|
|
|
I – THE INSTRUMENTS
1.1. The preliminary agreements
Prior to the deed of purchase of real estate, several types of agreements may be signed by the parties, in particular:
1.1. A unilateral promise to sell pursuant to which the promisor only undertakes to sell and grants an option to the beneficiary.
The unilateral promise to sell is not subject to any formalities and may be drafted in the form of a non-certified document.
In order for a unilateral promise to be valid, it must necessarily be recorded with the tax services within ten days.
The sanction for failure to record the unilateral promise to sell is its pure and simple invalidity, subject to certain exceptions.
1.2. The synallagmatic promise having the effect of a sale: each of the co-contracting parties respectively undertakes to sell and buy in accordance with agreed upon conditions and a price.
The synallagmatic promise may be subject to conditions precedent (obtaining a loan, authorization of a third party, absence of a major obstacle to the sale, etc.)
If the conditions are fulfilled, the sale is perfected and the promise is binding on the parties. Only the effects of the sale (delivery, transfer of title, payment of the price) are deferred until the date of the entering into of the deed witnessed by a notary (certified deed).
In this type of agreement the parties may agree to a withdrawal clause, which allows either one of the parties to prevent the final agreement by giving up an amount to his co-contracting party.
However, most of the time the parties agree to exclude the possibility of withdrawal.
1.3. In practice, the most frequently used prior agreement is that referred to as a « provisional sale agreement » which is a synallagmatic promise to sell, but which does not have the effect of a sale.
In this type of prior agreement the parties subordinate the completion of the sale to the signature of the act witnessed by a notary which, according to the will of the parties, alone realizes their final agreement.
1.2. The instrument for the acquisition of real estate
In France, a deed of sale of real estate must necessarily be a certified deed, that is to say, drawn up by a notary, a legal officer.
The notary, who has a duty to counsel, must verify in his deed the following essential points:
· the precise identification of the parties;
· the identification of the real estate that is sold (nature, location, surface area, land registry description);
· the intended use of the real estate;
· the terms and conditions of the sale;
· the clause concerning the price must be carefully set out in detail;
· prior to the drafting of the certified deed, the notary shall have verified various points relating to the real estate:
- by requesting a town planning certificate, he shall verify that the real estate has not been found to be insalubrious or affected by a prohibition on residing therein, is not affected by alignment, etc.;
- by obtaining a statement of mortgages and liens, he shall usefully inform the buyer concerning the situation of the real estate, in particular in the case of mortgages that might be an obstacle to the sale due to the size thereof;
- he shall inform the commune of the place where the real estate is located of the intention to convey, in order that such local government exercise its right of pre-emption within a time limit of two months;
- he shall claim from the seller the attestation of the surface area that has is mandatory pursuant to the “Carrez” Act;
- in addition, he shall verify that the diagnostics prior to the sale have been carried out concerning asbestos, lead and termites.
- Similarly, he will verify the fact that the reports and analyses prior to sale have been established, namely:
· a finding concerning the risk of exposure to lead (CREP);
· a report concerning the presence or absence of asbestos;
· a report relative to the presence of termites;
· a report concerning natural and technological risks;
· an analysis of energy performance (DPE);
- a report on the interior natural gas installation
1.3. Public auction purchase
In certain cases, real estate is sold by auction.
1.3.1. Voluntary auction sale by a notary:
Notaries have a monopoly for the voluntary sale of real estate.
Consequently, any owner of real estate may request that a notary sell his real estate at an auction.
The sale is announced by a notice in a newspaper carrying legal notices and in a newspaper having a wide public distribution or in a local paper.
The notice sets out the day of the auction and the conditions under which it is possible to purchase:
- A financial guaranty must always be provided in the form of a cashier’s check, whose amount is indicated in the notice.
- The auctions begin at a minimum price which is the upset price set out in the notice.
The purchaser must go personally to bear auctions: NON-REPRESENTATION BY A COUNSEL POSSIBLE.
- The buyer must personally make the bids.
- The expenses to be paid are the same for the recording taxes and fees.
- The notary’s costs are multiplied by two and the Chamber of Notaries that organizes the sale takes a fee which very often is 2% plus VAT.
1.3.2. Sale at the Bar of the court:
In the following cases, attorneys have a monopoly for auction sales of real estate at the Bar of the court where the real estate is located:
- Sales in the case of a court-supervised liquidation,
- Sales of property belonging to minors,
- Sales of jointly-owned property (auction-division sale),
- Sales pursuant to a real estate seizure of debtors’ property.
In all cases, the sale must be notified in a newspaper carrying legal notices and three notices must be published in a local paper for general public distribution.
The notice sets out the features of the real estate, the upset price and the day of the sale.
In order to purchase, a power of attorney must necessarily be given to an attorney admitted to the Bar of the court and he must be provided with a bank guaranty.
The recording fees and taxes are the same as for out-of-court sales.
