Ownership Taxation in France
By Prof Robert Anthony, Anthony & Cie
Naturally, foreign property owners wish to invest in a way which protects their inheritance and minimises their taxes. France is known to be a high tax jurisdiction. Currently, wealth tax exists, although this may no longer be the case under a new conservative government.
Like most countries, there are property taxes, such as occupational tax and ownership tax, but in addition to these, there are other taxes on buying a property. This can cost over 7% on top of mortgage registration fees. Furthermore, sales tax of between 10% and 20% can be incurred for property renovations.
Capital gains taxes come into play for property sales. Tapering relief is available based on the period of ownership but the government does not always respect European law and has created a questionable social tax of 15.5% over and above the gains tax. As if this were not enough, there are anti-avoidance taxes, such as 3% for non-disclosure of corporate beneficial owners, penalties for non-filing and failure to declare trusts. If one sells a property, the buyer has to pay transfer taxes on the value of the company shares. When renting a furnished or unfurnished property from an investment civil code company, this can affect the way a company is taxed.
When the civil code company rents a furnished property, it is subject to corporate taxation. This can have serious consequences as personal taxation will no longer apply and the company will not be considered transparent for tax purposes. With the complexities of all these issues, foreigners are often lost as to the best solution on how to own property. Should they borrow money, what should they do for renting, and are there issues for salaried employees? Frankly, even many French people are also confused. Professionals often do not understand the whole picture either, so their advice does not take all aspects into account.
Unfortunately there are many misconceptions. Clients are told that they don't need to keep accounts of civil code companies. They also don't need to prepare the obligatory legal company records known as statutory books, which contain details of annual general meetings. They are told that this is not necessary, which is far from the truth! With these complexities in mind, matters are made even worse with the evolution of international legislation.
From January 2017, companies in Luxembourg will no longer provide capital gains tax relief to French civil code companies. When preparing a set of accounts, a liability may be created by the shareholder financing the company with a loan account. These shareholder loan accounts have long been ineligible for debt deductions for wealth tax purposes, although this can be considered to be a litigious area. Taking into account all of these aspects, there has been an unfair pressure on tax payers ever since François Hollande became French President. We will look at what this means.
In a depressed market, it is common to lower the price of a property in order to sell it. However, the tax office does not recognise the value of the sale transfer price despite this being the actual market price. It argues that this is not realistic and assesses the clients for more gains taxes and transfer duties. It takes the view that there has been a deliberate attempt to undervalue the property by the owner in order to decrease the wealth tax burden and to pay less tax. The tax office assesses the property at a higher value and subsequently demands more tax. This is despite the fact that market valuations on rental prices are determined by valuation experts. The tax office asks the clients for tax on higher rents than market value even with arm’s length rental agreements. When a debt is not a bank debt, instead being lent by a third party, the tax office questions the validity of the deduction of this debt for wealth tax purposes, even though it is a real debt, and tries to collect additional tax. Corporate declarations of ultimate beneficial ownership are refuted as they don't coincide naturally with trust ownership declarations due to respecting French filing obligations. Tax demands are issued and legal charges are made at the land registry.
Often this means the client is pressurised and influenced by the tax revenue to pay their tax demands. They have to wait for the conclusion of any litigation before they can waive their legal charge, pending reclamation of the tax. This has negative consequences on the financial position of the owner as it may prejudice their working relationship with their lending institution. Some clients pay undue taxes to ensure some peace and quiet, while others grapple with the consequences of lawyer’s fees. What is clear is that this does not motivate people to invest in and own property in France. Tax payers discuss this pressure on home owners with their friends who dissuade them from buying, and others often think of leaving and selling their properties.
As if this is not bad enough, every client linked to ownership of a foreign entity is unfortunately subject to systematic tax control by the French tax authorities. It seems that either the tax office has decided that all wealthy people, and especially foreigners, avoid taxes or that they are the easiest from whom to collect taxes, whether these are in fact due or not! People are guilty before being proven innocent and the prevailing sentiment is that it does not matter because they have the money to pay, so who really cares?
Hopefully the abolition of wealth tax by a new government will reduce some of these issues.
It is a shame that the tax push against foreign investors may dissuade them from buying as this could seriously affect the luxury homes market and prices in France.
Published: January 2017 l Photo: Uwe Rieder