This becomes even more important when the subject is also international. This feature features Delphine Parigi, DPZ Avocats. She discusses the main concerns of HNWIs in France and foreign investors in France.
Please give us a quick overview of the regulations governing real estate and property purchases in your jurisdiction to help us get started.
France has a complex and continuous tax system that makes it difficult for foreign investors to invest in real estate. This requires a particular approach.
Real estate investments can be secured from a property perspective with the involvement of a notary for all transactions, including the transfer of foreign shares. However, the French tax regimes for ownership, inheritance and resale are very varied and depend on many factors. These factors include the type and location of real estate investments, ownership structure, destination, ownership, capital gains, and ownership.
How can an international element be a problem in such circumstances?
France has a complex system of procedures for international investors that goes beyond the possibility of double taxation for cross-border investments.
To give you an example, all entities (French and foreign) must be registered in France. A special purpose vehicle investment triggers a tax declaration of 3% by May 15 to reveal the investor channel to the UBO. French tax authorities will reassess the taxpayer with a joint liability of intermediary organizations at 3% of the fair value of the property. In the event of a second omission or delay, they will generally apply a 40% penalty.
If foreign financing of French real property assets or rights is not in compliance with French laws, it can be difficult to deduct the financing. Annual reporting is required for French property that is owned by trusts. There are many other requirements that must be met. These include significant accounting and administrative costs. Foreign investors are strongly advised to consult their French tax advisors in order to determine the exact tax and other indirect costs associated with acquisition, ownership, and inheritance.
France has a complex and continuous tax system that makes it difficult for foreign investors to invest in real estate. This requires a particular approach.
A substitution clause can be added to the promise of sale. This allows you to identify the type of acquisition (direct, indirect), before signing the final deed. Modifying the structure after acquisition is subject to a substantial transfer tax in France.
What are the most common tax issues in property-related transactions across borders and France?
The French tax declarative system places the burden on the investor. French tax authorities consider foreign HNWIs and companies as potentially fraudulent, contrary to what many authorities overseas believe. Since October 2018, the French tax fraud procedure rules have been substantially amended to allow for more tax fraud prosecutions of both individuals and legal entities. Our practice is focused on cross-border investments.
The French tax authorities have been referring cases automatically to prosecutors since October 2018.
- The tax reassessment exceeds EUR100,000.
- The French tax authorities impose a penalty of 100%, 80%, or 40%.
This procedural rule increases the number files that reach the prosecutor’s desk. The 40% penalty is applied almost immediately to any tax filing that contains an error.
This is because clients must deal with the lack of responsiveness of the authorities and the strict timeline for the transaction. It takes about one year for a deed of trust to be registered in full by the land registry.
How can procedural tax issues be handled before they become problematic?
It is best to act before closing the transaction. With the help of a team of lawyers and surveyors, one can create a detailed costs and modalities plan. This includes the assistance of experts in valuation who know the French tax landscape. The ability of advisors to communicate with all parties involved is crucial to ease the entire process.
It is important to recognize the criminal risk in this environment as soon as possible to minimize the possibility that the tax audit results in a criminal investigation for tax fraud against the HNWI, legal entity, or its directors. Many of the most difficult tax audits begin with a mail issue. This is often caused by failure to promptly follow up on a request made by French tax authorities.
It takes about one year for a deed of trust to be registered in full by the land registry.
What advice would you give to a large client with high net worth about making a tax-efficient French property investment? What additional factors would you need to consider if the investment was made internationally?
Today, tax efficiency requires that you establish a consistent SPV to avoid any discussion about artificial settlements. In the case of major renovations and the decision to rent the property, the SPV may be eligible for a full reimbursement under the paid VAT. These steps however require long-term renting with services.
Perfect coordination is essential between advisors if the investment was to be made over international borders. Even though we live in an integrated world, tax law is still governed by the specifics of each country. France has many tax-efficient systems, but specific conditions must be met. For example, the most favorable taxation regime for dividends is the one that suits the project’s objectives. Therefore, the SIIC and SPPICAV should be used to structure the projects.
Below is a summary of key elements from the SIIC and SPPICAV.
|
French SIIC type REITs |
SPPICAV |
||
| Register capital | Minimum EUR15 Million | NA | |
| Shares | Listed | Unlisted | |
| Types of assets in the structure | Minimum 80% in real estate assets |
– Minimum 51% in real estate assets
– 10% within 12 months of liquid assets – Other: Financial products that include at least five real estate assets, >20% of total real estate assets. |
|
| Corporate purpose |
Renting
Under certain circumstances, buying and selling activities can be disqualified under the property trader system (marchande de biens). |
||
| The structure’s tax regime | Certain conditions relating to capital split exempt you from CIT | CIT | |
| The tax regime for investors | Dividend regime – taxation in your country | ||
The SIIC (listed firm) requires that the following obligations be fulfilled:
- 60% of the share capital must not be held by the same investor, or investors who have agreed to act in the exact same manner.
- Investors should hold at least 15% of the capital, and not more than 2% each.