The sale at the Bar of the court takes place without a notary.
The costs of the instrument are the same as for auction sales by a notary, but the fees are lower.
In all cases, there is never an agency commission.
The buyer only pays the costs of the notices.
Auction sales are subject to the same rules as those for out-of-court sales as concerns purchases by French residents, foreigners, companies, etc.
For any and all auction sales it is possible, after the first sale, to make a higher bid by offering 10% more.
In this case the real estate that is sold is subject to a new sale based on the new offer approximately 10 to 12 weeks later.
The auction market is often advantageous.
The price is the real market price at the time that the sale takes place.
On the other hand, there is much less real estate to be sold.
1.4. The recent modification of the property seizures regime
An order of 21 April 2006 introduced new provisions in respect of the seizure and distribution of the sale price of the building, the goal being to simplify the property seizure instrument, guaranteeing a balance between the interests of the creditor and the rights of the debtor.
The creditor must have an enforceable title which may result only from a definitive judgment having acquired the authority of res judicata.
Article 2194 new of the Civil Code henceforth provides that the seizure will relate to the building but also to its income, unless the latter, for example rent, has become the subject of a seizure of garnishment.
To respect the balance between creditor and debtor, the new provisions establish in favour of the debtor a benefit of discussion of the moveables.
If the debtors are spouses with joint ownership of property and if the seized property belongs to the joint estate, the seizure must be exercised against both spouses.
Concerning the sale of the seized property, article 2201 new of the Civil Code poses the principle that the seized property is sold either amicably or by auction.
II – THE EFFECT OF THE NATURE OF THE PREMISES: THE VARIOUS LEASES
French law provides specific regulations depending on the nature of the premises:
· premises for residential use,
· premises for commercial or industrial use or use by craftsmen,
· rental of property to be used for an agricultural operation,
are governed by specific regulations.
2.1. The common law lease
All rental relations that are not covered by specific regulations are governed by Sections 1713 et seq. of the Civil Code relating to the renting out of a res. This is the sector that is referred to as the « free sector » ; we can cite, in particular:
· rentals of secondary residences;
· premises rented independently of a premise to be used for residential purposes, in particular garages, parking spots, etc.;
· furnished premises;
· company accommodations;
· seasonal rentals.
It must be pointed out that the rules of the Civil Code, Sections 1713 et seq., are applicable to all regulated rentals for the aspects that are not covered by specific provisions.
2.2. The residential lease
The actual status of premises to be used principally for residential purposes or both for professional and residential purposes results from the Act of July 6, 1989. Article 1 of this Act established the right to housing as a fundamental right. Therefore only natural persons may benefit from such right.
2.2.1. The main features of the lease
A residential lease must necessarily be written.
A physical inventory must be drawn up, either by both parties at the time of the handing over of the keys to the tenant, or by a sheriff at the initiative of the most diligent party, the costs of which are shared equally.
If the building is a condominium, the condominium owner and lessor must transmit to the tenant the excerpts of the condominium regulations concerning the use of the building, and the enjoyment and use of the private and common areas, specifying the share of each of the categories of common fees relating to the leased premises.
The lease must be entered into for a term of at least three years when the lessor is a natural person or non-trading company formed exclusively between family members and the family by marriage when the housing is jointly owned.
The minimum term is six years when the lessor is a legal entity.
The lessor may not give notice to quit except at the end of the lease, by the giving of six months’ notice. Such notice to quit must be due to:
· either the taking back of the housing, which may only be done for the purpose of using it as the principal residence by the lessor himself or his spouse or ancestors or descendants or those of his spouse; or
· in order to sell the housing. This notice to quit is accompanied by a right of pre-emption in favor of the tenant.
The tenant may terminate the lease at any time by giving three months’ notice.
Under the reform of the securities regime, an order of 23 March 2006 created in article 2321 of the Civil Code an autonomous guarantee applicable to residential leases.
This autonomous guarantee constitutes the undertaking by which the guarantor undertakes in consideration of an obligation signed by a third party, to pay a sum either on first request, or according to agreed methods.
This autonomous guarantee may thus be provided contractually to replace the deposit. It may be signed only in place of the deposit provided in article 22 of the Law of 6 July 1989 and up to a limit of two months' rent.
This represents an introduction into the Civil Code of an increasingly common practice, which is henceforth regulated.
2.2.2. The rent
The rent for residential leases governed by the Act of July 6, 1989 is freely set by the parties.
The revision of the rent takes place each year, according to a specific index called the "Rent Reference Index", which replaces the former building cost index published by INSEE [French national institute of statistics and economic surveys]; the new index is itself published by INSEE.
The 100 basis of this index is the 2nd quarter 2004.
2.3. Commercial leases
They are governed by Sections L 145-1 et seq. of the Commercial Code which reproduces the provisions of Decree 53-960 of September 30, 1953. These provisions have created a veritable status for commercial leases, which status constitutes an originality of French law.
