2016Jan
12

Key tax issues when investing in real estate in FranceTax aspects of acquisition of real estate in France – an excerpt from the presentation given by Iwona JOWIK, attorney-at-law, at an international conference “Investing Abroad. Real Properties” held in Warsaw on 26th January 2016

French real estate may be taxed when transferred for valuable consideration (sale) or without valuable consideration (gift, inheritance). In these cases, the tax generally takes the form of registration duty.

French real estate may also be taxed by the fact of their ownership. In that case they are liable to an annual tax on their total value, in the form of wealth tax, specific 3% tax on property and residence tax.

The seller of the real estate may also be liable to capital gains tax on gains arising on the disposal of the property.

Note: Foreign taxpayers, individuals or companies, who did not have their tax residence in France, but who made operations there or owned properties/goods there, used to appoint a fiscal representative.

The Budget law for 2015 no longer requires this condition:

  • for Income Tax : for the 2014 income,
  • for Wealth Tax (ISF) : as from 2015,
  • for Corporate Tax : as from 31st December 2014,
  • for Capital Gains tax : for all the transfers operated starting from 1st January.

1. Acquisition for valuable consideration

A. Acquisition of real property

A proportional duty is levied on sales of real property, called land registration tax (droits d’enregistrement) comprising the following elements:

  • Departamental tax which accrues to the département and is calculated in general at a single 3.8% rate. Départements themselves decide on the rate of the land registration tax which can go from 1.2 % to 3.8 %, this maximal level being temporarily raised to 4.5 %
  • 1.2% municipal tax
  • National tax in the amount of 2.37% of the land registration tax, i.e. 0.09006 % if the land registration tax is of 3.8% and 0.10665 % in case of 4.5 % tax.
    • Global rate of 5,09006%
    • But in Paris, for example, since 1st January 2016: 5,80665% because of the 2014 Budget Act

In principle, tax is assessed on the market value of the assets at the date of the deed or transfer, as expressed in the deed or in the estimated value declaration filled out by the parties and controlled by the authorities.

B. Acquisition of shares

Transfers of shares are liable to registration duties in proportion to the value of the shares.

For transfers of participating interests in companies investing predominantly in real property, the rate is increased to 5% without any cap or relief.

2. Ownership

A. Income tax

  • Individuals
  • Tax regimes

Subject to the provisions of tax treaties for the avoidance of double taxation, regardless of their nationality, persons not domiciled in France are taxable in France on their incomes from French sources only. Incomes from properties situated in France or from rights relating to such properties are deemed incomes from French sources pursuant to article 164 B CGI (= Tax Code), confirmed by article 6 Conv. France-Poland 20/06/1975.

Taxpayers whose gross annual revenue from properties does not exceed €15,000 and who do not let properties covered by certain special regimes, automatically benefit from a simplified tax regime called “micro – foncier”. In this case, the taxable income from property is determined by deducting 30% from the yearly revenue from property.

However, those letting furnished properties are not eligible to micro-foncier regime. They are considered entrepreneurs and their revenues as coming from economic activity.

Taxpayers whose annual revenue from property exceeds €15,000 are eligible to a standard tax regime.

In this case, the taxable income from property is the difference between the revenue received in a year and the total amount of expenses on the property paid during the same year (i.e.: repair and maintenance type expenditures, insurances, taxes, debts interests…).

Persons entitled to automatically benefit from the “micro-foncier” regime may also opt for the standard regime.

The taxable amount of income from property may be reduced, under certain strictly defined conditions, by an amortisation of the acquisition cost of new rental housing, to which certain specific deductions may be added (incentives for buy-to-let investments).

  • Reductions

Alternatively, the tax incentive for buy-to-let investments may take the form of an income tax cut.

Under the Pinel Act, which promotes buy-to-let investments in the middle-income sector, an acquisition of new housing units made between 1st September 2014 and 31st December 2016 entitles to a reduction in income tax provided that the housing is let within 1 year from its reception and for the period of at least 6 years.

The deduction is of 2% of the purchase price within the limit of 300,000 euro per acquisition per year between the 1st and the 9th year and of 1 % between 10th and 12th year:

Duration Tax reduction
 6 years 12 %
 9 years 18 %
12 years 21 %

Taxpayers may also rent the eligible housing units to their ascendants and descendants.

However, in order to benefit from the deduction, the owner has to respect certain conditions, for example the established limits for the amount of the rent per square meter (about 20% lower than the market price) and for the tenant’s income.

