Abridged Transcript of French and Monaco Tax Planning Seminar given by David Anderson on 20 May 2008
What is the best form of ownership for French property?
Generally, no restriction on acquiring vehicle
- France does not generally impose any restriction on the vehicles which can be used to purchase property. In addition to simply purchasing the property in a person’s individual name (personne physique), it is possible to use either a French or non-French corporate vehicle (personne morale). Insofar as non-French corporate vehicles are concerned, French law will in practice seek to identify them with a similar French vehicle and apply, in particular, French taxation rules to that vehicle. The Anglo-Saxon vehicle which causes most difficulty in France is the trust, which is not recognised in France as a legal entity capable of owning land. For tax purposes the trustees or beneficiaries are likely to be taxed direct as the owners; however from January 2008 trusts will have to pay the 3% tax or declare the beneficial owners.
- The main French ownership vehicles are:-
- Société civile immobiliere (SCI) which is a transparent company. Therefore the company is not taxed itself but the shareholders are on their own income tax return.
- SARL – This is a French limited company. The company is liable for French corporation, largely at 33.3%. The shareholders are liable for income tax on dividends in the UK if they are UK resident under the UK – France DTT. These are more often used for commercial properties.
- The main non-French vehicles which are used include:-
- Foreign limited companies
- Limited Liability Partnerships (LLPs)
- Foreign tax transparent vehicles.
Non Tax Factors to consider when choosing a vehicle
- It is important not to jump straight to the tax implications and to consider the wider picture first. You need to think whether the family or commercial requirements will dictate the need for a particular structure even if a higher level of taxation is the price. You also need to consider the private international law implications – in some cases tax planning which appears effective can end up failing because the private international law rules have been ignored.
- It is fundamental that the tax implications follow the international law rules and not vice versa. As an example, as French law requires that the UK domiciled deceased’s children inherit a substantial part of the French property, then this will be the position also in the UK because the law of the country where the land is situated takes precedence. This could mean that a UK will which gives the entire worldwide estate to the surviving spouse to avoid UK Inheritance Tax cannot be applied to that extent - even if the forced French gift results in a UK Inheritance Tax charge.
Avoiding forced heirship
- In family purchases the starting point is usually to consider whether there is a need to avoid French forced heirship rules. These rules provide that a fixed proportion of the deceased’s estate must pass to that person’s children, or, in the absence of surviving children, to grandchildren. As an example, if there are two children, but no surviving spouse, the children are entitled to 2/3 of the French property and the deceased is only to dispose of the remaining 1/3.
- The limits on disposing of ones estate can cause problems, for example if children from previous relationships are involved whose rights will compete with the current spouse’s rights. Although surviving spouses have some rights, they can be quite limited and will be different depending on whether children of other relationships are involved. As well as any reduction of the surviving spouse’s share of the estate, this can create difficulties in selling the property particularly where the children are minors. Insofar as French real estate is concerned, these rules apply whether the deceased died resident in France or abroad.
- French law distinguishes between movable and immovable property. For non-French residents, French forced inheritance law only applies to immovable property in France and not movable property, which is accordingly outside the scope of French law and can be left by, say, an English will to a surviving spouse, notwithstanding that there are children from a previous relationship involved.
Situations which are more commercial
- In a more commercial context if a number of UK investors are involved in say buying a holiday property and there is a need to regulate the relationship between them, such as giving investors the right of first refusal over another investor who wishes to sell their share, then there is usually a preference for an English structure to be used with the rights governed by English law.
- In the case of a commercial investment such as by a UK limited company buying commercial premises in France there will usually be a preference to have a corporate group structure. Outside shareholders will want the new French venture to be owned by the group if the company’s money is being used to finance it. The decision then is whether to use a UK company or a French company.
Tax trap for UK Limited “commercial” companies
- We have seen cases of the French Tax administration taxing UK companies which own residential property to income tax even though the properties have not been let. The argument is that if the company allows its shareholders to use the property for free the company is taxable on the income it should have received.
Lenders
- French banks will normally prefer to lend to French corporate vehicles. This is changing, though notaires are conservative and there may be delays if a vehicle with which they are not familiar is used. In most cases the banks are willing to proceed on the basis of personal guarantees which will be required anyway from the individuals.
Own name – marriage contracts
- In France, married couples’ relationships are governed by a matrimonial regime which regulates what they each own and what is jointly owned by the ‘community’. Individuals married in the UK are broadly treated as though they were married under the ‘séparation de biens’ regime, which means separate estates. This means that property registered in the name of either spouse is deemed to belong to either spouse with no assets ‘jointly’ owned within the community. Traditionally, English couples have changed their marriage contract under the Hague convention to a community of property marriage contract (communauté universelle), which only applies to French real estate, partly because there was inheritance tax in France under the separation regime and partly to ensure that the surviving spouse inherits all the assets on a first death. This has had the result that when the first spouse dies the French property passes automatically into the sole ownership of the surviving spouse, free of French inheritance tax. This is on the basis that there are no children from previous relationships. The rules have recently changed.
