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Country - France
Taxes
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A. AVAILABLE INVESTMENT STRUCTURES
Which legal structures are available for an investment in real estate in France?
- Asset deals.
- Share deals.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
Registration fees:
- 5.09% (calculated on the transfer price) if the property was built over five years ago.
- 0.715% if the property was built less than five years ago and has been sold to a real estate trader (marchand de biens).
- 19.6% (calculated on the basis of the transfer price excluding tax). VAT applies only if the sale occurs within five years of the completion of the building and this has been sold to a real estate trader (marchand de biens), or if the sale is of an incomplete property.
- No registration fees apply to the transfer of land for development (terrain à bâtir).
Notary fees are payable at the rate of 0.825% (calculated on the basis of the value indicated in the deed executed by the notary) plus VAT at 19.6% plus disbursements plus expenses.
A land registrar's fee is payable at 0.10% (calculated on the basis of the value indicated in the deed executed by the notary).
VAT (instead of registration fees) is payable on sales to real estate traders (marchands de biens) at the rate of 19.6% of the gross margin, not the total selling price.
Mortgage registration fees
Two kinds of real estate securities exist under French law: a contractual mortgage (hypothèque) and a purchase money mortgage (privilège de prêteur de deniers). These two securities cover the principal amount of the loan, as well as interest and related costs. Please note, however, that a purchase money mortgage (privilège de prêteur de deniers) covers the payment of interest for only three years. Typically, the amount of the secured debt equals the principal amount of the loan, plus a further 20% to cover interest and related costs.
Mortgage related fees are only paid in relation to a contractual mortgage (hypothèque) at the rate of 0.715% of the amount of the secured debt at the time of creation of the mortgage.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
No.
How is the purchase of shares in an SPV holding real estate taxed?
The transfer of shares in a real estate company (where the value of the real estate represents more than 50% of the total value of all assets) is subject to a registration tax of 5% of the price paid for the shares.
Who normally pays the transfer taxes, the buyer or the seller?
Costs relating to the transfer of land are normally paid by the buyer, unless otherwise agreed. However, the seller is jointly liable with the buyer for their payment.
Are notary fees determined by law or should they be negotiated?
Notary fees are determined by law but in the case of major transactions where fees amount to more than EUR 80,000 they can be negotiated. Both notaries must accept the negotiated amount.
Are there any other costs related to the purchase of real estate assets or SPVs?
No, but there are several other taxes in France relating to property ownership:
Annual 3% tax is payable, calculated on the market value of the property, by companies (whether or not they are resident in France) whose real estate assets represent more than 50% of the company's total assets.
If a foreign company is registered in a country with which France has signed a mutual assistance tax treaty, and if it submits a tax return every year showing the location of the property it owns, its fair market value and the identity of its shareholders, then it may benefit from a tax exemption.
The 3% tax is not levied on properties held by real estate traders (marchands de biens).
Wealth tax
An individual who owns properties in France worth more than EUR 760,000 is subject to wealth tax, calculated on the basis of the net value of their estate at rates of between 0.55% and 1.80%.
C. TAXATION OF RUNNING INCOME
How is income generated from the letting of real estate taxed in France?
(a) Direct investment through a permanent establishment
Owning a property in France does not constitute having a permanent establishment. If a permanent establishment exists, the running income is fully taxable in France at the rate of 33.33%.
(b) Direct investment without a permanent establishment
Foreign owners are generally subject to French tax on rental income. The same applies to property owned by a transparent entity. Depending on the applicable tax treaty, tax paid in France may receive a tax credit in the owner's country of residence.
(c) Indirect investment through a corporation entity
If property is owned directly by a French corporation, the income will be subject to corporate tax in France at the normal rate of 33.33%. If the property is owned by a French transparent entity, the shareholders will be taxed on their personal income.
(d) Indirect investment through a partnership
The shareholders will be taxed on their personal income.
How can income generated by investment be transferred to a foreign investor?
(a) Direct investment through a permanent establishment
As for an indirect investment (see below).
(b) Direct investment without a permanent establishment
Not applicable.
(c) Indirect investment through a corporate entity
Dividends paid to a French individual shareholder by a company subject to corporate tax receive a tax allowance of 40% of the amount of the dividend, as well as a general tax allowance of EUR 3,050 if the shareholder is married and EUR 1,525 if the shareholder is single. There is also a tax credit capped at EUR 115 if the shareholder is single or EUR 230 if they are married.
Dividends paid by one company which is subject to corporate tax to another company, also subject to corporate tax, are taxed as income at the rate of 33.33% without any tax allowances. If dividends are distributed by a subsidiary to its parent company, there is a tax exemption, but 5% of the amount of the dividend is treated as taxable income of the parent company.
Dividends paid to a transparent entity by a company which is subject to corporate tax are declared at the level of the transparent entity but taxed as the income of individual shareholders.
Dividends paid to non-resident shareholders by a French resident company which is subject to corporate tax are normally subject to withholding tax at 25%. Most tax treaties reduce this rate to 5% for shareholders holding more than 10% of the share capital of the French company. There is no withholding tax if the parent company of the French company is located in the European Union and owns at least 15% of the company's share capital.
