Changes to the French 3% tax on the market value of French Land
Please note that French tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case. This article does not constitute financial advice.
Article 990D of the French General Tax Code (“CGI”) is an important and regularly used provision for the French tax authorities. It is one of the main articles used to attack offshore structures which are set up to own properties in France concealing the ultimate beneficial owner who may be in what France classifies as a tax haven country. It also affects the very wealthy who for totally legitimate reasons seek to conceal the true ownership of high value properties. The article provides that persons who, directly or through intermediaries, own one or more properties situated in France are liable to pay an annual tax of 3% of the open market value of these properties. The Article is widely drafted and covers situations in which the shares in the company are held in trust or other opaque devices are used. There is no deduction for any mortgage on the property. In short French law allows you to conceal the true ownership of the property but the price is 3% per annum in tax.
The French Revenue currently requires companies shown as owners of French property to complete form 2746 which is short and clear. If you are willing to pay the tax all that is required is a declaration as to the market value. If you seek exemption from the 3% tax the full names of all shareholders including the number of shares held by each and the rights under which they are held must be disclosed.
The French legislation exempts you from this tax if the company owner is resident in a country which has a double tax treaty with France containing an exchange of information provision. Article 990E (CGI) provides that in this case you have to make a declaration at the latest on 15th May disclosing the beneficial owner for properties owned on the preceding 1st January. This is why the provision does not usually apply to UK residents provided they give the relevant information to the French tax authorities. In practice many UK buyers are unaware of this provision until they are contacted by the French tax authorities with a demand for the 3% tax.
There are a number of less obvious ways around the 3% tax which rely solely on the interpretation of French domestic tax law which are accepted by the French tax authorities. This is important even after the recent EU decision in the Elisa case (see below) because the Elisa case is only relevant to EU countries and would not for instance extend to say wealthy Russians buying in France. These techniques make it possible within certain parameters to legally avoid the 3% tax either for a certain number of years or indefinitely. For instance if a property is purchased by a company resident in a country with which France has a double tax treaty on 2nd January 2007 and is sold before 1st January 2008 the tax would not apply because there would be no need to make a declaration on 15th May 2008 because the property would not have been owned on 1st January 2008. There is also an exemption in Article 990E - 1 which exempts companies which have on their balance sheet at least 50% other French assets than land. It does not matter that the company may also have significant debt which is financing the 50% French non-property assets as the test is only of assets on the balance sheet not the net position on the balance sheet. Article 990F also exempts companies which hold the property as stock rather than as capital provided they do so as a developer or dealer. This can be very useful provided capital gains tax and income tax issues in France can be dealt with.
The French legislation has been tested in a recent case before the Court of Justice of the European Communities. A holding company based in Luxembourg owned a property in France and had to pay the 3% tax. The holding company was a “Luxembourg 1929 holding company” which has particular tax benefits and is outside the scope of the France – Luxembourg double tax treaty. Accordingly it could not benefit from the exemption in Article 990E - 2 of the French Tax Code which only exempts companies if there is a double tax treaty in place. The company was assessed to the tax and appealed finally to the Supreme Court of France (Cour de Cassation) which decided to stay the proceedings and to make a reference to the Court of Justice of the European Communities for a preliminary ruling on various questions. The main purpose of the questions was to determine whether the tax is compatible with the provisions of the EC Treaty on the free movement of capital. It is important to appreciate that the facts of this case were quite unusual.
The Court broadly agreed with the Advocate General’s opinion which was delivered on 26th April 2007 (case C-451/05 “Elisa vs Directeur Général des Impots and Ministère Public”). The Court in their decision given on 11 October 2007 came to the view that the European Directive on Mutual Assistance (77/799/EEC) covered the 3% tax. This meant that there was sufficient protection for France to protect its tax base without resorting to a default position that all companies had to pay the 3% tax unless they made the full disclosure as to beneficial ownership. Accordingly Article 56 (free movement of capital within the EU) of the EU Treaty applied and precluded domestic French legislation from discriminating against companies in EU states which did not have a treaty fulfilling the particular French requirements in Article 990E to protect them. This meant that in the unusual provisions of this case the Luxembourg Company could (if it wished) show that its beneficial owners were resident in a country with a suitable tax treaty with France to claim the exemption from the 3% tax.
The decision means that French internal law in so far as EU countries are concerned will have to be amended in order to make it compatible with European Law. In practice the procedures will have to change and form 2746 will doubtless have to become a lot more complicated. The Court’s ruling does not seem to prevent France from establishing the ultimate beneficial owner of the French property. At a practical level matters have not changed significantly for British buyers using UK companies or for non-EU residents seeking to purchase French properties using EU companies. Any person in receipt of an enquiry from the French tax authorities relating to the 3% tax may consider whether they should wait clarification of the French rules following the recent EU ruling.
November 2007