Today is: 30 July 2010
David Anderson solicitor and chartered tax adviser at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.
Please note that French property and tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
It is common in France for the more expensive residential properties to be owned by companies resident and incorporated outside France. There are a number of non tax reasons for this including privacy and avoiding France’s forced heirship laws. There are also considerable tax advantages. This article sets out a few considerations if you as a non French resident are offered for sale shares in a company which owns a high value French property or if you are wondering whether you should buy a French property using an offshore company.
French Capital Gains Tax is territorial
France operates on a territorial principle for capital gains tax and income tax – you are liable to pay French tax because the property is in France even if you are not French resident. This is always subject to any applicable double tax treaty just like the UK international treaties override domestic law. Historically Luxemburg companies have been popular holding companies because the double tax treaty between France and Luxemburg gave Luxemburg exclusive rights to tax capital gains on the sale by a Luxemburg company of French land and helpfully Luxemburg did not tax Luxemburg companies in such circumstances. This favourable situation ended on 31st December 2007 as the treaty was amended. This followed adverse publicity in the media when an American fund resold a building in France “l'Immeuble de l'Imprimerie” to the French state using a Luxemburg company thereby avoiding €120 million in French capital gains tax. The fact that the French State thereby implicitly approved the offshore tax exemption became a political football.
End of Luxemburg exemption & other countries with useful tax treaties
The ending of the Luxemburg exemption has moved the spotlight to several other countries which have favourable tax treaties with France giving them exclusive taxing rights on French land and where there local taxes on such disposals are nil or low. The choice of such a country depends on each investor’s circumstances and expert advice is important. It also has to be remembered that the exemptions from French tax depend on the double tax treaty and the exemptions come with various criteria which must be satisfied some of which are not obvious on a first reading of the treaties. The listing and commentary of the various countries which can be used is outside the scope of this article though this is an area where specialist advice is essential.
UK companies with French property are exempt from French Capital Gains Tax
One surprising country is the UK. UK companies are exempt from French capital gains tax as a result of the current UK - France double tax treaty. This turns on a technical interpretation of the French version of the double tax treaty under French law, which is not immediately apparent to the Anglo-Saxon mind. This is poorly understood by many notaires who usually insist on deducting tax at the default rate for non French companies of 33.3% until the position is explained to them and they receive clarification from the French Revenue. This clearance has been obtained by us. A new UK France treaty was negotiated some time ago which may change the position but this has yet to be ratified and brought into force. It seems quite possible that the new treaty may be effectively abandoned and renegotiated entirely. The UK Revenue has been reluctant to explain publicly why there has been no move to ratify the treaty in Parliament which was signed several years ago. This exemption from French tax is most useful and allows the tax planning to be moved back to the UK. There are some other useful French tax angles here.
Valuing the shares in a French property company
With many expensive residential and commercial properties in France held by offshore companies it is important that the tax position of these companies is fully understood when valuing the shares. In most situations the seller will want to sell the shares rather than the property and it is important to work out the net position if the property has to be extracted from the company in the future. A €40M property in a Luxemburg property was probably worth €40M until the end of 2007 when the treaty was changed and then say €27M after that date when Luxemburg companies were taxed in France on a disposal of the property. Most well advised people extracted the properties from such companies before the well publicized deadline.
Acquisition of a property through a company
When acquiring a property through a company rather than purchasing a property alone, a more extensive due diligence exercise is required. A buyer should ascertain whether the target company’s constitution and place of residence is adequate for the buyer’s purposes and in particular check the accounting and tax history of the company. Any contracts currently in place might need to be terminated and the seller should indemnify the buyer from any liability in respect of any breach thereof that might have occurred.
The determination of the share price will usually be subject to the completion accounts which will need to be signed off by the seller’s and the buyer’s accountants. Accordingly, the accountants should be brought in at an early stage so that there is time to resolve any issues.
Taking over the seller’s mortgage
It can be advantageous for the buyer to purchase the company with its existing mortgage and loans in place. This is because there will be no land registry transfer in France. The only transfer will be in the share register of the non French company. Of course the seller will probably have given guarantees to the bank and will want to be released from them and the buyer may have to give personal guarantees but this bank documentation is signed as a private document “sous seing privé” and not as a registered deed “acte authentique”. On higher value transactions it is not unusual for the loan facilities to be from a Monegasque or Luxemburg bank.
If any mortgage currently in place is not redeemed on completion, this will become the liability of the buyer as the new owner of the company. While there can be advantages in structuring the transaction in this way (if only that the cash consideration payable on completion is reduced by the amount of the mortgage) there are obviously risks in taking on such a liability. The buyer must seek full disclosure of the mortgage facility and examine carefully whether it is acceptable.
Another advantage is that considerably lower notaires fees are incurred as there is no need to redeem the mortgage and take a fresh mortgage. It is possible for there to be a deed of substitution in which a mortgage say in favour of one bank is transferred to another bank with minimal notaires fees. The new bank takes over the old banks security and then loans on the basis of a facility letter incorporating this mortgage of which it is now proprietor. This route involving a considerable saving on notaires fees may not be immediately volunteered by the notaires involved in the transaction but they will carry it out once the point is made to them.
Exemption from French Stamp Duty
Normally stamp duty in France on property transactions is around 5.4%. France has anti-avoidance legislation similar to the UK’s which provides that on the transfer of shares in a property company the same stamp duty must be paid. However it is widely accepted that the transfer of shares in any non French company which is completed outside France is outside the jurisdiction of the French taxing authorities and is therefore exempt. Transactions are regularly carried out on this basis.
Mortgage risks for the buyer
Throughout the process the involvement of any notaire should be minimal. The notaire will need to be involved on taking any new mortgage or drafting the deed of substitution referred to above. The buyer will obtain an extract from the French Land Registry shortly before completion to see what mortgages are registered against the property. However unlike the position in England there is no “priority period” in France which prevents other buyers from registering a mortgage during the period between any Land Registry certificate being issued and your transaction completing. There is the danger that a dishonest seller procures that the company remortgages or sells to a third party shortly before completion of the share sale.
This is a common problem in France and is dealt with by a form of insurance provided the sale is handled by a notaire and the full sale price passes through the notaire’s account. There are a variety of ways of dealing with this problem which in practical terms means that neither the buyer nor seller is unduly inconvenienced.
Summary
It is often the case that estate agents market higher value properties in France on the basis of a share sale. Buyers who insist on an asset sale usually find the seller unwilling to proceed or requiring a higher price. In many cases however it is better to buy the shares in the company though you need to keep an eye on whether any changes to international tax treaties France has with the company the property is registered in will affect the position.