Existing investors in French property - and those considering it - must take new taxes into account. Bart Kruijssen and Bruno Lunghi explain
W hile overall tax due was at a reasonable level, non-French investors have been used to paying several taxes on their French real estate investments including the administratively complex 3% tax. Since 1 January this year there are two ‘new' taxes, and some other, more benign, developments. All of the changes discussed below have come into force.
Enacted just before the start of 2010, the changes to the French real estate transfer tax may significantly impact French structures. Transfers of non-listed (French) entities whose assets on a fair market basis predominantly consist of French real estate at any time during the year have always been subject to a 5% transfer tax. Now it has been made clear that transfers of shares in similar foreign companies - regardless of where the transfer deed is executed - are also subject to this tax. The tax has to be paid within the 30 days following the transfer and is due on the higher of either the sales price or the fair market value of the shares. The tax payer is the purchaser. The seller is jointly liable for the payment of the transfer tax, however, which will create an additional negotiation point for the lawyers.
While it may be difficult to imagine how the French tax authorities will know that foreign entities have changed hands, it is likely that they will use the information collected through the 3% real estate tax disclosures to track changes of ownership. Also the 3% tax inspectors may be aided by the collection of information related to sales prices of the shares.
Some examplesA fund sells a Luxembourg Société à Responsabilité Limitée (SARL) for €1m. The SARL's assets consist, on a consolidated basis, of 40% French real estate, through a French Société Civile Immobilière (SCI), and 60% Dutch real estate, through a Dutch Besloten Vennootschap (BV). No French or Dutch transfer tax is due as the respective thresholds of 50% (France) and 70% (Netherlands) are not met. The proportions are now such that the French real estate accounts for 60% of the total. Tax of €50,000 (€1m x 5%) is due even though the French real estate is worth say €2m, but at the same time the French allocation is only 60%. The fund sells the equity in the SARL for €10,000 and debt (insofar as acknowledged from a French tax perspective!) it had extended to the SARL for €990,000. The tax due is €500 (€10,000 x 5%) as only equity interests are taken into account.
Also effective from 1 January, renting out of French real estate, other than residential, is subject to a new French business tax on the value add it produced, ie, CVAE (contribution sur la valeur ajoutée des enterprises). This new tax is due by the landlord of the real estate if annual revenues exceed €500,000. The effective rate of taxation is progressive and depends on the level of revenue generated by the tax payer, ie, 0% should the revenue be below €500,000, up to 1.5% on the value add if the revenue is greater than €50m.
Anti-abuse provisions have been adopted to avoid the carving out of taxable activities for the purpose of reducing this new tax. Financial expenses and temporary depreciations do not reduce the taxable value added element. By way of transitional measure and to mitigate the effect of this new tax on real estate owners, the percentage of revenue and expenses taken into consideration in 2010 will be 10%, increasing over time to 100% in 2019. The impact on real estate values has yet to be seen.
The 3% real estate tax
The 3% tax returns need to be filed annually before 15 May. It is a kind of wealth tax, so even though earnings have been wiped out in the industry, the French 3% tax is still going strong. There is a little bit of relief, due to the fact that a slew of countries, popularly known as tax havens, such as the Channel Islands, the Cayman Islands, Bermuda, Liechtenstein, Singapore, Malaysia, Gibraltar, BVI, and Netherlands Antilles, have all signed exchange of information agreements with France. Because of this development it may be expected that Cayman LP/Bermuda LP fund structures are no longer prohibitive for funds with a French investment allocation.
The SIIC regime
A Société d'investissements immobiliers cotées (SIIC) is, in broad terms, the French equivalent of a REIT. Non-French REIT-type entities are also eligible for the beneficial French SIIC regime. The dual listing requirement has been cancelled, and therefore a Paris listing is no longer required. At least for other EU vehicles, this new provision simplifies the access to the French market while obtaining the benefits of the SIIC regime. Whether US REITs and other, similar, global beneficial real estate investment vehicles are allowed to waive the dual listing obligation is subject to further guidance by the French authorities. The new provisions also allow the set-up of a joint venture between a SIIC and a SPPICAV RFA (Société de placement à préponderance immobilière à capital variable, règlement à formule allégée). The latter is a regulated vehicle mainly used by qualified investors. The French listed and regulated real estate market is now sufficiently mature to allow such a combination to operate in the capital markets.
In conclusion, structuring and negotiating French real estate deals have become rather more complicated with the two new taxes, on top of the omni-present 3% tax. On the positive side, the French SIIC has become a tried and tested regime and should keep a strong position in the market place. If the transactions resurface, the regulated SPPICAV RFA is also expected to play a key role on the French market. The open question for now is whether foreign REITs, in particular US REITs, may decide to invest in France and ask to benefit from the new tax measures. Should this happen, it may have a major impact on the French real estate market.