The Pinel Act applies not only to acquisitions of new housing but also renewed ones which are considered as new by the law.

  • Income tax calculation

The authorities calculate income tax on the basis of the amounts declared by taxpayers.

The income tax calculation is adjusted to personal circumstances, inter alia, by means of an income splitting system and by allowing taxpayers tax reductions or credits for certain personal expenses.

Income splitting is a way of taking dependents into account and, accordingly, to cushion the effects of progressive taxation by applying the progressive rate to a partial income, namely taxable income per part.

The method involves dividing the taxable income into a certain number of parts (e.g. one part for a single person, two parts for a married couple or partners of a PACS (civil union), an additional half-part for each of the first two dependent children and an additional part for each dependent child thereafter).

The progressive tax scale is then applied to the taxable income per part.

Starting in 2012, a new 45% tax bracket was introduced to tax income. The 2015 Budget Act removed the 5.5% tax bracket and lowered the threshold for application of the 14% tax bracket as from taxation of income for 2014.

The scale, corresponding to one part, is as follows (2015 income):

 For the portion under €9,700 0 %
 For the portion over €9,700 and less than or equal to €26,791 14 %
 For the portion over €26,791 and less than or equal to €71,826 30 %
 For the portion over €71,826 and less than or equal to €152,108 41 %
 For the portion over €152,108 45 %

This tax per part is multiplied by the number of parts to determine the gross amount of tax payable.

However, there is a minimum basic rate of 20% of tax on the net rental (and other) income of non-residents.

To make application for a rate of taxation lower than 20%, the nonresidents need to declare all their worldwide income to the French tax authorities, together with supporting documentation (with French translation).

  • Social levies on rental income

In addition, rental income is subject to 15.5% of social levies since 1st January 2012.

In the de Ruyter case dated February 26th, 2015 (CJEU, aff. C-623/13, de Ruyter), CJEU, following the conclusions of its Advocate General, considered that  income from assets cannot be subject to social contributions of another country but the one where a professional activity is carried out.

Although the de Ruyter case concerned income from purchase life annuities paid by two Netherlands insurance companies, based on Regulation (EEC) No 1408/71, it is possible to challenge the wrong application of social contributions to real estate income.

The problem was, that the tax contributed to social security services only available to persons affiliated to French social security system.

Nevertheless, the French government amended the laws relating to future social contributions. This was completed in the recent 2016 law on the French social security budget (n°2015-1702 of 21/12/2015). The French Government has just changed the allocation of social contributions to avoid the application of Regulation N° 1408/71 and to circumvent the court ruling.

  • Companies

The letting of a property in France by a foreign company is subject to corporation tax (1), and branch remittance tax (2).

  • Corporation tax
  • Scope of corporation tax

France operates a territorial tax system. Profits made by enterprises operated in France are liable to corporation tax, independently of the company’s nationality.

The term « enterprise operated in France » means an enterprise which carries on a regular business in France, whether in an autonomous establishment or, if there is no establishment, through representatives without independent professional status, or as part of operations forming a complete business cycle.

Moreover, the letting of real property for residence use, operated in France by foreign company is a particular case in which, even if there is no establishment, the foreign company will be liable to corporate tax in France.

According to the Convention between France and Poland, income derived by a resident of Poland from immovable property situated in France may be taxed in France. These provisions shall apply to income derived from the direct use, letting or use in any form of immovable property.

  • Determining taxable income

The taxable profit is equal to the difference between the gross operating profit and incidental income, on the one hand, and deductible costs and expenses, on the other hand.

The free use of  real estate located in France by a shareholder can be liable to corporation tax in France on the normal (and virtual) income derived from the letting (i.e.: in the case of a Cyprus company: CAA Marseille 3 mai 2005 n° 02-237 plén., min. c/ Sté Les Embruns Limited).

Besides, costs and expenses may be deducted under the following conditions:

  • they must be incurred in the direct interest of the business or be connected with the normal management of the enterprise;
  • they must correspond to an actual expense and be sufficiently substantiated;
  • they must be included in the expenses of the period during which they were incurred and reflect a decrease in the enterprise’s net assets;
  • their deductibility must not be called into question by a particular provision of law (Certain expenses are not deductible where they do not correspond to the enterprise’s purpose, such as expenses related to hunting or fishing and expenses incurred in providing yachts or leisure craft – expenses classed as luxuries).
  • Assessment and payment of the tax

The foreign company is liable in France to corporation tax (Impôt sur les sociétés) on the income derived from the letting.

