Today is: 09 September 2010
Foreigners buying property in France may be told that it is normal and acceptable for some of the purchase price to be paid “under the table” outside France. It is very much an idea put to foreigner buyers, probably because French buyers are more likely to spot the pitfalls.
Advantages of “sous la table”
The advantages of not declaring the full purchase price fall into two categories, those for the buyer and those for the seller. For the buyer, paying a lower ‘official’ purchase price means that the notaire’s fees and the Property Transfer Tax (5.09%) will be lower. In a limited number of cases, the lower ‘official’ price may keep the purchaser outside the Wealth Tax net. For the seller, a lower sale price means less capital gains tax and, if they have been declaring a lower value for the purposes of Wealth Tax, less likelihood of having to back-pay additional Wealth Tax. However, as set out below, the advantage for the buyer is potentially a double edged sword. This is why “under the table” payments are usually suggested by the seller.
Recent French case
A recent court decision by the Cour de Cassation (equivalent to the Supreme Court in England and Wales) makes undisclosed payments more dangerous. The facts were that a sale deed was signed on 3 August 2000 by a British couple as purchasers and a French couple as sellers. They had previously come to an agreement that an additional purchase price, not mentioned to the notaire, would be paid via a Geneva-based Swiss lawyer. The English purchasers on 18 February 2003 brought proceedings against the French sellers on the grounds that they had hidden the true sale price and that they wanted the “under the table” price refunded. The Cour de Cassation decided in favour of the English couple. This somewhat surprising turn of events was achieved by the application of various rules relating to evidence. The lesson to be learnt by parties purchasing or selling in France, and this regardless of their nationality, is that under the table payments are very risky and should not be attempted.
In the past parties could rely on a French legal rule that if an under the table payment had been agreed verbally, no evidence could be put before a French court to overturn the presumption that the price recorded in the notaire’s sale deed was the true price. However, the Cour de Cassation decided that because an under the table payment constitutes fiscal fraud, proof can be brought by all means. In other words verbal evidence of a “Swiss payment” from the buyer which contradicts the price in the notaire’s conveyancing deed is admissible in evidence.
Risks for buyers
The English couple in bringing proceedings against the selling couple were informing on the selling couple that they had committed tax evasion, and were also publicising the fact that they had done the same. The risk for a purchaser is that the tax authorities may re-qualify the purchase price at a higher level, leading to the payment of additional Property Transfer Tax (5.09% of the purchase price) and other penalties.
These penalties include:
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a civil penalty - the nullity of any side-letter,
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a fiscal penalty- interest for the late payment of the Property Transfer Tax and an increase of 80% of the tax due,
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a criminal penalty – a three year prison sentence and a 45 000 euros fine, plus associated penalties.
Even if the purchaser is not caught out or does not bring proceedings issues arise. The downside of participating in under the table payments is that the purchase price will be deemed to be that declared in the sale deed and not the true price paid. This means that on the sale of the property, the purchaser will, in effect, have to pay tax on a far larger capital gain. The seller might have been trying to avoid paying such a larger capital gains tax bill. Also, in the event that the sellers are subject to French Wealth Tax, by hiding a portion of the price, it may avoid calling into question the price at which the property has been declared for the purpose of Wealth Tax in previous years.
Mitigating tax in France is often possible with careful planning. There are structures which can help with mitigating both the 3% tax and Wealth Tax. Professional advice should always be taken on your personal circumstances.
May 2010