Fiscalité liée à l'achat d'un bien immobilier via une société étrangère

When purchasing residential real estate in France, foreign residents are often interested in the idea of owning the property through a foreign company.

Beyond the legal aspect  and beyond any eventual specific  and personal tax reason, it is important to keep in mind the tax disadvantages of purchasing with such a foreign legal entity.

This advice letter will help you to summarise and clarify the some aspects of the french tax consequence: 

I. The annual 3 % tax; 

II. The capital gain tax. 

I. The annual 3 % tax

French and foreign legal entities who own immovable property or rights (usufruct, right of use, bare ownership, whether rented or not, whether built or not.) in France on 1 January are subject to an annual tax of 3% calculated on their market value.

The tax on the market value of immovable property owned in France, directly or indirectly, by any French or foreign legal entity, is provided by the articles 990 D, 990 E, 990 F and 990 G of the general tax code (CGI).

The tax applies to all French and foreign corporate bodies, organisations, trusts and comparable institutions (legal entities), regardless of their legal form, whether incorporated or unincorporated, that own real properties or real property rights in France on 1 January of the tax year, either directly or through intermediaries.

The declaration N° 2746 showing the location and the nature of the french real estate or rights held by the legal entity on 1 January of the year must be lodged, together with their payment by 15 May at the latest of each year.

However the law provides for some exceptions. 

Exemptions that not require filing of declaration N° 2746 (the tax is not applied) : 

- International organisations, sovereign States and their political and territorial subdivisions, and legal entities in which they have a majority stake;

- Legal entities that are not deemed companies investing predominantly in real property, whose property assets located in France account for less than 50% of French assets they hold, either directly or indirectly;

- Legal entities whose shares, units and other rights are the subject of significant and regular transactions on a regulated market, as well as corporate bodies in which these entities hold the entire share capital, either directly or indirectly; 

- Legal entities that have their registered office in France or another EU Member State;

- Legal entities that have their registered office in a country or territory bound to France by an administrative assistance agreement with a view to combating tax evasion and avoidance

See below list of relevant states : 

- Legal entities that have their registered office in a country bound to France by a treaty under the terms of which they enjoy the same treatment as legal entities having their registered office in France (see below), and that: 

    o Directly or indirectly hold a share in real properties situated in France or hold real property rights relating to such properties, whose market value is less than €100,000 or 5% of the market value of the aforementioned properties or rights; 

    o Are established for the purpose of managing retirement schemes, are public interest organisations, or organisations managed without personal gain, and whose business activity or financing justifies ownership of real properties or real property rights; 

    o Take the form of a real-estate investment trust (FPI) or a limited liability real estate company with variable capital (SPPICAV) and legal entities that must comply with equivalent regulations, subject to the provisions of Article 990 E 3 c) of the French General Tax Code; 

    o Under the provisions of Article 990 E 3 d) of the French General Tax Code, agree to provide the tax authorities, at their request, with the location, form and market value of properties owned as of 1 January, as well as the identities and addresses of all shareholders, partners and other members. 

See below list of relevant states : 

Exemptions that require filing of declaration N° 2746 (the tax is not applied) : 

Legal entities liable for VAT and whose registered office is located in France, in another EU Member State or in a country or territory bound to France by an administrative assistance agreement with a view to combating tax evasion and avoidance or in a country bound to France by a treaty under the terms of which they enjoy the same treatment as legal entities having their registered office in France may also be eligible for:

- Total exemption from the tax under the provisions of Article 990 E 3 d) of the French General Tax Code provided that they freely file declaration N° 2746 each year by 15 May at the latest. Nevertheless, legal entities that also file a declaration containing the information set out in d) of Article 990 E of the French General Tax Code shall be exempt from this formality. This is the case for legal entities that file declaration N° 2038 or N° 2072 each year. 

- Partial exemption from the tax under the provisions of Article 990 E 3 e) of the French General Tax Code provided that they freely file declaration N° 2746 each year by 15 May at the latest. The exemption is granted on a pro rata basis, depending on the number of shares, units or other rights held as at 1 January by the shareholders, partners or other members, whose identities and addresses are included in declaration N° 2746. 

For non-exempted structures, we could therefore summarise the methods of taxation as follows:

1- Taxable property.

Property (built or not) situated in France and real rights (life interest, right of use..) on such property, with the exception of property which the company uses for its own professional non real-estate activity.

2 - Tax base and rates.            

Tax base is the market value of the property that is without deducting debts. Rate: 3 %. Subsidiary companies: this is due as a pro rata of the tax.

3 - The effect on other taxes.

