inheritance duties if the real estate is assigned by succession to the spouse.

In case of taxation in the foreign country of deceased or recipient, a double taxation is avoided by :

  •   an attribution of a tax credit corresponding to the inheritance tax possibly paid abroad.

-   or by an exemption in the state where the   deceased was domiciled.

Generally, the tax scheme of donation duties is the same than this one applicable to succession.
Note that donation duties, even if in principle the taxpayer is the donee, can be paid by the donor without this payment is regarded as an additional gift subject to gift taxes.

Other taxes (VAT, etc.)

VAT is due on the real estate disposal if the real estate property is completed since less than 5 years and if it is the first mutation involved since under 5 years of its completion.

 

 

Ongoing taxation of real estate

Net wealth tax

A net wealth tax is due. For tax residents of France, there is a 30% allowance against the value of the principal home. The applicable date for determining net assets is January 1st each year. For non residents of France, only loan and other debts from  France can be deducted  of the tax base of net wealth tax.

Generally,  under the terms of most DTT concluded by France, the liability to immovable property is assigned to the state where the real estate is situated. Mostly, an exemption method is included to avoid double taxation. 

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

In general, under the terms of most DTT concluded by France, rental incomes from French private properties (after rental cost allocation) are subjected to individual income tax in France at a standard rate. However, under the terms of certain DTT, partial relief or exemption on rental income can be granted to non residents of France against potential tax liability in their own country.

Other taxes

See Section III-1.8 :
Generally, “Real property tax” and “Residence tax” are due by the owner of the real estate.

 

Comments

Pursuant to French domestic law, there still is an interesting scheme called in French “Loueur en meublé professionnel” (LMP) for people who want investing on immovable property and making some profits by renting them. To benefit from this special scheme, several conditions must be fulfilled. Notably, the private real estate property has to be rented furnished and the annual turnover (all taxes included) derived from this kind of rental  must be at least equal to € 23.000 or must be account for at least more than 50 % of annual overall income.
 
This status of “LMP” can be assigned either to an individual or to a family company (not  liable to French corporate income tax) holding residential property.
The status of “LMP” delivers following advantages :

  • give the right to impute a possibly real estate deficit (including especially interests  from real estate loan and depreciation of buildings) derived from rental of business assets on taxable overall income. That permits to reduce significantly the basis of French individual income tax ;
  • total exemption of real estate capital gains tax (RECGA) after 5 years under certain conditions ;
  •  the landlord has the right, under certain conditions, to recover the real estate VAT possibly paid at the event of the purchase of real estate rented if he or it decides to opt for liability to rents on VAT.  

This activity of rental furnished apartments and houses is liable to business tax and residence property tax.

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax (RECGT)

We assumed the real estate is situated outside France and owned by a French resident.

Pursuant to the DTT France has concluded, the right to tax real capital gains is allocated to the state where the real estate is located. Accordingly, no RECGT is levied in France in this case.

Income tax

The principle is the same like this one applicable to RECGT. Rental incomes derived from immovable property are taxed in the State where the real estate is situated.

Real estate transfer taxes (RETT)

No RETT is levied on the transfer of real estate located outside France.

Inheritance taxes

Pursuant to French domestic law, if the deceased person had his or her domicile for tax purposes in France, Inheritance duties are payable on all movable and immovable property situated in or outside France. The principle is the same when the inheritor is domiciled in France.

But if there is a DTT covering inheritance tax concluded between France and the state where the real estate is situated, generally in this case, the right to tax is assigned to the state where the real estate is situated. Method provided to avoid double taxation are either imputation if tax credit or exemption.

If there is no DTT covering IT, France is entitled to tax the real estate due to the deceased or the inheritor to be domiciled in France. But the amount of IT possibly paid abroad (outside France) can be imputed on IT due in France.

Gift taxes

In general, according to French domestic law,  the tax scheme of donation duties sticks this one applicable to succession duties. So, if the donor or the donee is a French tax resident, France is entitled to tax the gift of the real estate despite the fact this later is situated in a foreign country.
 
France has concluded DTT covering donation duties with only 11 foreign country (e.g. Germany, USA, Austria, Italy, Sweden, etc…). Pursuant most of DTT covering donation duties, the right to tax gifts of real estate is assigned to the state where the real estate is situated. Method provided to avoid double taxation are either imputation of tax credit or exemption (which is combined with the rule of effective rate).
 
In case of absence of DTT covering donation duties, a tax credit corresponding to donation duties possibly paid in the state, where the real estate is situated, can be imputed on French donation duties.

Other taxes (VAT, etc.)

None

Other taxation (other than upon holding or upon disposal)

Comments

 

Case 2

 

Part A

 

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

 

Yes, according to French domestic law, this kind of capital gains is regarded as RECG, provided  the company holding real estate is an unquoted company in which more than 50 % of the assets consist of real estate assets located in France and are not business assets. The tax rate is equal to 16 % for residents of EU and 33 % for residents outside the EU and also for a foreign legal entity.

But, if the seller of shares is a non resident of France, pursuant to the majority of DTT concluded by France, these capital gains, resulting from the sales of shares of a French Real Estate Company, are taxable in the state of residence of the shareholder.
However, few DTTs concluded by France assign the right of taxation to the state where the real estate held by the real estate company is situated (e.g. DTT with USA, Italy, Austria, Canada, Norway, Sweden, and Switzerland) if the company is predominantly real estate situated in France.      

