For many wealthy individuals and families, an apartment in Paris, a chalet in a ski resort or a villa on the French Riviera are essential elements of their property portfolio.
While finding the right property may appear to be the priority, a potential buyer should also seek advice on how to buy and own a property to maximise its tax efficiency.
As with other types of assets, it is essential to consider the tax efficiency of the acquisition structure at an early stage, preferably before any pre-sale agreement is signed (even if the structuring can be implemented later, during the conveyancing process, to be in place before completion).
Given the low tax rates in certain countries, one could be forgiven for not giving much thought to tax planning, or for thinking that the holding structure for a property acquisition can be safely reviewed later. Unfortunately, the French tax environment is not so benign and failure to adopt the right structure at the outset can have costly tax consequences.
There are three main capital taxes to consider when buying a home in France:
- Inheritance Tax (IHT);
- Property wealth tax (PWT);
- Capital Gains Tax (CGT).
Other taxes may also need to be considered, depending on the buyer's circumstances.
For example, income tax if the property is to be let and, more importantly, corporation tax if the proposed purchase is to be made through a foreign
company (or other entity).
In addition, if the company or entity in question is domiciled in a country that has not signed an appropriate tax treaty with France, a 3% annual tax will be payable on the market value of the French property.
Inheritance tax (IHT)
French IHT is generally levied at progressive rates. In the direct line, i.e. transfers to children and parents, rates rise from 5% to 45% depending on the value of the beneficiary's share of the estate (the 45% rate applies to a share exceeding €1,805,677).
Death transfers between spouses are not taxed and assets passing to an unrelated beneficiary are taxed at a flat rate of 60% regardless of value. The rates applicable to other family members generally vary between 35% and 55%.
IHT may of course apply where a French property is directly owned (French sited asset), but the use of a foreign company to own French property does not necessarily help to avoid French IHT. Under French tax law, shares in foreign companies owning French property may also be considered French sited assets potentially subject to French IHT (unless a relevant double tax treaty provides otherwise).
In addition, movable assets located in France (such as works of art, French financial assets, furniture, cars registered in France, etc.) may be subject to French IHT. In certain situations, the use of a foreign company to hold these assets may also be considered.
Property Wealth tax (PWT)
The PWT was introduced by the 2018 French Finance Act on 30 December 2017. Since 1 January 2018, this new tax applies to French real estate that is not used for a business activity.
This tax mainly affects residential property. Real estate owned by a company for the purposes of its own business activity is excluded from the scope of the tax. In the case of residential property, this could include "para-hôtellerie" activities.
The tax applies to French residential property owned directly by the taxpayer or indirectly through a French or foreign company or entity (regardless of the number and location of the companies or entities in the chain of ownership).
If a French residential property is owned by a company (or a legal entity), the shares are only taxable to the extent that their value is attributable to the property assets or rights held directly or indirectly.
Tax is charged on the net value of the asset (i.e. the home or the shares in the company that owns the home). However, not all debts are deductible when determining the net value of the asset. The legislation contains a list of debts that are generally not deductible.
In principle, shareholder loans are not deductible.
Bank loans are deductible. However, interest-only loans are not fully deductible. The legislation provides for a formula to determine the deductible annuities of the loan. A similar restriction applies to loans that do not have a repayment period.
PWT is due when the net value of the taxable asset (i.e. the residential property or the shares in the company that owns the residential property) exceeds the threshold of €1,300,000.
Progressive tax rates apply:
Net taxable Value Rate
Up to €800,000 NIL
From €800,001 to €1,300,000 0.50%
From €1,300,001 to €2,570,000 0.70%
From €2,570,001 to €5,000,000 1.00%
From €5,000,001 to €10,000,000 1.25%
Above €10,000,000 1.50%
The taxable asset (the property or the shares) must be valued at its market value on 1 January of the tax year in question. The valuation of the taxable asset is the responsibility of the taxpayer (subject to review by the French tax authorities if they do not consider the declared value to be correct).
