REALWorld Law

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Investment in real estate occurs either through an asset deal or through a share deal.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Generally, the purchase of property is subject to transfer taxes or value added tax (VAT) at the standard rate (20%) depending on whether the seller and the buyer are VAT taxpayers or not.

The VAT tax regime complies with EU directives. As a general rule, real estate properties are placed within the scope of the VAT standard regime and no longer subject to a specific regime.

The following rules apply to transactions entered into by a French SPV (registered for French VAT) and a seller registered for VAT:

• · Transactions involving non-developable land are exempt from VAT (unless an election for VAT to be payable is filed in which case the VAT is due on the total purchase price) and are subject to transfer tax at a rate between 5.09% and 6.40%, depending on the type and location of the land. A reduced rate of 0.715% applies if an undertaking to re-sell the land within five years is made by the buyer.
• Transactions involving developable land are subject to VAT on the total price where VAT on the acquisition cost was deducted when the land was acquired by the seller and are subject to transfer tax at a rate of 0.715 % (or a fixed fee of €125 if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with the undertaking). Where VAT on the acquisition cost was not deducted when the land was acquired by the seller VAT is payable by the seller on any capital gain realized. In addition, transfer tax is payable at a rate between 5.09% and 6.40%, depending on the type and location of the relevant property (or a reduced rate of 0.715% if a commitment to re-sell the land within five years is made by the buyer, or a €125 fixed fee if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with the undertaking).
• · Transactions involving new buildings for VAT purposes (ie a building is considered as "new" for VAT purposes when it is acquired less than five years after its completion from a VAT-liable entity acting as such. Moreover, pursuant to Article 257-I-2-2° of the French Tax Code, works carried-out on an existing building consisting of an increase in height (surélévation) or a refurbishment (remise à l'état neuf) is assimilated to the delivery of a new building, subject to certain conditions), including transaction involving a new property known as a ‘sale before completion’ (Vente en l’état futur d’achèvement), are subject to VAT on the total purchase price and to transfer tax at 0.715% (or a fixed fee of €125 if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with such undertaking).
• Transactions involving other properties are exempt from VAT (unless an election for VAT to be payable is filed, in which case the VAT is due (i) on the total purchase price if the VAT incurred by the seller on the initial acquisition was deducted or, (ii) on the margin if the VAT incurred by the seller on the initial acquisition was not deducted and are subject to transfer tax at a rate between 5.09% and 6.40%, depending on the type and location of the relevant property (or a reduced rate of 0.715% if the buyer commits to re-selling the property within a five-year period, or a fixed fee of €125 if the buyer commits to erect a building within a certain period).

Please note that, regardless of the buyer's registration in France for VAT, if the seller is not registered for French VAT, the transaction is not subject to VAT. Transfer taxes are due at the 5.09% to 6.40% normal rates specified above, unless the buyer is indeed registered for French VAT and undertakes either to re-sell or to erect a building (see the specifics above about these undertakings).

The transfer tax regime also differs if the seller is registered for VAT in France but the buyer is not: in this case, the benefit of the reduced rates of transfer taxes subject to the above mentioned undertakings are not available.

Furthermore, notary fees are due at a rate of 0.799% on the sale's price. It is generally due by the buyer.

The sale of shares in a company holding real estate (where the value of the real estate represents more than 50% of the company’s assets) is subject to a transfer tax of 5% of the price paid for the shares or the fair market value if higher.

Moreover, transactions involving real estates or rights on real estates are subject to a real estate security contribution (contribution de sécurité immobilière) of 0.10% of the price paid for the real estate or for the rights on real estates.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

VAT can be recovered under certain conditions if the asset is used for a VATable activity (e.g. the building is rented under the VAT regime). VAT can be recovered by offsetting the deductible VAT against the VAT collected on the VATable activity or by claiming a reimbursement of VAT credit to the public Treasury. Foreign investors from outside the European Union who are not registered for VAT in France must appoint a VAT representative in order to reclaim VAT.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Costs relating to the transfer of land are normally paid by the buyer, unless otherwise agreed. However, the seller is jointly liable for the payment of these costs.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Dividends can be expected from real estate ownership through a company.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Current income

Direct investment through a permanent establishment

Owning a property in France does not itself constitute a permanent establishment. If a permanent establishment exists, current income is fully taxable in France at the rate of 25% on top of which miscellaneous contributions are added. The effective tax rate is 25.83% for corporate taxpayers whose turnover exceeds €7,630,000.