The company remains liable in the conditions of common law to all the taxes. The tax at 3% is not deductible from other taxes. It does not release non-resident partners in France from transfer tax or wealth tax.

II. The capital gain tax.

According to French tax law and to any double tax treaty signed by the French government, the gain on selling French property is taxable in France. 

The each of the aspects, specifically: property directly owned or property owned through a company, related to capital gain tax, however, must be considered:

1 - Sales of property directly owned.

The capital gain realised by individuals are subject to taxation in case of the sale of the buildings whether built or not (apartment, house or land)...), real property rights (usufruct, bare ownership...), shares in real estate companies. The capital gain consists of the difference between the sale price and the purchase price. 

For calculation of the net gain a number of adjustments applied to the price of purchase. So thus the tax payer who sells an asset more than five years after acquisition, without providing proof of work, may simply increase the acquisition price by 15 % and by registration fees actually paid at the time of purchase or by 7,5 % (a flat rate).

Once the gross gain has been calculated, the net taxable gain must be established by applying a reduction for term of holding. Thus, the capital gain is fully exempt of tax after 22 years of holding, and fully exempt of social contributions after 30 years of holding.

After the application of these adjustments, the capital gain is taxed at 19% and 17,2% of the social contributions are added. The social contributions can be reduced up to 7,5% for non-French residents affiliated to a social security, other than French, in one of the European Economic Area’s country (European Union, Iceland, Norway, Liechtenstein) or Switzerland. 

However, the capital gains could be fully exempt from this tax if the asset was used as the principal residence before the sale’s day, or could be exempt on 150 000 euros if the non-French resident who is a national of one of the European Union’s state or one of the European Economic Area’s state who has concluded an agreement with France on administrative assistance with a view to combating tax evasion and avoidance and if the seller has been fiscally resident in France for a continuous period of at least two years prior to the sale; and not later than 31th December of the 10th year following the transfer out of France of the fiscal residence of the seller  (CGI, art.150 U II).  

In any case when a share of the sale’s price exceeds 150.000 € and the term holding is less than 30 years and the state of residence is out of the European Economic Area, the seller must find a fiscal accredited representative:

- either put somebody forward to the French Tax Authorities who usually lives in France, and who will promise to pay the for and on behalf of the seller, any taxes which the latter may be liable for (before accepting the person put forward, the French Tax Authorities will carry out an internal investigation to check the person's solvability, and his good tax reputation).

- or ask an authorised body (accreditation company) to represent him at the French Tax Authorities (in this case, the accreditation is automatic; on the other hand, the authorised body will open a summary file and ask for payment for the work and the risk involved in the transaction, amounting in general to approximately 1% of the sales price). 

2 - Sales of property owned through a company.

The taxation is highly different when the property is owned and sold by a non-French resident company and the taxation differs whether the company is a limited company or not.

      a.    When the non-French company is considered as a non-limited company.

The above individual tax regime applies to foreign non limited companies. However in this case they cannot pretend on the exempt equal to 150 000 euros (CGI, art.150 U II 2e). 

 Any shareholder (only individuals) would be liable for his/her part of the tax corresponding to his/her share in the Company's asset.

It is however sometime uncertain to know in advance whether a company is a limited or a non-limited company. The tax authorities will carry out a technical analysis, in accordance with double tax treaties, of the memorandum and articles of association of the company.

      b.    When the non-French company is considered as a limited company.

Foreign legal entities who sell immovable property or rights (usufruct, right of use, bare ownership, whether rented or not, whether built or not.) are liable for CGT in France and the calculation is very different than the above.

 The capital gain tax is calculated on the difference between the purchase price and net book value and this is done without considering if a foreign legal entity has or not its head office in one of the country of the European Economic Area or outside of this area.

The capital gain is also calculated differently.

The determination of the capital gain has some specificities:

-      the flat rate 7.5% is not applied, just the fees and exact costs actually paid,

-      the 15% flate rate for maintenance costs is not applies

-      the reduction for term of holding is not applied,

-       the depreciation (if not done in the books or if the books do not exist) is automatically equal to 2% per year of holding.

 The standard rate of the tax is 31% for financial year begins after the 1 January 2019, 28% for financial year begins  after the 1 January 2020 and 26,5% for financial year begins after the 1 January 2021. The rate of 75 % is applied to a foreign legal entity established outside of France in a non-cooperative state.

Whatever the price of the sale is a foreign company will have to appoint to a fiscal accredited representative (see above).

 It is therefore highly recommended to consider the above before deciding to purchase property in France with a foreign legal entity.