Corporate income tax

None

Real estate transfer taxes.

Even if the act ascertaining the transfer of property is concluded abroad, Registration duties must be paid in France. The purchaser (resident or non resident of France)  is liable to registration duties at a rate of 5 %.   

Inheritance and gift tax

According to French domestic law, the transfer (by succession or donation) of shares of real estate company, in which more than 50 % of the assets consist of real estate assets located in France and are not business assets, is subjected to French Inheritance/donation duties.
Certain DTTs which France covering succession and also sometimes donation duties, assimilate shares above mentioned to immovable property, and consequently assign the right to tax the mutation of them to the state where the real estate assets are situated (e.g. Italy, USA, Germany, UK, Switzerland, Norway, Sweden, Austria, Canada). The other DTTs which France covering succession and also sometimes donation duties provide the right to tax the mutation of them to the state where the deceased was domiciled (e.g. Belgium, Spain). 

Other taxes (VAT, etc.)

None.

Ongoing taxation of real estate

Net wealth tax, net equity taxes

Generally, the definition of French property, in terms of net wealth tax, is the same for inheritance and donation duties. 
According to French domestic tax law, these shares are included in the assessment basis of the net wealth tax provided more than 50 % of the assets of the French company consist of real estate assets located in France and are not business assets.
 Pursuant to mostly DTTs which France covering net wealth tax, the tax scheme of shares from real estate company is almost the same than these one applicable to inheritance/donation duties (except the DTT concluded with Spain, which provides that the shares of real estate companies are treated as movable property and taxable in the state where the shareholders are domiciled.

Corporate income taxes.

If the real estate company is liable in France to corporate income tax, all expenses derived from the exploitation of real estate situated in France are deductible  of taxable incomes (such than notably the interests of real estate loan, depreciation of buildings, etc…). 

Other taxes

Real properties taxes are due.

Other taxation (except upon holding or upon disposal)


Nil

Comments

Nil

 

 

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

According to French domestic law, RECG resulting from sale of shares of foreign real estate company, are, in principle, taxable in France if the ownership is a French tax resident (at a rate equal to 27 %). Two hypothesis are conceivable :

  • If the real estate is situated in a state which has not concluded a tax treaty with France : the RECG is taxable in France even if it also taxable outside France. But, the French domestic law allows to deduce from the assessment basis the tax paid abroad ;
  • If the real estate is situated in a state which has concluded a tax treaty with France : the solutions can be different according to DTTs. Certain DTTs assign the right of taxation to the state where the real estate is situated and other to the state of residence of the owner of the shares. When the two states have simultaneously the right to tax the RECG, the double taxation can be avoided with the imputation of tax credit equal to foreign tax. 

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

The rules are the same than these one applicable in case 1 Part  A, because French tax law does not distinguish between residential property and business property, except for the exemption provided to the main home.
But there is a very interesting tax scheme called in French “location équipée ou aménagée” applicable when business property are rented with the capital goods (equipments as furniture, arrangements, facilities, office equipment, hardware, machinery, etc) which are necessary for the exploitation of the business activity developed into buildings rented.
The advantages of this special tax scheme are almost the same than this one of “LMP” described hereinafter (cf. Case 1 Part A into comments) (reduction of individual income tax with imputation on overall income of possibly deficit), exemption of RECGT, recovery of VAT and exemption of net wealth tax).

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

None.  The same answer applies in Case 1 Part B.

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

The same answer as in Case 3 Part A applies. 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The same answer as in Case 2 Part B applies.

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

The same answer as in Case 1 Part A applies.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

The same answer as in Case 2 part A applies. To benefit from LMP status, the condition about the turn over applies  at the level of each shareholder if these later are not member of the same family.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

Capital gains resulting from sale of business assets follows the tax treatment of professional capital gains. Professional capital gains are exceptional profits made when fixed assets are transferred by industrial, commercial, small trading, agricultural enterprises or non-commercial enterprises.

 

A distinction is made between long-term capital gains (or losses) and short-term capital gains (or losses). Short-term capital gains (or losses) are generally included in the assessment basis applied to taxable profit subject to progressive individual income tax, whereas net long-term capital gains are entitled a lower tax rate of 26 % (including social levies).

The distinction between treatment of long-term and short-term capital gains is based on the following rules:
- Capital gains (or losses) with respect to non-depreciable assets are deemed short-term when transferred within two years from being entered as assets. In all other cases, capital gains are considered long-term ;

  • Capital gains (or losses) with respect to the transfer of depreciable assets are normally deemed to be short-term and therefore taxed under general law provisions, regardless of the time during which such assets have been held.

However, if the asset has been held for over 2 years, the part of the capital gains which exceeds depreciation is deemed to be long-term and
therefore taxed at the reduced rate of 27 %.
 

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.

 

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

The same answer as in Case 7 part A applies.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

None.

 

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

The tax scheme depends if the legal entity is or not liable to corporate income tax.
If the legal entity is not liable to corporate income tax, CG derived from the transfer of real estate by a legal entity which their assets are consisting mainly of immovable property are taxed under the same treatment as real estate company (cf. Case 1 Part A).  And if the legal entity, selling real estate assets, has a business activity, the taxation of capital gains resulting from sale of assets follows the same treatment than these one of professional capital gains above mentioned (cf. Case 7 Part A). 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

No comments.

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

 

Comments

Similar to case 6.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

 

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Similar to case 8.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Nil.

 

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

Similar to Case 8.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Nil.