Direct investment without a permanent establishment

Foreign owners are generally subject to French tax on rental income (i) under the individual income tax regime at a progressive rate ranging from a minimum of 30% up to 45% (increased by additional contributions), or (ii) under the corporate income tax regime at the standard rate of 25% (increased by additional contribution) (the effective tax rate is 25.83% for corporate taxpayers whose turnover exceeds €7,630,000). The same applies to property owned by a transparent entity. Depending on the applicable tax treaty, tax paid in France may generate a tax credit or otherwise be taken into account in the owner’s country of residence.

Indirect investment through a corporate entity

If property is owned directly by a French corporation, income will be subject to corporate tax in France at the normal rate of 25% in the hands of the French corporation on top of which miscellaneous contributions are added. If the property is owned by a French transparent entity, the shareholders will be taxed on their personal income.

Indirect investment through a partnership

The individual shareholders will be taxed on their personal income.

Below is an overview of applicable rates of corporate income tax for the coming fiscal years as resulting from the French Finance Law for 2022 (not including the 3.3% social contribution to corporate income tax which applies to corporate taxpayers whose turnover exceeds €7,630,000).

Taxable income (EUR)	FY as from 2022
0 to 42,500	15 % (1)
> 42,500	25 %

* Provided that the conditions to benefit from the reduced rate provided for in Article 219, I-b of the French General Tax code are met.

Deductions

It is normally possible for any interest paid on debt used to finance the acquisition of property to be deducted against income generated by the 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 deductions if this exceeds the borrower’s repayment capacity.

Moreover, the French Finance Law for 2019 transposing the anti-avoidance Directive (UE/2016/1164) has introduced, as from 1 January 2019, new interest deduction limitations.

This text, provides in particular that net financial charges may be deductible up to the higher of the following two amounts:

(i) €3 million; and

(ii) 30% of the adjusted taxable income, before offsetting of tax losses.

Specific rules apply in the case where a company is considered to be thinly capitalized, which is the case when the average amount of sums left or made available by all affiliated companies, directly or indirectly within the meaning of Article 39.12 of the FTC, during a financial year, exceeds one and a half times the amount of its net equity which it can assess, at the beginning or end of the financial year.

In such a case, the limit on the deductibility of net financial expenses is to be assessed taking into account (i) the interest on debt to third-parties and related-party debt inferior to 1.5 times the net equity of the company which are subject to the same threshold of €3 million pro-rated or 30% of the pro-rated tax EBITDA if higher and (ii) the interest on the debt owed to related parties exceeding 1.5 times the net equity of the company, which deduction is then limited to 10% of the pro-rated tax EBITDA or to €1 million pro-rated if the latter amount is higher.

In addition, interest deductibility is subject to certain limitations regarding inter-company loans under the maximum deductible interest rate provision: related-party debt may be deductible for a rate that is higher than the maximum deductible interest rate provided that the taxpayer evidences the arm's length nature of such rate.

In addition, the Finance Act for 2020 has transposed into French law the provisions regarding hybrid mismatches of Directive (EU) 2016/1164 of 12 July 2016 (ATAD I) as amended by Directive (EU) 2017/952 of 29 May 2017 (ATAD II).These provisions aim at neutralizing the tax effects of hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more EU Member States. ATAD II extends the scope of these provisions to arrangements involving non-EU countries.

No withholding tax on arm’s length interest expenses applies in France, except when they are paid in a non-cooperative state, in which case a 75% withholding tax is triggered.