2.3.1. In order to benefit from this status for commercial leases, the tenant must operate a business belonging to him in the leased premises, that is to say, it must be registered with the Register of Commerce or Register of Trades.
The minimum term of a commercial lease is nine years; the parties are free, however, to enter into a lease having a term in excess of nine years.
Should a contrary agreement be absent, the tenant may give notice upon expiry of a three-year period.
2.3.2. The particularity of the status of commercial leases in France is constituted by the tenant’s right to renew the lease; the lease renewal right is also called « commercial ownership ».
In order to benefit from the renewal right, the tenant must be a French citizen on the day of the renewal request and must have actually operated his on-going business in the course of the last three years preceding the date of expiration of the lease or its renewal.
The lessor may always refuse to renew the lease upon its expiration. However, he must justify a legitimate reason for not renewing the lease or, failing this, he must pay the tenant an eviction indemnity equal to the loss caused by the refusal to renew.
2.3.3. Under the regulations governing commercial leases, the amount of the rent is freely set by the parties. The revision of the rent is:
· either prescribed by the legislation concerning commercial leases (Section L 145-38 of the Commercial Code): three-year revision for which the revised rent is capped depending on the variation in the INSEE cost of construction index, without it being able to exceed the rental value; or
· it results from the existence of an escalator clause (Section L 145-39 of the Commercial Code.
In this situation, a lease containing an escalator clause is subject to a contractual adjustment resulting from an automatic indexation and not a request for a three-year revision.
2.3.4. At the time of the renewal of the lease, the rent of the renewed lease depends on the two following principles:
· the amount of the rent must correspond to the rental value;
· the rent of the renewed lease is capped at the variation in the cost of construction index published by the INSEE.
However, this capping rule applies only to leases whose term does not exceed nine years.
If the lease is entered into for a term of more than nine years, or entered into for a term of nine years and it continues for more than twelve years due to its tacit renewal, the rent of the renewed lease is set according to the rental value; the capping rule according to the variation of the cost of construction index is excluded.
2.3.5. We may note the special case of premises to be used exclusively for offices or monovalent premises (hotels, garages, movie theaters, etc.) subject to the status of commercial leases, the rent of which is subject to specific rules.
In fact, in such cases, the capping rules do not apply and the rent must be set at the rental value.
2.3.6. The short-term lease
A special category of lease is prescribed by Section L 145-5 of the Commercial Code.
The maximum term of such type of lease is two years.
At the end of the agreement, if the lessee remains in the premises at the end of the two-year period, a new lease is automatically formed having a term of nine years, which shall be subject in its entirety to the status of a commercial lease.
The same applies in the case of the express renewal of the two-year lease.
2.3.7. The precarious occupancy agreement, which is not an exceptional two-year lease, is characterized by the brevity of its term or the possibility for the lessor to terminate it at any time, and in general by the low amount of its fee.
The veritable precarious occupancy agreement, contrary to the Section L 145-5 two-year lease, even if it continues for more than two years, will never give right to the status of a commercial lease.
III – THE LEGAL STRUCTURES
The acquisition of real estate property and rights may be carried out in France using various legal structures that may be distinguished essentially between:
· asset management companies;
· non-trading or trading companies subject to corporate income tax.
3.1. Asset management companies
The most frequently used form for acquiring real estate is that of a « real estate » non-trading company, which is advantageous both with respect to its management and the conveyance of property.
3.1.1. The legal system for non-trading companies is characterized by the considerable flexibility of this legal framework, in particular as concerns the drafting of the bylaws:
· no minimum capital is set by law, but a capital is mandatory;
· the allocation of the results is not necessarily egalitarian;
· voting rights may be given to the usufructuary or the bare owner of the shares;
· the powers of the manager or managers are freely determined in the bylaws;
· the bylaws may set rules of quorum other than those determined by law for rules of majority at shareholders meetings.
An asset management non-trading company may only exist if at least two persons decide to associate with each other.
Two spouses may alone or with other persons be shareholders of a non- trading company.
Furthermore, there is nothing opposing the formation of a non-trading company with minors.
One of the features of non-trading companies is that the shareholders have unlimited liability for the debts of the company in proportion to their shares in the stated capital.
3.1.2. Management
The company is managed by one or several managers designated in the bylaws or by a decision of the shareholders. The manager may or may not be a shareholder. The manager may be a legal entity represented by its manager.
In his relations with third parties the manager binds the company by acts that come within the company purpose.
In relations with the shareholders, the manager may carry out all acts of management pursuant of the bylaws in the interest of the company.
3.1.3. The advantage of a non-trading company is, in particular, the fact that the shareholders may freely arrange in the bylaws the conditions under which the managers shall assume their duties.