Standard corporation tax in France is 33.33% except for small companies controlled by individuals, per which the rate is 15% up to a taxable income of € 38,120.

  • Branch remittance tax

Profits realised in France by foreign companies are deemed to be distributed out of France and subject to a withholding tax of 30%, after having borne the corporation tax.

The branch tax is not due if the foreign company is located in the EU and subject to income tax with no possibility of opting out or of being exempt.

B. Wealth tax (“ISF”)

Wealth tax (impôt de solidarité sur la fortune, ISF) is an annual tax payable by individuals whose personal assets assessed on 1st January of the year of taxation, exceed a certain amount.

  • Liable persons

Individuals liable for the wealth tax are those whose net taxable wealth exceeds €1.3 million as of 1st January 2016.

Persons domiciled in France are taxable on their assets in and outside France (taxation on « worldwide assets »).

Persons not domiciled in France are taxable only on their assets in France, provided that their value exceeds €1.3 million, with the exception of their financial investments.

Persons who transfer their domicile to France are taxable, for the five years following their establishment in France, only on their assets in France, if they have not been domiciled in France for tax purposes during the five years prior to the transfer of their residence.

  • Tax base

The tax base includes all assets, rights and values belonging to the taxable persons on 1st January of the year of taxation (developed and undeveloped land, sole proprietorships, farms, furniture, cars, aircraft, pleasure craft, etc.).

Under certain conditions, some debts (incurred by a taxpayer in order to acquire or in the interest of assets) may be deducted from this tax base, or be subject to a specific charge.

Financial investments of persons not domiciled in France for tax purposes are specifically exempt from wealth tax. However, the following are taxable:

  • shares in an unlisted company or legal entity assets of which predominantly consist of real property or real property rights situated on the French territory, in proportion to the value of such assets in relation to the company’s total assets,
  • participating interests representing at least 10% of a company’s capital,
  • shares more than 50% of which are held directly or indirectly by legal entities or organisations that own real property or real property rights situated in France.
  • Tax scale
Net taxable value of the assets band (%)
 Between €8,072 and €12,109 10
 Between €12,109 and €15,932 15
 Between €15,932 and €552,324 20
 Between €552,324 and €902,838 30
 Between €902,838 and €1,805,677 40 
 Over €1,805,677 50 

Taxpayers having assets which net taxable value is greater than or equal to €2.75 million are obliged to file a specific wealth tax statement and to pay the tax spontaneously by 15th July at the latest for taxpayers domiciled in the Principality of Monaco or other European countries (and by 31st August for taxpayers domiciled elsewhere).

C. Tax on the market value of real properties owned in France by legal entities (3% tax)

French and foreign legal entities (corporate bodies, organisations, trusts and comparable institutions) which directly or indirectly own one or more real properties situated in France or hold real property rights relating to such properties are liable to a 3% annual tax on the market value of such properties or rights.

The tax is payable on real properties and real property rights owned on 1st January of the income year.

However, the following legal entities may be exempted from the tax under certain conditions:

  • international organisations, sovereign States and their political and territorial subdivisions
  • legal entities that are not deemed companies investing predominantly in real property
  • listed legal entities
  • legal entities established in the European Union or in a country or territory bound with France by an administrative assistance agreement with a view to combating tax fraud and evasion or in a country bound with France by a treaty under the terms of which they enjoy the same treatment as legal entities having their registered office in France

Legal entities liable to the 3% tax must file a return at the latest by 15th May of each year stating the place, composition and market value of taxable real properties and real property rights owned on 1st January of the year of taxation. The return must be accompanied by payment of the tax.

D. Local direct taxes

Local direct taxes are the oldest taxes in the French tax system.

Nowadays, we can distinguish four main local taxes:

  • property tax on developed land (taxe foncière sur les propriétés bâties, TFPB),
  • property tax on undeveloped land (taxe foncière sur les propriétés non bâties, TFPNB),
  • residence tax (taxe d’habitation, TH),
  • local economic contribution (contribution économique territoriale, CET) including:
  • business premises contribution (cotisation foncière des entreprises, CFE) and
  • company value added contribution (cotisation sur la valeur ajoutée des entreprises, CVAE).

The key feature of local taxes, except for the company value added contribution, is that they are mainly assessed on a property’s cadastral rental value (valeur locative cadastrale) which represents hypothetical rent that could be obtained from the property as determined by the authorities.

