For many, the allure of owning a second home in France, whether nestled in the Alps, along the glamorous French Riviera, or within the enchanting City of Light, is a cherished dream.
Yet, amidst the excitement of finding the perfect property, one must confront a multitude of practical, legal, and tax considerations. Among these, the famous question looms: Should one purchase in their own name or through a company? We aim to shed light on this query with practical insights.
The Infamous “3% Tax”
Formally known as the Taxe sur la Valeur Vénale des Immeubles détenus en France (TVVI), the notorious “3% tax” levies an annual charge equal to 3% of a French property’s value under specific conditions for foreign owners. However, many are exempt from this tax by annually submitting a tax return disclosing the actual property owners via the Cerfa 2746 form. Failure to file this return can result in costly consequences, making timely submission imperative.
Benefit in Kind and Corporate Tax
French law mandates that commercial activities conducted by companies on French soil are subject to French corporation tax. Consequently, if a property is rented out, the company must maintain commercial accounts per French regulations, file annual accounts, and pay applicable French corporation tax. This aligns with the principle of fiscal equity.
However, foreign owners may encounter a peculiar concept known as “benefit in kind.” This entails reintegrating a notional rental income into accounts if the property is occupied without charge by the operator, partners, or any other individual. While many foreign companies fail to declare these benefits in kind, tax authorities may adjust assessments annually, potentially resulting in substantial payments—an outcome deemed unjust by affected owners.
Foreign Companies & Capital Gains Tax
Dispelling misconceptions, foreign companies are not exempt from capital gains tax upon selling French properties. French tax law mandates the declaration and payment of any capital gains made on French real estate to the French Treasury, irrespective of the owner’s nationality or ownership structure.
However, the calculation of capital gains for foreign companies differs significantly from that for individuals. Foreign companies are treated akin to commercial entities subject to French corporate tax, resulting in distinct tax treatment:
- Holding period deductions are unavailable.
- Property depreciation is factored into calculations, with depreciation amounts added back.
- Capital gains are taxed at the French corporate tax rate of 25%.
Illustrative Example:
Consider Mr. X, a UK tax resident who purchased a charming Normandy property two decades ago for €200,000, making no substantial alterations since. Selling the property for €300,000, Mr. X faces divergent tax scenarios:
- If purchased individually, Mr. X would owe €3,998 in capital gains tax.
- If acquired via a UK company, Mr. X would incur €45,000 in corporation tax.
Tax Implications
Our intention is not to dissuade purchasing French property through a foreign company but to underscore the consequential tax ramifications. We urge prospective buyers to consult seasoned professionals well-versed in such arrangements. Many stakeholders in the French real estate realm may lack familiarity with these intricacies, potentially exposing clients to significant tax risks inadvertently.