A non-trading company may be an excellent instrument for the conveyance of property, in particular to children during the life of the parents, due to the dividing up of the shares. In fact, parents may, during their lifetime, either sell or even give the bare ownership of the shares to their children based on a value of the company that is necessarily lower than at the time of their death; the usufruct automatically returns to the bare owner upon the death of the parents.
For example, in the case of a rental real estate non-trading company, parents who own the usufruct of the shares shall be entitled during their lifetimes to the rents paid by the tenant of the real estate; the children who are the bare owners recuperate the usufruct upon the death of their parents without taxation.
The bylaws may, furthermore, freely determine under what conditions the usufructuary shall exercise his voting rights at general meetings; failing this, the law has provided (Section 1844 subsection 3 of the Civil Code) that the usufructuary takes part in votes concerning the appropriation of the profits of the company.
3.2. Companies subject to corporate income tax
3.2.1. The normal system of « stock » trading companies is that of corporate income tax. These companies may be in the form of:
· stock corporations, simplified companies with shares, limited partnerships with shares, limited liability companies.
Limited liability companies whose sole shareholder is a natural person and family-owned limited liability companies having exercised the option for the tax system for partnerships are expressly excluded from corporate income tax.
3.2.2. However, certain partnerships, in particular non-trading companies, may be subject to corporate income tax:
· either ipso jure when they engage in an operation or transactions having an industrial or commercial nature tax-wise.
Income from the rental of a commercial or industrial establishment fitted out with furnishings or materials necessary for its operation is assimilated to a commercial activity.
Furthermore, the activity of a realtor, that is, a non-trading company which habitually purchases in order to resell real estate or on-going businesses, is considered to be an activity that, due to the profits made, has the nature of industrial and commercial profits.
· or pursuant to an option: in fact, partnerships may opt to be subject to corporate income tax. These are, in particular, general partnerships, non-trading companies, joint venture companies, a limited liability company with a sole shareholder or an EARL (Limited Liability Agricultural Business), with the notable exception of real estate non-trading companies that are fiscally transparent, building-sale non trading companies and non-trading real estate investment companies.
The option must be provided for in the bylaws or failing this, by all of the shareholders and must be notified to the tax department at the latest before the end of the third month of the fiscal year for which the company is desirous of being subject to corporate income tax.
Once the option is exercised, it is irrevocable.
3.3. French legislation has provided a special category of non-trading companies, building-sale non-trading companies, for the specific activity of the construction of real estate in order to resell it.
This concerns, in particular, the acquisition of land in order to construct buildings thereon or for the division of the land prior to building thereon and the sale of the buildings.
In general, these special building-sale companies must conform, with respect to their operation, to the common law rules applicable to all non-trading companies; in particular the fact that the shareholders have unlimited responsibility for the company’s liabilities in proportion to their company rights.
Their distinctive feature is on the tax level since they are not subject to corporate income tax and are placed in the same situation as general partnerships carrying out the same operations; it is the shareholders and not the company itself who are taxed in proportion to their rights according to the tax system applicable to them (personal income tax or corporate income tax, as the case may be).
IV ACQUISITION BY A FOREIGNER OF A REAL PROPERTY IN FRANCE
On the occasion of acquisition by a foreigner of a real property located in France, an ever more frequent occurrence, several questions arise relative to the identity and capacity of the purchasing foreigner, to his matrimonial regime, to the law applicable between the parties, and to the procedures involved in financing the acquisition.
4.1 The parties' identities
Since the Law of 14 November 2006 « relative to verifying the validity of marriages », article 47 of the French Civil Code sets forth the following:
« Any civil status document of French citizens and of foreigners established in a foreign country and drafted in the forms followed in that country is authoritative, unless other acts or documents held, external data or elements drawn from the act itself establish, if the case arises, that the said act is irregular or falsified, or that the statements made therein do not correspond to reality ».
In the light of these rules, the notary establishing the sale agreement will have to assure himself of the status and capacity of the foreign purchaser.
According to the French Civil Code, the competent rule for determining the status and capacity of persons is national law. This means that the notary will have to seek out and verify the content of the said national law.
4.2 The effect of the foreigner's matrimonial regime
In case of acquisition or of sale of a real property located in France, it is necessary to determine the spouses' matrimonial regime.
The Convention of The Hague of 14 March 1978, applicable in France since 1992, allows a choice only among three types of domestic law:
- the law of a State of which one of the spouses has the nationality,
- the law of the State on the territory of which one of the spouses has his or her usual residence,
- the law of the first State on the territory of which one of the spouses establishes a new usual residence after the marriage.
In the absence of a choice of applicable law, the Convention of The Hague assigns jurisdiction to the domestic law of the spouses' first common usual residence after the marriage.
4.3 The European Commission's draft rule (Rome I Rule) of 15 December 2005.
The European Commission's objective is to promote the compatibility of the rules applicable in member States when it comes to conflicts of laws and of jurisdiction, in the context of proper operation of the interior market.
In the real property field, according to that draft rule, and as an example, at the time of execution of a property sale contract, the law applicable to payment of the price will be the law of the contract.