Depreciation

If the owner of the property is a company subject to French corporate income tax, depreciation is allowed (on a straight-line basis) on the acquisition value of the buildings but not of the land (generally at rates between 2% and 5% per year for commercial buildings). 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 asset, each with its own depreciation rate.

Depreciation on land is not permitted (unless the land contains a quarry in which case the value of materials to be sold after treatment can be depreciated).

A participation in an SPV holding real estate cannot be depreciated.

No depreciation is deductible under the individual income tax regime.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Direct investment through a permanent establishment

Dividends paid by French translucent entities are not subject to corporate income tax or to withholding tax at the level of the partners.

Direct investment without a permanent establishment

Not applicable.

Indirect investment through a corporate entity

Dividends paid to an individual

Resident

The French Finance Law for 2018 introduced a flat tax (PFU) applicable to capital gains, interests and dividends income. The rate for the PFU is set to 30% (12.8% of individual income tax and 17.2% of social contributions) and applies to dividends distributed as from 1 January 2018.

Previous to the introduction of the PFU, dividends were subject to a progressive scale of income tax, after a flat-rate reduction of 40% has been applied when possible. As from 1 January 2018, under certain conditions, individual taxpayers may still elect for dividends to be taxed to the progressive income tax rate. However, please note that:

• this election is global for all capital gains, interests and dividend income received within the fiscal year and it is thus not possible to combine the PFU and individual income tax at a progressive rate; and
• when the PFU applies, the 40% rebate as well as the deduction of 6.8% out of the 17.20% social contributions are not applicable.

Non-resident

Tax rates depend on the applicable tax treaties. The French standard withholding tax rate on dividend distributions is aligned to the PFU rate (12.8%). The rate is 75% for dividends paid on a bank account located in a Non-Cooperative State or paid or accrued to persons established or domiciled in such a Non-Cooperative State.

Under certain conditions, the same rules apply (including the application of double tax treaty) to the shareholders of tax transparent partnerships.

Dividends paid to companies

Resident

Unless the participation exemption on dividends applies, dividends arising in France paid to corporate shareholders are included in taxable income for corporate income tax purposes.

Under the French participation exemption regime, 95% (99% in certain circumstances) of the dividend is tax-exempt. The participation exemption is available if resident parent companies opt for it to apply to dividends received from their resident and non-resident subsidiaries. The parent company may benefit from the participation exemption if:

1. The parent company holds a participation in the subsidiary equal to at least 5% of its share capital, and
2. Has held – or commits to hold – the participation for at least two years.

Dividends paid to a transparent entity by a company which is subject to corporate tax are declared at the level of the entity but taxed at the level of the shareholder.

Non-resident

Dividends arising in France distributed to non-resident shareholders are subject to a final withholding tax at the rate of 25%, unless a treaty provides for a lower rate.

Subject to certain conditions, the withholding tax is reduced to nil for dividends paid by a French resident company to (i) a qualifying EU parent company if the parent company holds at least a 10% participation in the French subsidiary for at least two years (or 5% when the EU parent company cannot offset the withholding tax in its country of residency) or (ii) to certain qualifying foreign UCIs under certain conditions. The rate is 75% for dividends paid on a bank account located in a Non-Cooperative State or paid or accrued to persons established or domiciled in such a Non-Cooperative State.

Indirect investment through a partnership

Dividends paid by French translucent entities are not subject to corporate income tax or to withholding tax at the level of the partners.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

No.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

No.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Capital gains

Real estate assets held by foreign investors directly without a permanent residence in France

Profits (other than usual profits derived by asset dealers) on the sale of a French property by a non-resident company are subject to a 25% tax in France (although certain treaty exemptions may apply).

Profits on the sale of a property by a French resident individual or an individual residing either in or outside the European Union are subject to a 19% tax, plus 17.2% of social contributions, giving a total charge of 36.2% (although certain treaty exemptions apply). Please note that, the social contributions’ rate can be reduced to 7.5% for European Union residents under certain conditions.

