Today is: 30 July 2010
Important Note. The information given here is for information only and is of a general nature and is not exhaustive or comprehensive. Law is a technical and complex area and you should not act or refrain from acting without comprehensive specialist advice on the facts of your case. This article does not constitute investment advice.
It is not uncommon for UK buyers to use an English limited company to purchase property in France. Often this is done with smaller companies because the shareholders, who are usually also the directors, do not want to take a salary or dividend from the company which would trigger UK income tax at say 40% to enable them to buy in their own names. This raises a number of tax issues in the UK and is generally not advisable especially if the property is going to be used by the directors of the company, because of benefit in kind liabilities in the UK. However these are frequently ignored or overlooked and matters normally only come to a head much later when the property is sold and the French notaire informs the seller that because a company is involved, French capital gains tax at 33.3% will have to be deducted by the notaire from the net sale proceeds.
If the property had been purchased in the person’s own name then the maximum tax liability in France would be 16% and in many cases if the property had been owned for more than 5 years French taper relief would apply and after 15 years no French capital gains tax would be payable. Crucially this rule does not however apply when companies sell which is often not appreciated by UK owners of French property. The invariable response from the notary and indeed the tax agent, who is appointed to deal with the matter, as well as the French Inland Revenue, is that the UK company is taxable because the property is situated in France, and France levies capital gains tax on a territorial basis at 33.33% on companies.
There is however now strong jurisprudence in France to the contrary, namely that UK companies should not be taxed to capital gains tax in France because of the protection UK companies enjoy under the UK-France double tax treaty. This is a point which most notaries and tax agents are completely unaware of and which should be raised immediately if you are informed that capital gains tax is due on a company sale. The French court decision which supports this view has been given recently by the Conseil d’Etat which is the highest French court for administrative and public cases and in these matters is like the House of Lords in the UK.
The important point is that the double tax treaty between France and the UK overrides domestic French law – as it does domestic UK law. The difficulty is in interpreting the double tax treaty in the context of French domestic law. Article 6 of the double tax treaty provides that the profits of an enterprise of the UK (i.e. a UK company) shall be taxable only in the UK unless the enterprise carries on business in France through a permanent establishment situated in France. It is established (see below) that a property in France is unlikely in most investment cases to be a permanent establishment.
The reasoning is complex and goes as follows. The fifth paragraph of article 6 in the UK- France tax treaty provides that some taxable revenues are not subject to the rule in Article 6 which exempts UK companies from French tax. However gains derived by a resident of the UK from the sale of immovable property (article 13) are not included in this list. Therefore it seems likely that the rules in article 6 apply to gains on French property made by UK companies.
Article 13 of the UK France tax treaty provides that gains from the sale of immovable property located in France will be taxable in France. However article 13 crucially does not include the gains made by a company. Accordingly gains derived by a UK company from the alienation of a French property are not subject to the rules in article 13 and therefore will not be taxable in France by virtue of Article 13. In that case article 6 of the treaty should apply and the French Inland Revenue will be able to tax the gains made by the company only if the UK company has a permanent establishment in France. Article 4 of the treaty gives a definition of a ‘permanent establishment’, which does not include a property. In other words a UK company will not be taxable in France for the gains from the alienation of its French property, as long as this company does not have any permanent establishment in France.
Our view is that UK companies are not taxable to French capital gains tax in the absence of a permanent establishment in France and any one who is told to the contrary by their notaire on a sale should take the matter up with the French Inland Revenue without delay.
22nd July 2007