4.4 Procedures for financing the acquisition by a foreigner of a real property in France
A foreigner acquiring a real property in France may finance the acquisition by means of a loan concluded in France, which is recommended, or by a loan concluded abroad.
4.4.1 Loan concluded in France.
4.4.1.1 The rules applicable depending on the nature of the acquisition
· If the foreigner is an individual who is not a real estate professional, and buys a real property for residential or mixed use (residential/professional), he benefits from a protective regime. The credit institutions must respect far-reaching formal requirements and regulations imposed by the Code of Consumption:
- the loan offer must contain complete information concerning the loan;
- the loan offer must be addressed by mail, and the would-be borrower benefits from a reflection period of ten days to decide whether or not to accept the offer;
- the content of the loan contract is governed by rules of public policy.
· If the foreign purchaser is a professional investor, particularly with respect to business premises, the loan regime is the one under common law, excluding the rules laid down in the Code of Consumption.
4.4.1.2 The various guarantees that the credit institutions may request.
- the lender's lien: the bank having made a loan with a view to acquisition of the real property, as long as the borrowing document is official, will hold a recorded lien becoming effective on the date of the document;
- the vendor's lien and action for cancellation: if the sale price is not paid in cash in full, the seller holds the "vendor's lien", which enables it, in case the purchaser does not pay the balance of the price, to be paid in preference to all other creditors of the purchaser, both prior to and after the sale;
In addition, in this situation the seller may request termination of the sale (action for cancellation).
The bank financing all or part of the acquisition of the real property is subrogated to the vendor's lien and to the action for cancellation.
- the conventional mortgage: this mortgage allows its beneficiary to have the real property sold, whoever may hold it, and to be paid in preference to others from the sale price. The mortgage acquires its rank on the date of its entry;
- the "rechargeable" mortgage (ordinance of 23 March 2006): this mortgage may make it possible to guarantee claims not mentioned in the constitutive document;
- the sureties: a personal commitment by the surety or sureties to the benefit of the lending entity to pay off the borrower's debt. The surety document must contain a handwritten mention of the surety, under penalty of nullity.
4.4.2 Loan concluded abroad.
Foreign law is very likely to be applicable to the loan contract.
The choice between the lender's lien and the mortgage will not be possible, as there is no foreign legislation recognising the lender's lien.
The loan guarantee cannot be anything other than the conventional mortgage subject to the property notice tax (0.715% on the principal amount of the loan and its incidentals).
The French notary establishing the sale agreement will issue an enforceable copy to the foreign lending bank.
But if the loan has been concluded by means of a private contract abroad, the signatories will have to personally file the agreement in the originals section of the French notary with acknowledgement of entry and of signature in order to make the loan agreement official.
V – TAXATION OF REAL ESTATE
The taxation of the sale or acquisition of real estate is different depending on whether the transaction is made by a private person or a professional.
5.1. The taxation applicable to the purchaser of real estate and real property rights
5.1.1. The taxation of real estate transactions carried out by a private person
For the purchaser, the acquisition gives rise to a proportional recording tax of 4.89%. The same applies for a private person who acquires land on which a residential building is to be built. This operation shall be subject to a 4.89% recording tax (departmental tax of 3.60% + communal tax of 1.20% + 0.2 % to the State + 0.09 % for basis costs and recovery = 5.09 %.
5.1.2. The acquisition of real estate other than by private persons
The acquisitions of real estate, whether or not built upon, which are not subject to real property VAT are subject to recording tax at the rate of 5.09%.
On the other hand, operations contributing to the production or delivery of real estate are subject to « real property » VAT; this concerns essentially:
· sales of lands to be built upon for the purpose of an operation for the construction of real estate of any type, other than that carried out by private persons;
· credit sales or in a future state of completion;
· sales of new real estate that has been completed less than five years ago.
In such situations, and in consideration for payment of the VAT, these sales are totally exonerated from recording taxes if lands are to be built upon; in other cases, they are subject only to tax at a reduced rate of 0.70 % paid on the price ex-VAT.
· Furthermore, purchases made by realtors benefit from the reduced rate of 0.60% (0.615% taking into account the levy for basis costs), provided there is a commitment to resell within four years.
5.2. The seller’s taxation
The issue that is posed for the seller is whether or not there is a capital gain as a result of the real estate.
The Finance Act for 2004, which applies as from January 1, 2004, extensively modified the tax treatment of capital gains on sales of real estate.
This new real estate capital gains system is applicable as of 2004; the features of such system are:
- taxation of capital gains at the rate of 16% (+ additional social welfare levies of 11%, currently), i.e. 27%
- exoneration of capital gains made at the time of any sale whose amount does not exceed 15,000 €uros or made on property held for more than fifteen years.
5.2.1. The real estate capital gains system applicable to private persons
This system applies henceforth to natural persons who make capital gains on real estate within the framework of the management of their private assets.