- Care should also be taken if the French property is high value and the estate of the first spouse to die exceeds the Nil Rate Band.
Usufruit
- Usufruits are similar to English life interest trusts in that they give say the parents the right to live in a property until their death with the children inheriting tax free on death.
- There are some UK difficulties with this in that the usufruit will be viewed as a life interest trust. The situation will depend on whether the parents die domiciled in France or the UK.
VAT
- VAT is an issue which is often overlooked. As an example the purchase of land with a view to building a house on it is subject to TVA at 19.6% and not stamp duty.
Tax agent
- On most sales involving non residents the notaire will not release the sale proceeds unless a French tax agent has been appointed and confirmed the correct amount of tax which the notaire will deduct. This is a practicality which UK sellers are often not aware of until shortly before completion.
- This can also create unexpected VAT problems if the seller in his keenness to ensure the maximum deductions provides invoices which reveal that the extent of the works.
Tax haven companies
- France, unlike the UK, taxes French property because it is situated in France. French tax law particularly discourages the use of companies resident in what France classifies as tax havens to own French property. Generally, France classifies such countries as countries which have not entered into a double tax treaty with France with a full exchange of information clause. This includes the Channel Islands and the Isle of Man.
- France imposes a 3% tax each year on the market value of such properties, disregarding any mortgage or debt. The tax is payable even if the owning vehicle is say in the UK or other treaty country but the shareholder of the UK company is in a “tax haven” country. The 3% tax form is being revised as a result of an EU decision in 2007 though substantial changes are unlikely.
Wealth tax (“ISF”)
- French Wealth Tax is only payable by individuals (article 885A CGI). This means that a company cannot be assessed to wealth tax. This would appear to mean that non-French companies would escape the French wealth tax net. However, the combined articles 750 ter and 885D provide that individuals who own a company which has invested in French real estate as to more than 50% of its assets, is liable to French wealth tax. The individual(s) are taxed to ISF on the value of the shares attributable to the French property. Other assets in the company will be disregarded for this calculation and debt secured on the property will be deductible.
Inheritance tax
- Although the gift of shares either inter vires or on death will pass according to the law of the domicile of the donor, French inheritance tax is chargeable on the transfer of shares where the assets of the company are more than 50% French property. Like the valuation for ISF, the taxable amount is the value of the shares attributable to the French property.
Limited companies not resident in tax havens
- France has an extensive network of double tax treaties, covering income tax, capital gains tax and corporation tax, and a much more reduced double tax treaty covering inheritance tax. France has a double tax treaty covering income taxes with the UK. The use of double tax treaties is most important. Historically, until December 2007 many French property companies have been based in Luxembourg which had a favourable tax treaty with France allowing Luxembourg companies to dispose of French properties free of French capital gains tax. There was no Luxembourg tax either in such situations, though of course UK investors needed to proceed with caution as any gain could be attributed back to them in the UK under for instance Section 13 of the UK Capital Gains Tax Act. Luxembourg structures are still used with the Luxembourg Company operating as a holding company.
- Other jurisdictions are available though the investor needs to proceed with caution to ensure that no tax will become payable in those other jurisdictions on the basis that the company is incorporated and resident there, and no tax will be deemed payable in the country of ultimate residence of the shareholder. Although it may be possible to avoid capital gains on the company in such cases foreign withholding taxes and UK income tax on distributions out of the company will remain a concern. This is an area worth exploring for the high net worth investor.
Company – tax on sales
- There are two ways for a limited company to dispose of French property either by the company selling the property or by a share sale. In lower value transactions share purchase transactions are rare because of the due diligence problems with the company, difficulties ensuring all mortgages are paid and the tax difficulties if the property ever has to be extracted from the company. It is encountered at times in connection with SCIs. In the case of such a sale of shares or part in an SCI a notaire need not be involved.
- In higher value transactions of villas over say €20M it is quite often the case that an offshore corporate vehicle will own the villa and sellers may be reluctant to sell anything other than the shares. In such a case it is essential to analyse the French tax charge on extracting the property from the company and discount the price accordingly. This is a drawback to using a foreign company as if the tax treaty with France is changed the company which may previously have been exempt from French capital gains tax because of the treaty is now taxable at 33.3%. A recent example is the France-Luxembourg treaty in which villas owned by Luxembourg companies had to be conveyed out before the treaty ended on 31st December 2007. Failure to do so by the deadline means French capital gains tax is payable if the Luxembourg Company sells the villa which severely depreciates the share value.
- It can be advantageous on expensive properties to buy the shares in a foreign company rather than the property provided the seller has packaged the property in a tax-efficient way.
Trust details
- It is not uncommon for foreign trusts to own a French property via a limited company or indeed via individuals. There is no French prohibition for instance on a French SCI or indeed an individual purchasing a property on behalf of a trust. The classical way of proceeding has usually been by way of the shares in for instance a French SCI being settled into a foreign trust, with say UK trustees. The foreign trust relationship will govern the relationship between the trustees and the beneficiaries though will not prevent the trustees having to disclose the identity of the ultimate beneficiaries for, for example the 3% tax.
May 2008