Furthermore, a progressive 2% to 6% tax applies on real estate capital gains on sales of property. This tax applies indifferently on real estate rights or assets, other than building lands. This tax applies to, (i) transfers made by individuals and pass through entities in the scope of article 8 to 8 ter of the FTC (eg SCI) and, (ii) transfers made by non-French tax residents who are subject to taxes levied on the basis of the article 244 bis A of the FTC.

Allowances increasing with the holding period can be deducted from the taxable gain, leading to a full exemption of individual income tax after 22 years of holding and social contributions after 30 years of holding.

Real estate assets held by foreign investors through a permanent establishment in France or a French company

Capital gains realized on the sale of French real estate assets by a French permanent establishment or a French company are subject to corporate income tax at the rate of 25% on top of which miscellaneous contributions are added. The effective tax rate is 25.83% for corporate taxpayers whose turnover exceeds €7,630,000.

If participation shares are registered as such in the accounts, and are held for more than two years, a participation exemption applies on any capital gains so that only 12% of their value is subject to French corporate tax at the rate of 25% on top of which miscellaneous contributions are added for an effective tax rate of up to 25.83%, provided the company whose shares are held by the French permanent establishment does not qualify as a predominantly French real estate company from a French capital gain tax perspective (for capital gain tax purposes, a predominantly French real estate company is a company that owns, directly or indirectly, French real estate assets that represent more than 50% of the fair market value of its total assets, without taking into account those that are allocated by the company to run its own business, at the closing of the three tax years preceding the sale, irrespective of the fact that this company has its respective head offices in France or not).

Replacement of the wealth tax (ISF) by a real estate wealth tax (IFI)

The Finance Law for 2018 provided that ISF is repealed and replaced, with effect from 1 January 2018, by a new real estate wealth tax (IFI). IFI is assessed on the real estate owned by the taxpayer to the extent that the value of the taxpayer's real estate net assets exceeds €1.3m.

The definition of the taxpayers, the triggering event as well as the tax threshold and the tax scale as regards IFI are similar to those that were applicable to the previous wealth tax.

The main change concerns the IFI's tax base, which is defined as all the real estate owned directly or indirectly by the taxpayer via companies or collective investment vehicles when it is not allocated to the business of the relevant entities. Taxation is not limited to shares in real estate companies.

Measures are designed to exclude from the taxable fraction, on the one hand, professional real estate owned by companies and, on the other hand, real estate held by taxpayers through operating companies in which their shareholding is less than 10%. Tax-exempt status may be granted to taxpayers holding less than 10% interest in non-operating companies if they establish that they are not in a position to obtain the information necessary for the assessment of the taxable portion of their shares. A similar exclusion applies in the case of holding less than 10% of the rights in an investment fund or in a collective investment vehicle, provided that these funds hold (directly or indirectly) less than 20% of their assets in property and real estate rights taxable to the IFI. Finally, goods of a professional nature are, under certain conditions, also excluded from the IFI's tax base.

French law sets out the list of deductible debts (in particular, expenditure on the acquisition of taxable property or real estate rights and shares, in proportion to the value of taxable real estate assets) and provides for a deduction cap for large heritage assets. The Finance Law for 2024 specified that, for the purposes of valuing real estate company shares, the debts that are not related to a taxable real estate asset should not be taken into account. French law also lays down special deduction rules for "in fine" loans designed to take account of theoretical amortisation. An anti-abuse clause is also provided for the deduction of intra-group loans limiting the deduction of the debt, except in the event that the borrower is able to justify the normal nature of the loan terms and conditions (ie on an arm's length basis), in particular compliance with due dates, the amount and the actual effectiveness of repayments.

In this respect, it should be noted that the provisions exempting financial investments of non-residents from ISF have been repealed, so that, subject to tax treaties, non-residents holding corporate securities will henceforth be liable to the IFI for the part of the value of such shares corresponding to real estate, whereas they were previously subject to ISF only on shares in real estate companies and shares in companies held more than 50% by the family group.

Last modified 22 Mar 2024

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

There are none.

Last modified 22 Mar 2024