Under French tax law, certain charitable donations may give rise to a tax credit against the PWT liability. The tax credit is applied directly to the tax due. The tax credit is equal to 75% of the amount donated, up to a maximum of €50,000 per year. Taxpayers are often unaware that this tax credit may also benefit non-French tax residents, provided that certain conditions are met.
If the value of the French taxable assets exceeds the threshold, the taxpayer must file a specific form (2042-IFI / 2042-IFI-COV). The PWT is a voluntary declaration.
The deadline for filing is usually before the end of May.
Capital gains tax (CGT)
In general, French CGT is payable on gains realised on the sale of French real estate (including the sale of shares in a French or foreign company owning French real estate).
The tax is levied on the net gain, which is determined by the difference between the purchase price and the sale price after application of a taper relief (at various rates) depending on the length of ownership of the property.
Under the current rules, no tax is payable after a long period of ownership of 30 years. After 22 years of ownership, no CGT is payable, but social security contributions remain payable (albeit with a higher taper relief available).
Since 2013, an additional tax has been levied on net gains (after application of the taper relief) in excess of €50,000. The rates range from 2% to 6% (the higher rate of 6% applies to gains in excess of €260,000).
CGT is charged at a rate of 19%. This single rate applies to all taxpayers regardless of their country of residence. In addition to CGT, social security contributions are payable at a rate of 17.2% or 7.5% (if the vendor is compulsorily affiliated to an EU/EEA/UK health care system).
This CGT regime only applies if the property is directly owned by individuals or by certain companies (such as a French or Monegasque SCI), provided that the SCI is not subject to the corporation tax regime (e.g. it habitually carries out furnished lettings or it is owned by a company subject to corporation tax). If the French or foreign company selling the property is subject to the French corporation tax regime, the gain would be taxed according to the corporation tax rules and not as described above.
Sometimes the buyer has the option of buying the shares in an existing company that owns the residential property, rather than the property itself. In addition to some potential stamp duty savings, buying the shares of an existing company could also offer some interesting CGT savings (on the future sale of the property by the company).
Corporation tax (CT)
A consequence that non-French tax residents are often unaware of is that the use of a foreign company to own French residential property can raise unpleasant French corporation tax issues.
It is usually not advisable to apply CT to residential property for three main reasons.
Firstly, CT is due on the deemed profits derived from the free use of the property.
Secondly, and more importantly, capital gains realised by the company on the sale of the property would be calculated and taxed under the French CT regime, which would be less favourable than the private CGT regime described above.
In addition to the fact that no taper relief would apply, the depreciation of the property must be taken into account. Given the impact of the depreciation rules, the longer the company owns the property, the higher the CT liability would be on a future sale at the current rate of 25%. The application of CT may not be favourable for long term ownership (but may be favourable for short term ownership given the current high CGT rates as explained above).
Finally, the application of CT triggers the need to comply with more formalities and tax reporting requirements (e.g. additional operating costs).
Before using a foreign company (or other entity) to purchase a French residential property, the tax treatment of this company in France must always be checked.
It should also be noted that if the foreign company (or entity) is domiciled in a country that has not signed an appropriate tax treaty with France, it may be subject to a 3% annual tax on the market value of the French property.
3% tax
Under French tax law, French or foreign companies and entities (such as trusts and private foundations) that directly or indirectly own French real estate are subject to an annual tax of 3% of the market value of the real estate.
However, a number of exemptions apply, in particular to EU companies/entities and foreign companies/entities established in a country that has signed a treaty with France that either provides for adequate administrative assistance to prevent fraud and tax avoidance between the two countries or contains a non-discrimination clause. This concerns more than 100 countries worldwide.
Companies/entities established in one of these countries are not subject to taxation, provided that they comply with certain filing requirements. Broadly speaking, the company/entity must either provide, or undertake to provide at the request of the French tax authorities, certain information relating to the assets and the names and addresses of all shareholders, partners or other members of the company/entity.
The information can be provided either by filing an annual 3% tax return or by undertaking to provide this information at the request of the French tax authorities.
These formalities must be taken seriously as the consequences of not complying with the 3% tax legislation can be extremely unpleasant and costly.
This information is for reference only. It is not intended to provide tax or legal advice and should not be relied upon as such.