  • Residence tax (“taxe d’habitation”)

Furnished residential premises and their dependencies (gardens, garages, private parking spaces) are liable to residence tax (taxe d’habitation, TH). The tax is payable by any person (owner, tenant, free occupier) who, on 1st January of the year of taxation, has taxable premises at their disposal.

Residence tax is assessed on the cadastral rental value of residential premises. Different mandatory or optional tax reliefs are offered for taxpayers on their primary residence.

Certain premises are exempt from residence tax, either by nature or on a decision of the commune.

Starting on 1st January 2015, in zones where there is a shortage of residential premises, communes may increase by up to 20% the residence tax on furnished accommodations not used as a primary residence, what has already been done in many places, such as Paris or Toulouse.

Even if your housing does not fall under the residence tax, for example because you have a vacant not furnished flat, you may still be liable to pay a tax on vacant residential premises (taxe annuelle sur les logements vacants, TLV)

The annual tax is applicable in zones in which there is a huge disproportion between the demand and the number of housing for rent. It is payable by the owner of the property on properties vacant for at least a year on 1st January of the year of taxation.

The rates are set at 12.5% for the first year of taxation and 25% starting from the second year of taxation.

The tax on vacant residential premises is not due in cases where the premises were occupied for more than ninety consecutive days during the previous year, or in cases where the vacancy was attributable to reasons beyond the taxpayer’s control.

  • Property taxes (“taxes foncières”)
  • Property tax on developed land

Property tax on developed land (taxe foncière sur les propriétés bâties, TFPB) is levied annually on owners of developed land situated in France unless they benefit from permanent exemptions (public property, farm buildings, etc.) or temporary exemptions (new or innovative enterprises, incentives for development as part of urban or spatial planning policy).

Taxable property includes permanent constructions perpetually attached to the ground such as residential properties or business assets (workshops, sheds), certain civil engineering structures and transport routes, as well as land immediately necessary for such constructions, etc.

The tax base is equal to 50% of the cadastral rental value of the property and the tax rate is each year voted by local authorities.

The tax is payable by the owner of the property at 1st January of the year of taxation.

  • Property tax on undeveloped land

Property tax on undeveloped land (taxe foncière sur les propriétés non bâties, TFPNB) is levied annually on owners of any undeveloped land of any nature situated in France except unless they are permanently exempt (public property) or temporary exempt (incentives for organic farming, reforestation and the conservation of environmental interest zones).

As with the property tax on developed land, the tax is payable by the owner of the land at 1st January of the year of taxation.

The tax base is equal to 80% of the cadastral rental value of the land.

To encourage owners to put their land up for sale in order to increase the volume of buildable lots, an increase in the cadastral rental value of lands is applied in zones where real estate pressures are the strongest.

  • Business premises contribution (“Cotisation Foncière des Entreprises”)

The business premises contribution is one of two components of the local economic contribution (contribution économique territoriale, CET), the second one being a contribution on business value added.

Individuals or legal entities carrying on a regular non-salaried business activity in France are liable to the business premises contribution (cotisation foncière des entreprises, CFE) every year.

The business premises contribution tax base is the rental value (less 30% for industrial plants) uniquely of property liable to property tax in France, which the taxpayer used for business purposes during the reference period.

The business premises contribution rates are decided upon by the communes which also set a minimum contribution for different group of legal entities.

The calculated amount may not be less that the minimum contribution determined from

For 2014, the contribution was set at:

  • between €210 and €500 for taxpayers with net turnover or net income of less than €10,000 for the reference period
  • between €210 and €1,000 for taxpayers whose net turnover or net income is greater than €10,000 but less than or equal to €32,600 for the reference period
  • between €210 and €2,100 for taxpayers whose net turnover or net income is greater than 32,600 but less than or equal to €100,000 for the reference period
  • between €210 and €3,500 for taxpayers whose net turnover or net income is greater than €100,000 but less than or equal to €250,000 for the reference period
  • between €210 and €5,000 for taxpayers whose net turnover or net income is greater than €250,000 but less than or equal to €500,000 for the reference period
  • between €210 and €6,500 for taxpayers whose net turnover or net income is greater than €500,000

3. Transfer

A. Capital gain tax

Subject to the provisions of tax treaties for the avoidance of double taxation, regardless of their nationality, persons not domiciled in France are taxable in France on their income from French sources only. Under Article 164 B CGI, the following are deemed income from French sources:

  • capital gains on the transfer for valuable consideration of rights of all kinds and profits derived from transactions carried out in particular by property dealers, where they relate to businesses operated in France and to properties situated in France, property rights relating to them or shares in unlisted companies whose assets mainly consist of such property and rights (confirmed by article 13.1 Conv. France-Poland 20/06/1975).

