Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
The Tax Information Exchange Agreements (TIEAs) France has recently signed with Jersey, Guernsey, the Isle of Man and the British Virgin Islands have evoked little comment in France or elsewhere. Whilst these tax agreements will reduce confidentiality, their potential importance to increase investment in French properties using vehicles in these offshore jurisdictions cannot be underestimated. The TIEAs with Jersey, Guernsey, the Isle of Man are currently being vetted by the Conseil d’Etat (French Supreme Court which also vets administrative legislation) whilst the BVI agreement is still being considered by various government ministers who have yet to send it to the Conseil d’Etat.
3% Tax
One of the bars to offshore investments in French property has been the 3% tax (taxe sur la valeur vénale des immeubles possédés en France par des personnes morales) which is governed by article 990D of the French General Tax Code. The article provides that companies (or other legal entities, including trusts), which own property in France, directly or indirectly, are liable to pay an annual tax of 3% of the open market value of these properties. There is no deduction for any mortgage on the property. The provision is disapplied if investment is from a country with which France has an exchange of information treaty. There is an obligation to file an annual return showing the chain of ownership up to the ultimate beneficial owner. If you find an entity in the chain which is in a non treaty country the 3% charge applies. This has been a major bar to investment from the jurisdictions mentioned above.
With the introduction of the TIEAs, it will be possible for offshore vehicles to benefit from the most general exemptions to the 3% tax, provided for by article 990D of the French General Tax Code. This provides for the company or legal entity to make a declaration each year disclosing the beneficial owner for properties owned on the proceeding 1st January. This will enable offshore capital to flow into French property, in particular investment property.
Notional Income
Another tax which has deterred individuals who are offshore residents from investing in French residential property is notional income tax, governed by Article 164C of the French General Tax Code. Offshore residents (there are special rules if they are French nationals) are taxed on the notional income of any residential French property which they own, even if they do not actually rent out the property. The notional income is calculated as three times the annual rental value of the property owned in France. If the property is rented out, notional income taxation still applies, but only if the notional income is greater than the real French rental income received.
The French tax authorities have stated that the forms of the Jersey, Guernsey and Isle of Man TIEAs will not prevent the application of article 164C of the French General Tax Code. It is currently unclear if residents of these countries may be able to claim the exemption for French nationals set out in the article.
The exemption states that where you are resident in an offshore country which has a TIEA and your income tax there is 2/3 or more of what it would have been if you were French resident (including social charges) you can claim the exemption. It is unlikely that, even if the exemption is available, it will protect many people.
Difference between TIEA and Full Tax Treaty
It highlights the difference between a TIEA and a full double tax treaty, almost all of which give protection from the notional income tax. It also shows the need to give careful consideration how the purchase of French property is structured. Equally, the TIEAs themselves are not all the same, and consideration should be given to the differing tax situations in each of the offshore jurisdictions.
For example, the Isle of Man, is set apart from the other jurisdictions by being part of the EU for VAT purposes. This may be useful if the investment is in off-plan property or a development company.
Higher French CGT for non-cooperative states
France has also increased the severity of the consequences of belonging to a designated non cooperative state or territory. Amongst the tax consequences of being resident in such a country, is an increase in French Capital Gains Tax to 50% (previously 33 1/3%). It appears that although the TIEAs have yet to come into force, the fact that they have been signed, is sufficient to give protection from this higher rate French Capital Gains Tax.
January 2010