This system also applies to capital gains on real estate made by companies or groupings that are subject to the tax system applicable to partnerships, i.e., non-trading companies that have not opted for corporate income tax, non-trading condominium companies and non-trading professional companies.
5.2.1.1. The various cases of exoneration
The following capital gains on real estate are exonerated:
- capital gains made at the time of the sale of the principal residence of the seller when the real estate, the part of the real estate or the rights relating to such property constitutes the principal residence of the seller on the day of the sale;
- whose sale price is less than or equal to 15,000 €uros.
- Capital gains made by persons receiving an old-age pension or having a disability card are exonerated.
- Taking into account the application of a 10% deduction per year of ownership beyond the fifth year, capital gains on real estate made upon the expiration of a period of fifteen years are exonerated from tax. Regarding this point, it should be noted that the prior system resulted in the exoneration after twenty years of ownership.
5.2.1.2. Calculation of the capital gain
The gross capital gain or loss is equal to the difference between the sale price and the price of the acquisition by the seller.
It should be noted that the sale price is decreased on proof of the amount of the VAT that has been paid and sales costs paid by the seller.
The acquisition price is the price actually paid by the seller.
In the case of an acquisition for free, resulting from an estate or gift, the acquisition price is increased by the taxes on the free transfer, plus the notary’s costs.
The acquisition price is also increased by the amount of the expenses for construction, reconstruction, enlargement, renovation or improvement paid by the seller since the completion of the real estate or its acquisition, if subsequent thereto.
However, for property that is sold more than five years after acquisition, the increase is set on a lump-sum basis at 15% of the acquisition price without any proof thereof.
The determined gross capital gain is decreased by a 10% deduction for each year of ownership beyond five years. This mechanism therefore allows the capital gains to be definitively exonerated upon expiration of a period of fifteen years.
Lastly, a deduction set at 1,000 €uros is applied to the gross capital gain, a deduction which applies to the amount of the capital gain following the deduction for the duration of ownership.
5.2.1.3. Taxation terms and conditions
Capital gains on real estate are subject to personal income tax at the proportional and flat rate of 16% to which, for individuals having their tax residence in France, additional social welfare levies (11%) are added, i.e., a total levy of 27%.
The new regulations concerning capital gains has considerably simplified taxation terms and conditions. Since 2004 capital gains shall give rise to the completion of a new return, which in principle is made by the notary who has drafted the deed of sale, a return which shall be accompanied by the payment of 16% on the capital gain.
The capital gains tax, i.e., 16% to be paid by the seller, must therefore be paid together with the recording taxes due by the purchaser without any possibility of staggered payments of the tax. Practically speaking, it is the notary who shall keep the amount of the 16% levy and the recording taxes and make the payment thereof to the tax authorities.
5.2.1.4. Particularity of the sales of shares of companies that are preponderantly real estate in nature
The taxation of capital gains on the sale of shares according to the system for capital gains on real estate are henceforth reserved to sales of shares of companies that are not subject to corporate income tax.
* Sales of shares coming under the system for real estate capital gains of private persons
The following only are subject to the system for real estate capital gains of private persons:
- sales of shares of transparent companies, i.e., non-trading real estate condominium companies;
- sales of shares that are preponderantly real estate in nature.
Beginning in 2004, the net gains made at the time of the sale for consideration of company rights of non-trading companies that have not opted for corporate income tax, non-trading real estate condominium companies and professional non-trading companies, whose assets are principally comprised of real estate or rights to such property, are subject to the tax system for real estate capital gains of private persons.
Free transfers, whether inter vivos (gifts) or due to death, are not taxable transactions.
· The following capital gains are exonerated:
- when the sale involves shares of companies that are preponderantly real estate in nature, which gratuitously make housing available to the selling shareholder who occupies it as his principal residence;
- when the shares that are sold have been owned for at least fifteen years.
· On the other hand, the exoneration as a result of the amount of the sale (15,000 €) is not applicable.
In an instruction, the authorities provided the new definition of being preponderantly real estate in nature:
The following is considered to be preponderantly real estate in nature: a company that is not subject to corporate income tax whose assets, at the closing of the three fiscal years preceding the sale, are comprised for more than 50% of its real value, of real estate or rights to such real estate, which is not used for its own industrial, commercial or agricultural operation or the carrying out of a non-commercial profession.
* Sales coming under the system for capital gains on securities
Sales of shares of companies otherwise known as being preponderantly real estate in nature are not taxed under the system for capital gains on real estate and come under the system for capital gains on securities if the company is subject to corporate income tax.
These are stock companies that are not listed on a stock exchange and partnerships that have opted for corporate income taxation or subject to it ipso jure.
It may be noted that in the past these sales came under the system for real estate capital gains of private persons.