(d) Indirect investment through a partnership
The shareholders of French transparent entities do not benefit from a reduced rate of withholding tax if tax treaties do not provide for this.
Are there local taxes on the possession of real estate assets?
Land tax (taxe foncière)
This tax is payable by the property owner (as of 1 January 2007), whether a company or an individual. The tax is calculated on the basis of the actual value of the property. Rates depend on the property's location.
Property tax (taxe d'habitation)
This tax is payable by the occupier of the property (as of 1 January 2007), whether a company or an individual. Premises used for housing purposes, parking lots, and premises used for both personal and professional purposes, are subject to property tax. The tax does not apply to premises which are already subject to local tax on business activities.
Tax on offices and premises for commercial and storage use in Ile-de-France (taxe sur les bureaux, les locaux commerciaux et de stockage en Ile-de-France)
This tax is payable by the owner of premises used as offices, or for commercial or storage use, located in Ile-de-France (i.e. Paris and the surrounding areas: Essonne, Hauts-de-Seine, Seine-et-Marne, Val d'Oise and Yvelines). The tax is calculated by multiplying the area of the premises by the applicable rates (in 2007, EUR 1.80 per square metre for premises for commercial use, EUR 0.90 per square metre for premises for storage use; other rates (from EUR 3.20 per square metre to EUR 11.30 per square metre) apply to offices, depending on their location).
Tax on unoccupied premises
This tax is payable by the owner of any premises which have been unoccupied for more than two years (as of 1 January 2007). It only applies to premises located in the following areas: Paris, Lille, Bordeaux, Toulouse and Lyon. The tax is calculated on the basis of the rental value of the premises at the rate of 10% in the first year 12.5% in the second year, and 15% in the third year.
Local equipment tax
This tax is payable in relation to building, rebuilding or extension projects for all types of premises. The tax is calculated on the basis of the value of the property, and rates depend on location.
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
If the owner of the property is a company subject to corporate income tax, depreciation is allowed on the basis of the acquisition value (on a straight-line basis) of the buildings but not of the land. Accelerated tax depreciation is possible for industrial buildings if their expected lifespan is less than 15 years.
If some elements of the building are expected to have a shorter lifespan than the building as a whole then the depreciation value is broken down into different categories of assets, each with its own depreciation rate.
Can land be depreciated?
No, unless the land contains a quarry.
Can a participation in an SPV holding real estate be depreciated?
No.
E. VAT
Is the purchase of real estate assets subject to VAT?
VAT applies only if the sale occurs within five years of the completion of the building and this is sold to a real estate trader, or if the sale is of an incomplete building.
For sales to real estate traders (marchands de biens) VAT is payable at the rate of 19.6% on the gross margin, not on the total selling price.
How can VAT paid on the purchase price be recovered?
This can be done by claiming a reimbursement of VAT credit. Foreign investors who are not registered for VAT in France must appoint a VAT representative to reclaim VAT.
F. LEVERAGE, THIN CAPITALISATION RULES
Are there rules which limit the deductibility of interest for third party (bank) financing?
A deduction against the income generated by the property is normally possible for any interest paid on debt used to finance the acquisition of property. There is no mandatory debt to equity ratio (except in the case of loans from related companies) but the tax authorities may disallow interest deduction if it exceeds the borrower's repayment capacity.
Are there thin capitalisation rules in France and if so, how do they work?
Interest deductibility is subject to certain limitations regarding inter-company loans. An average rate of interest and a maximum debt ration are applied by banks.
Does France apply any withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
No withholding tax is levied on interest payments.
G. TAXATION OF CAPITAL GAINS
How are capital gains deriving from the sale of real estate assets taxed in France?
(a) Real estate assets held by foreign investors directly without a permanent residence in France
Profits on the sale of a French property by a non-resident company or an individual who is resident outside the European Union are subject to a 33.33% tax in France (certain treaty exemptions apply). Individuals benefit from a 10% allowance in each year after the fifth year. Capital gains are therefore not subject to tax if the property has been held for more than 15 years.
Profits on the sale of a property by a French resident individual or a resident of the European Union are subject to a 16% levy, with a 10% allowance in each year after the fifth year. Capital gains are therefore not subject to tax if the property has been held for more than 15 years. The same tax treatment applies to individuals who own property through a transparent entity. Additional social taxes at the rate of 11% are payable by French tax residents only.
(b) Real estate assets held by foreign investors through a permanent establishment in France
Gains on the sale of a French property by a French company are subject to French corporate tax at the rate of 33.33%.
How are capital gains deriving from the sale of shares/interests in property companies/partnerships taxed in France?
Where participation exemption rules do not apply, profits on the sale of shares/interests made by a resident company are subject to a 33.33% French corporate tax.
Are there any rules regarding participation exemptions in France?
If participation shares are registered as such in the accounts, and if they are held for more than two years, a participation exemption applies on any capital gains such that only 5% of their value is subject to French corporate tax at the rate of 33.33%.
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