A portion of the SIIC capital should be held by at least seven investors in addition to the main shareholders.
Every year, the SIIC is subject to certain distribution obligations:
- The SIIC receives 85% of the rental income from the SCIs every year.
- 50% of capital gains derived by the SCIs from the sale or lease of real estate
- 100% of all other incomes (e.g. Dividends from SIIC subsidiaries
Failure to fulfill the distribution obligation could result in the SIIC losing the CIT exemption.
Additionally, the SIIC could withhold tax dividends to legal investors that hold, directly or indirectly, at least 10% of the SIIC. This is in the event such investors are not subjecte to CIT (or if they are foreign, to an equivalent tax).
These very restrictive conditions make the SPPICAV a more convenient structure. The SPPICAV may not be subject to CIT but it can still be convenient. This is primarily because of the following reasons.
- The SPPICAV is not listed and is not subject to any stronger regulations.
- There is no minimum capital requirement;
- Capital repartition is not subject to any restrictions
The SPPICAV’s assets repartition is restricted to holding at least 51% real estate.
Similar to the SIIC and the SPPICAV, distribution obligations are imposed on the SPPICAV every year.
- Rent income equals 85%
- 50% of all other income
It is crucial to recognize criminal risks in this environment as soon as possible
Are there any changes in the law regarding tax and property in France during 2022?
In accordance with article 279-0bis of the FTC, the Finance Bill 2023 requires that VAT be levied at a 10% rate on any improvement, transformation or maintenance work related to residential properties built more than two years ago. The FTC also provides that VAT is levied at a rate of 5.5% for energy quality improvements in same dwellings.
The FTC article 257, II-1deg also states that when the work of a professional lessor is performed, the work must contribute to the enhancement or extension the building’s life. This is true when the building is used for residential rental (this type is exempted from VAT).
This self-delivery rate is generally 20%, except for works related to social housing.
What tax developments are French corporations to be aware of in the coming year?
Tax developments are mainly published by the OECD rules with a particular practice and by case law (though France is supposed be a civil-law country). The electronic filing of VAT has made a significant change.
The system adopted in article 26 of the Amended Finance Bill 2022 and 2023 by the Finance Bill 2023 are based on two goals: the generalization of electronic invoicing of transactions between persons subject VAT and the transmission transaction data.
- Electronic invoicing is becoming more popular
- The obligation to transmit to administration the information that relates to operations performed by persons subject to VAT, but not taken from electronic invoices.
The implementation of electronic invoices will take place according to a progressive schedule. This will minimize the impact on companies and allow them to be included according to their size. For large companies, the dates will be January 2024 (ETI), January 2025 (ETI), and January 2026 (SMEs and VSE).
This reform is completed by two changes to article 62 of the Finance Bill 2023. The first amendment is to article 289-VII CGI. It relates to invoices that taxable persons can issue and receive. They will be able now to use the qualified electronic sealing procedure, which is part of the European regulation known collectively as the eIDAS regulation. This procedure adds to the ones already available, such as the electronic signature, reliable audit trail, and structured message.
The second amends article L.102 B of Tax Proceedings Code to say that books, registers, and documents drawn up on a computer media must be kept for six years starting from the date of last transaction or date the records or documents were created. They would no longer be possible to keep them on a computer medium for three years, then switch to another medium for the three remaining years.
Delphine Parigi
Tell us about yourself and how you got into law.
Because I am passionate about solving complex and difficult legal problems as efficiently as possible, I believe that I chose the path of international tax law. While I was tempted to pursue a diplomatic career, tax law provided me with the opportunity to help in cases that involve the human element.
With the increasing criminalization of tax law, I fully understand my need to defend taxpayers and freedom.
Freedom is ended whenever the laws allow that, in certain circumstances, a man can cease to be a human being and become something.” Cesare Beccaria
What are your most proud career achievements?
This question is difficult for lawyers to answer, since the essence of our profession is to fight in the shadows and in silence in order to protect the interests of our clients.
It would be a lie if I said that I felt indifferent to participating in billion-euro transactions. Having represented one of the few French Constitutional Council cases, being contacted to launch their office by top-ranking firms, and being a speaker at international conferences, including the Harvard Business Club. Winning complex cases at transactional levels or solving problems which other advisors thought impossible.
My greatest achievement, however, is the fact that every day I get to choose the profession I love with people who are grateful for it. It is an incredible gift to be able to work happily over the years with clients and a team that is grateful, despite the challenges.
Delphine Perigi, Founding Partner
81 Avenue Raymond Poincare 75116 Paris, France
Tel: +33 9 81 25 89 87
Fax: +33 9 81 38 38 77
Delphine parigihas been a tax attorney since 2005. She started her career in Paris with EY Societe d’Avocats. DPZ was established in 2011 by her to provide technical services of high value to international clients. She also works within her values, proximity and accessibility.
DPZ Avocatsis a boutique legal firm based in Nice and Paris. They offer services in France as well as abroad. It provides both legal and advisory services.