* Transitory mechanism for shares sold in 2004
For shares sold between January 1st and December 31, 2004, and by way of exception to the new principle defined by the Finance Act for 2004, the system for capital gains on real estate is maintained if the following conditions are met:
- the sale involves shares acquired before November 21, 2003 and is made between January 1, 2004 and December 31, 2004;
- the object of the shares sold is a holding in stock companies subject to corporate income tax or partnerships having opted for corporate income taxation or which are subject to it ipso jure and whose assets are comprised principally of real estate.
5.2.2. Professional capital gains
The system for professional capital gains depends on the system the enterprise comes under: personal income tax or corporate income tax.
5.2.2.1. Enterprises coming under the personal income tax system
A capital gain of less than two years is considered to be short-term; a gain of more than two years is considered to be long-term.
Net long-term capital gains after compensation with any capital losses are taxed at the rate of 16% which, taking into account any additional social welfare taxes, amounts to 26%.
Net short-term capital gains are part of the results that are taxable at the common law rate.
5.2.2.2. Enterprises coming under the corporate income tax system
Henceforth, since 1997, the distinction between short- or long-term capital gains no longer applies and the capital gain is therefore included in its entirety in the results of the fiscal year. Such results are subject to the corporate income tax rate in force.
5.2.3. Taxation of non-residents with respect to capital gains
5.2.3.1. Beginning in 2004, the terms and conditions for the calculation and taxation of capital gains made in France by persons residing in a member State of the European Union, in the case of a sale of real estate or shares of companies that are preponderantly real estate in nature as newly defined, are the same as those that apply to taxpayers domiciled in France.
Such non-residents are therefore taxed at the flat rate of 16%; however, they are not subject to the additional social welfare levies.
This taxation is in full discharge of personal income tax.
5.2.3.2. Subject to the provisions of international agreements, non-residents who reside outside the territory of the European Union continue to be subject to a one-third levy on their real estate capital gains.
5.2.3.3. In general, non-residents are entitled to the same exonerations as French residents; thus, following the reform of the Finance Act for 2004:
- for natural persons who are non-residents of France and citizens of a member State of the European Union, provided that the seller had had his tax domicile in France in a continuous manner for at least two years at any time prior to the sale.
This exoneration applies within the limit of one residence per taxpayer.
Exoneration of sales that do not exceed 15,000 €uros.
Exoneration after fifteen years of ownership.
5.3. Taxation of income
5.3.1. The income of persons or companies who or which are not real estate professionals
5.3.1.1. Income from land
A natural person or real estate non-trading company who or which leases his or its real property reports the income arising therefrom in the category referred to as « income from land ».
Income from land is determined by deducting from all of the rents received and reimbursements by the tenants of the expenses paid by the owner:
· the rental expenses paid by the owner which have not been repaid by the tenant; for example, tax for garbage removal, sweeping tax, etc.;
· a lump-sum deduction whose rate is currently 14%, which covers management costs (fees of the real estate manager, travel costs, correspondence, etc.), insurance premiums, depreciation;
· actual management expenses;
· the costs of compensation of caretakers;
· payments made for work that has been performed (maintenance and repair work, improvement and renovation work),
· levies and taxes (land tax);
· interest on loans.
Once the income from land is thus determined, it is included in the general return of annual income.
If the determination of the income on land shows a deficit, such deficit resulting from deductible expenses other than interest on loans may be applied against overall income within an annual limit set at 10,700 euros.
The fraction of the deficits that exceeds the 10,700 euro limit or that results from interest on loans, may be applied exclusively against the income on land for the next ten years.
5.3.1.2. Non-professional renters of furnished property (ICP)
This is a commercial activity which comes under the category of Industrial and Commercial Profits.
The following are considered to be non-professional renters of furnished property: persons who are not registered with the Register of Trade or who derive from their activity as renter of furnished property an amount of annual receipts that is less than 23,000 euros and less than 50% of their global income.
The profit is calculated by applying a lump-sum deduction of 72% to the amount of the receipts.
5.3.2. Income of real estate professionals
5.3.2.1. The profits of realtors, property developers and profits from construction, are subject to personal income tax in the category of industrial and commercial profits or corporate income tax when the activity is carried out in the form of a stock company (corporation, simplified company with shares, limited liability company, non-trading company subject to the Wealth Tax).
The profits of such professionals are determined by the difference between the sale price of the real estate and their cost price increased by expenses and charges.
5.3.2.2. Professional renters of furnished property
The professional renters of furnished property are persons registered with the Register of Trade and Companies and who have made more than 23,000 euros in annual receipts or who derive from the rental activity at least 50% of their income.
The profit of such enterprises is determined according to the general principles concerning such matter.
A micro ICP is applicable exclusively to individual enterprises whose annual receipts are less than or equal to 76,300 euros.
According to this special system, the profit is calculated by applying to the amount of the receipts a lump-sum deduction for expenses of 72%, with a minimum of 305 euros.
