Acquiring a second home is a cherished aspiration for many, especially when the allure of France beckons with its breathtaking Alps, the iconic French Riviera, the enchanting City of Light, and more.
Once you’ve located the ideal property, you’ll need to address a multitude of pragmatic, legal, and tax-related matters. A fundamental question arises: should you purchase the property in your personal name or through a corporate entity? In this article, we aim to provide you with practical insights.
The ‘3% tax’
Officially referred to as the Taxe sur la Valeur Vénale des Immeubles détenus en France (TVVI), the notorious ‘3% tax’ burdens foreign property owners in France under specific conditions, requiring them to pay an annual tax equivalent to 3% of the property’s value. This is an annual obligation that cannot be overlooked.
However, most of these property owners can claim an exemption from this tax by committing to submit an annual tax return detailing the actual property owners using the Cerfa 2746 form.
It is of utmost importance to remember to submit this return, as failing to do so can result in costly consequences in the form of unpaid taxes.
Benefits in kind and corporate taxes
According to French law, all operations conducted by a commercial company on French soil are subject to French corporation tax, a reasonable requirement when a property is used for rental purposes. In such cases, the company must maintain commercial accounts in adherence to French regulations, file annual accounts, and pay French corporation tax where applicable.
A surprising twist for foreign property owners emerges from the concept of ‘benefit in kind’. French law dictates that when the property is occupied rent-free by the operator, partners, or any other individual, a benefit in kind must be incorporated into the accounts for tax purposes. This entails reporting fictitious income corresponding to the rent the property would have fetched under normal market conditions and subsequently paying tax on this hypothetical income.
Regrettably, very few foreign company owners declare these benefits in kind, but this does not deter tax authorities from making adjustments using methods that are often unfavorable to property owners, resulting in substantial and seemingly unfair tax liabilities.
Foreign corporations and capital gains tax
The last tax consideration, but by no means the least, revolves around the calculation of capital gains when a property purchased with a foreign corporation is sold. It is crucial to debunk any misconceptions, such as the belief that these companies are completely exempt from capital gains tax. In reality, French tax law mandates that any capital gains arising from the sale of property in France must be declared and remitted to the French Treasury, irrespective of the owner’s nationality or corporate status.
Foreign company owners face unique circumstances in the calculation of capital gains, as they are classified as commercial entities that have opted for French corporate tax. Therefore, the calculation of capital gains diverges from the approach for private individuals and is instead based on the rules governing companies subject to corporate tax (Impôt sur les Sociétés), which yields distinct outcomes.
Without delving into intricate calculations, let us outline the key differences in tax treatment:
- Holding period does not grant deductions.
- The property is subject to depreciation for accounting purposes, with the depreciation added back into the final capital gain calculation.
- The capital gain is taxed at the French corporate tax rate of 25%.
To illustrate these differences, consider Mr. X, a UK tax resident, who purchased a charming Normandy property for €200,000 two decades ago, without undertaking significant renovations, only regular maintenance. He now intends to sell the property for €300,000.
If Mr. X had bought the property in his personal name, his capital gains tax liability would amount to €3,998. However, if he had acquired the property through a UK company, he would face a substantial €45,000 in corporation tax.
This article does not intend to discourage the purchase of French real estate through foreign companies, but rather to inform readers and their advisors about the substantial and irrevocable tax implications that may arise.
We strongly recommend that prospective buyers seek guidance from seasoned professionals experienced in handling such arrangements. Many real estate practitioners in France may not be well-versed in these situations and may inadvertently expose their clients to significant tax risks.