How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?
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.
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.
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.
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.