Under most international tax treaties concluded by France (as the article 13.1 Conv. France-Poland 20/06/1975), capital gains on the sale of property are taxable in the country where the property is situated.

> Capital gains on the sale of a property situated in France by a taxpayer domiciled outside France are taxable in France.

Capital gains on property realised by non-residents are taxed at a 33.33% rate. However, they are taxed at 19% when they are realised by non-resident individuals.

Moreover, non-residents may be entitled to certain exemptions from capital gains tax on property and, in particular, to a special exemption for sale of housing units located in France.

The exemption is limited to one residence per taxpayer and to €150,000 of net taxable capital gains, under the dual condition that:

  • the seller has been French resident for tax purposes for a continuous period of at least two years at any time prior to the sale,
  • the sale is concluded by 31st December of the fifth year following the year when the seller transfers his tax residence outside France or, without conditions as to time limits, when the seller has had free enjoyment of the property at least since 1st January of the year preceding the year of the sale.

The taxable base is equal to the difference between the sale price and the purchase price paid by the seller (or the market value if the property was acquired free of charge), plus, where relevant, certain exhaustively specified expenses and charges.

The calculated gross capital gain is reduced by an allowance based on length of ownership of 6% yearly after the fifth year, followed by an allowance of 4% at the end of the twenty-second year of ownership, therefore leading to total exemption.

The notary is responsible for drawing up the return, filing it and paying the corresponding tax on the seller’s behalf to the land registry in the location of the property. Payment is made when the sale deed is presented for registration.

Moreover, capital gains on property representing a taxable amount of more than €50,000 are subject to a surtax.

This surtax does not concern capital gains from the sale of building plots or related rights.

The rate is between 2% and 6% based on a progressive scale depending on the amount of the taxable capital gain. It is owed by the seller and payable under the same conditions as income tax.

Withholding tax is applied to some income from French sources received by persons not domiciled in France. In some cases the withholding may discharge the income tax liability partly or in full, meaning that progressive rates of tax are not applied to the income in question.

That’s the case for certain profits made by individuals domiciled outside France from property which are subject to a withholding tax in discharge of income tax of 33.33% (which is increased to 75% when the profits are made by taxpayers domiciled in a non-cooperative country or territory).

This applies to:

  • profits made by property dealers
  • profits made by individuals on the sale of properties they have built or had built and of related property rights
  • profits made by individuals who sell land divided into plots intended for development

Moreover, capital gains on property are subject to 15.5% of social levies since January 1st, 2012.

B. Inheritance and gift tax

Transfers without valuable consideration include inheritance and gifts.

For the calculation of inheritance and gift tax we should distinguish two different situations:

  • the beneficiary is domiciled in France at the transfer date or has been domiciled there for at least six of the previous ten years – duty on transfers without valuable consideration is then payable on movables and real property situated in or outside France,
  • the beneficiary is domiciled outside France – transfer duty is payable only on the French assets they received.

Inheritance and gift tax is calculated by applying a progressive or proportional scale to the amount of the net share received by each beneficiary, above the tax-free-allowance which varies depending on the degree of kinship between the parties to the transfer. 

The allowances applied in case of inheritance tax are:

  • €100,000 for ascendants and children
  • €15,932 for brothers and sisters who do not fulfil the conditions for exemption from transfer duty without consideration
  • €7,967 for nephews and nieces

The inheritance between spouses is exempt from the tax as well as between siblings on certain conditions.

In the case of a gift, the relief is set at:

  • €80,724 for donations between spouses and partners of a PACS
  • €31,865 for gifts by grandparents to their grandchildren
  • €5,310 for gifts from great-grandparents to great-grandchildren

There are several different scales

For example: Scale applicable in 2016 to transfers (inheritance or gift) between parents and children (after the deducting the tax-free-allowance):

 Fraction of net taxable part Rate (%)
 Up to €8,072 5
Between €8,072 and €12,109 10
Between €12,109 and €15,932 15
Between €15,932 and €552,324 20
Between €552,324 and €902,838 30
Between €902,838 and €1,805,677 40 
Over €1,805,677 50