5.3.2.3. The profits made by building-sale non-trading companies are, in principle, subject to corporate income taxation, if they carry out an activity deemed to be commercial from a tax point of view.
However, exceptionally, non-trading companies whose purpose is the construction of real estate for the purpose of selling it, are excluded from corporate income taxation, without any option possibility. Consequently, they are subject to the system for partnerships, i.e., the shareholders are taxed in proportion to their rights depending on the tax system applicable to them.
This system for partnerships is strictly reserved to non-trading companies whose purpose is the construction of real estate in order to sell it, without the possibility of carrying out another activity deemed to be commercial.
5.3.3. The taxation of income of non-residents
Normally, the profits habitually made by a non-resident are subject to a levy of 50%. This levy is recovered at the time of the recording of the deed of sale in sight of a special return n° 3005. It is in full discharge of the tax on personal income and is charged to corporate income tax.
These profits are determined under the same conditions as the profits made by residents.
This levy is not due on the part of the profits of a French partnership (general partnership, limited partnership, non-trading company) due to its non-resident shareholders.
The profits coming from the sale for consideration of real estate located in France, whether or not built upon, real property rights and shares of companies that are not listed on a stock exchange and that are preponderantly real estate in nature are covered by this system.
The levy is not applicable to sales of real estate to be used for a professional operation in France.
5.4. Non-residents and the Wealth Tax
Natural persons who are not domiciled in France are subject to the Wealth Tax for property they own in this country.
In particular, real estate and real property rights that they own in France, whether directly or indirectly, are taxable.
The notion of property owned indirectly in France is extremely important since the entry into force on January 1, 1999 of the Finance Act for 1999, which is codified in Section 750 ter, 2°, para. 2 of the French General Tax Code.
Pursuant to the terms of this section, all real estate is deemed to be owned indirectly when it belongs to a legal entity or body in which the person domiciled outside of France owns, alone or jointly with his family group (spouse, ancestors, descendants, brother and sisters) more than half of the rights or shares, directly or even through a chain of holdings regardless of the number of interposed legal entities or bodies and the place of their registered office.
Furthermore, paragraph 4 of the same Section 750 ter, 2° of the General Tax Code provides that the shares of companies that are not listed on a stock exchange, whose registered office is located outside of France and whose assets are principally comprised of real estate or real property rights located in France are deemed to constitute property located in France and are therefore taxable as such from the point of view of the regulations applicable to the Wealth Tax.
Concretely, this provision covers foreign companies, the majority (i.e., more than 50%) of whose company assets located in France are comprised of real estate themselves located in France.
Natural persons domiciled outside of France who own shares of such companies, referred to as « companies preponderantly real estate in nature » are therefore subject to the Wealth Tax on the value of such shares.
For the application of this provision, real estate located in the French territory that are used by the legal entity owning such real estate for its own industrial, commercial or agricultural operation or the exercise of a non-commercial profession, are not taken into consideration.
The French tax authorities have stated in one of its instructions (April 19, 1983, 7 G 5-83, N°s 4 to 8) that in order to determine whether a company is preponderantly real estate in nature, there must be used the value of the real estate that is leased, regardless of whether a rental of residential real estate that is unfurnished or furnished or a rental of real estate for an industrial or commercial use, whether or not equipped with furnishings or material that is necessary for its operation.
Similarly, buildings constituting the property stock of building and sale companies or companies undertaking estate agent activity must be included.
5.5. The tax on real estate owned by certain legal entities
5.5.1. French or foreign legal entities, regardless of their form (partnerships or stock companies, associations, etc.) that directly or through third parties own one or several pieces of real estate in France or real property rights to such real estate, are liable for an annual tax equal to 3% of the market value of such real estate or rights.
The tax is due on real estate or real property rights owned at January 1 of the tax year, with the exception of property that has been duly entered in the inventory of legal entities that are realtors or promoter-builders.
5.5.2. The following are not subject to the 3 % tax:
· companies whose real estate located in France represents less than 50% of French assets;
· companies having their registered offices in a country having entered into a tax administrative assistance agreement for the purpose of fighting fraud and tax evasion, provided that they fill out a tax return every year;
· legal entities having their actual management headquarters in France and other legal entities that, by virtue of a treaty, benefit from an equality of treatment clause, when they communicate each year or undertake, within two months following the date of acquisition of the real estate or the holding, the commitment to communicate to the authorities, at their request, certain information concerning the real estate and the shareholders;
· companies whose shares are admitted for negotiation on a regulated market;
· retirement funds and other not-for-profit bodies.
Patrick MOCHKOVITCH
IDEACT SOCIETE D'AVOCATS
19, rue de Marignan 75008 PARIS
Tel 033 1 43 59 15 62
Fax. 033 1 43 59 15 60
Email : ideact@ideact-avocats.com
www.ideact-avocats.com
© AVRIO-ADVOCATI 2007 / website design and cms-administration: Dr. Grischa Kehr