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Holding french Real Estate

DIRECT HOLDING OF REAL ESTATE

Resident individuals

Personal income tax

Rental income is taxed as ordinary income, subject to annual tax return. Rental income received by individuals is subject to individual income tax. Rental income is determined by the difference between revenues and expenses (régime réel). Nonetheless, it is possible to benefit from a fixed reduction of the tax basis (régime micro). In that case, expenses are not deductible.

Losses carry forward

For revenus fonciers (unfurnished rental income):

  • It is possible to impute the losses on the global income up to € 10,700;
  • The losses exceeding € 10,700 in the current year can be carried forward on the same type revenues of the 10 following years.

For bénéfices industriels et commerciaux (furnished rental income):

  • It is possible to impute the losses on the global income unlimitedly if the rent activity is pursued as a professional activity (certain conditions need to be fulfilled, this requires further analysis);
  • If the rent activity is not professional, the deficit is imputable only on same type revenues of the next 6 years;
  • It is possible to amortise the price of acquisition of the real estate.

Taxe foncière (tax on ownership of real estate)

Taxe foncière is a communal tax on the ownership of real estate.

Ownership of a real estate on January 1st of the year considered makes one liable to this tax for the entire year. The rates are fixed by municipalities.

Wealth tax

A real estate wealth tax (impôt sur la fortune immobilière) is levied on the detention of real estate only by individuals (it was levied on the total wealth including movable property, before 2018). Individuals are subject to this tax when their net real estate wealth exceeds € 1.3 million.

Value of real estate exceeding € 800,000. Expenses are deductible under conditions. An allowance of 30% is granted on the value of the main residence. Progressive rates from 0.5% to 1.50%.

3% tax on immovable property (FTC, art. 990 D to 990 G)

A tax of 3% is levied on the market value of all immovable property owned by a company, regardless of the company’s taxation regime (corporate tax companies pay it themselves and income-tax companies pay it through the associates).

Non-resident individuals

Same rules as for a resident individual. Except that non-residents are taxed at a minimum rate of 30% of income tax on their rental income. And the social contributions are reduced to 7.5% instead of 17.2% for non-residents who pay social security in an EEE member state.

Resident companies

Corporate income tax

Business income such as rental income and capital gains are subject to corporate income tax. All income gains and expenses of companies are taken into account on an accrual basis.

Deductibility of costs, interest and depreciation

Companies can deduct interest costs and depreciation costs from rental income. Amortisation of buildings can be taken into account for periods depending on the type of building (20 to 50 years for commercial buildings, 20 years for industrial buildings, 25 years for offices, etc.). However, land is not depreciable.

Anti-tax-avoidance directive

The anti-tax avoidance Directive (ATAD) is an EU Directive that will be implemented by the European countries. ATAD contains certain interest restrictions that may affect investors in real estate. The Directive has been transposed into French law by the French Financial Law for 2019. It prevents for instance the deduction of more than 75% of the financial expenses if their amount is more than € 3 million or 30% of the EBITDA.

Losses – carry back/forward

Losses may arise if there is an excess on interest and depreciation allowance over the rental income. Such losses may be carried forward for offset against future rental income and capital gains of this company in the limit of € 1,000,000 plus 50% of the benefit’s amount of the fiscal year exceeding this limit. The overage of deficits could be carried forward in the same conditions without time-limit. A carry back is also possible. In case of fiscal unity (consolidated group), losses of the company can be offset on profits made at group level.

Non-resident companies

Since French real estate held by a foreign company is considered as constituted a permanent establishment in France, non-resident companies are treated in the same manner as resident companies. However, the non-resident company is limited taxable in France with the income generated in France.

INDIRECT HOLDING OF REAL ESTATE

This section discusses the tax implications of the indirect (shares) holding of real estate. First is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax

If the company is subject to corporate tax, the shareholder will be taxed on the products of the shares in the category of revenus de capitaux mobiliers (dividends) at a flat rate of 30% or at the progressive rate after application of an allowance of 40% of the income. If the company is subject to income tax, the shareholder will be taxed according to the type of revenue they are provided with (unfurnished rental, furnished rental, etc.), submitted to the progressive rates (14% to 45%).

3% tax on immovable property (FTC, art. 990 D to 990 G)

A tax of 3% is levied on the market value of all immovable property owned by a company, regardless of the company’s taxation regime (corporate tax companies pay it themselves and income-tax companies pay it through the associates).

Non-resident individuals

A withholding tax is applied on dividends distributed to non-residents at a rate of 12.8%. For shares of companies subject to income tax, no withholding tax applies.

Resident companies

Corporate income tax

Income derived out of shareholding is qualified as business income for companies and taxed at corporate income tax.

Losses

Interest costs from loans for acquiring the share of a real estate company are regarded as part of the cost price and are amortised for 5 years. Depreciation costs can be subject to provision.

Anti-tax-avoidance directive

The anti-tax avoidance directive (ATAD) contains certain interest restrictions that may affect investors in real estate. The Directive has been transposed into French law through the French Financial Law for 2019. It prevents for instance the deduction of more than 75% of the financial expenses if their amount is more than € 3 million or 30% of the EBITDA.

Distribution of income and gains

Dividends paid to another company who owns at least 5% of the payers share capital are exempted from taxation provided the shares are owned for a minimum of 2 years (under the parent-daughter regime). A quota of fees and shares equal to 5% of the net income from the dividend is reintegrated and taxed at corporate income tax. Dividends paid to a foreign company (non-resident) are exempted from withholding tax.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies. However, the non-resident company is limited taxable in France with the income generated in France