THE PURCHASE OF PROPERTY SUCCESSION LAWS AND PROPERTY TAXATION
INTRODUCTION
The transfer of ownership of property in France involves a notarial transaction and in particular the execution of a deed of conveyance "acte de vente" before a local notary. The notary is a a government appointed official acting, as far as property transactions are concerned, as a land registrar. The choice of notary for a particular transaction always lies with the purchaser (who is responsible for his fees and for all the various registration duties). The vendor may, if he so wishes, nominate his own notary to work with the notary chosen by the purchaser although this is not strictly necessary in view of the general impartiality of a notary. This does not give rise to any increase in fees, these being split between the two notaries.
The first stage of a transaction is for the parties to execute a sale and purchase agreement "a compromis" which will generally be subject to various conditions precedent e.g. the obtaining of satisfactory local searches, the obtaining of mortgage finance and any other specific arrangements agreed between the parties. Surveys are not customary in France but advisable, in particular regarding "second-hand" properties, in order to check not only the condition of the property but also that the planning permissions obtained correspond to the buildings actually constructed.
If the agreement concerns a purchase of residential property by a person who is not a professional property dealer, the purchaser has the option to retract, without having to justify himself, within 7 days. The retraction period will begin the day following the receipt by the purchaser, by registered letter with acknowledgement of receipt, of the "compromis" duly signed and accepted by the Vendor. In the case that the purchaser exercises the option to retract, then the agreement will be null and void, and if the deposit has been paid, it must be refunded within 21 days. Generally speaking, a period of two months is required by the notary between the signing of the sale and purchase agreement and the signing of the "acte de vente".
Mortgage loan finance is available to foreigners. Financial institutions would generally lend between 50% and 60% of the purchase price depending on market conditions.
If you take out a loan which complies with certain French tax regulations, then the loan can be deducted from the value of the property when calculating French wealth and inheritance taxes, thereby reducing the amount of tax payable.
METHODS OF OWNERSHIP
The choice as to whether property should be acquired in the individual name(s) of the purchaser(s) or through a company will depend on a number of factors, including the purchaser's family and financial situation. No specific approach can be said to be appropriate in all cases.
The two most important factors to consider when deciding on the most appropriate course of action are firstly, the impact of French succession laws and, secondly, taxation.
SUCCESSION LAWS
In regard to property situated in France, French succession law is paramount and to the extend to which it conflicts with the terms a will made by the purchaser elsewhere, it will override these terms, and thus may restrict his ability to dispose of his French estate as he would wish, due to laws of forced heir ship.
The main potential difficulty is that under French succession law, children have an automatic and overriding right to a portion of their deceased parent's estate, regardless of what their parent may have provided in his or her will, the portion depending on the number of children: one child is entitled to a half share of the estate, two children are entitled to one third each and where there are three or more they are entitled to three quarters between them. This may cause a particular problem where the children who are entitled are minors.
There are certain possible methods whereby an individual purchaser can provide for his wife, say to have the exclusive benefit of the property after his death, in priority to any children of the marriage (eg by giving the wife a life interest in the property) but if the overriding provisions of French succession laws described above are likely to cause difficulty or are at variance with the purchaser's preferred succession arrangements, a purchase through a company may be desirable.
PURCHASE OF REAL ESTATE BY COMPANIES
a) Companies incorporated in France
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A French limited liability company (an "SARL" or "SA") is not generally used by an individual purchaser to acquire residential property. There exists a particular type of company, a "Société Civile Immobilière" (SCI), designed for such purposes.
An SCI is effectively "transparent" for tax purposes which means that the individuals who own shares in it will be taxed on income from the property or on any capital gains tax liability at the rate applicable to individuals. There are no annual fees and there is no obligation to appoint auditors.
An SCI is advantageous both in situations where French inheritance law may cause problems and where one is purchasing together with a number of co-purchasers. In certain circumstances it may also assist in reducing inheritance taxes.
As the shares in the SCI are considered to be "moveable" property, as opposed to the real estate itself which is "immoveable", their transfer will, in the event of the death of a shareholder, be governed by the laws of the country in which the shareholder was domiciled at the date of his death and thus the provisions of French succession law described in 3 above will be overridden. However, the purchaser should carefully study the tax implications, in his country of residence, arising from the ownership of a French property through a French SCI.
b) Companies incorporated overseas
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There is no restriction on overseas companies purchasing real estate, the only consideration being those of taxation. An overseas company will have the same advantages as regards French succession laws are enjoyed by an SCI, described above.
It should be noted that a company incorporated in a country with which France does not have a tax treaty (ie any low tax jurisdiction such as the Channel Islands, the Isle of Man, Panama, etc) is at a disadvantage for French tax purposes, insofar as an annual tax is payable by the company equal to 3% of the market value of the property. This tax is not payable by a company incorporated in a tax-treaty country (eg any EU country) providing that the annual declaration is submitted to the French authorities, specifying the shareholders in the company.
TAXATION
i) Purchase taxes
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Notary fees and registration duties are payable by the purchaser on the acquisition of property. These are between 6% and 7% of the purchaser price, according to the size of the transaction. A lower rate o around 3% is payable in respect of a purchase of a new property which has not been resold within 5 years of construction. If a mortgage is obtained then there are additional fees and duties of approximately 1% on the amount of the loan registered.
ii) Annual taxes
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These are of two kinds: the "taxe foncière" which is a tax payable by the owner of the property and the "taxe d'habitation" which is a tax payable by the occupant.
iii) Income tax
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Rental income earned from property in France is subject to French income tax.
Regarding secondary residences the general rule is that a person resident outside France who owns, or has at his disposal, a secondary residence in France, is liable for income tax on a deemed income equal to three times the rental value of the French property. However, most recent double tax treaties entered into by France exclude this tax and this is so in the case of all EU residents.
iv) Capital gains tax
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v) Succession duties and wealth tax
Succession duties and wealth tax considerations will also affect the decision as to how the property should be purchased. Companies are not subject to wealth tax but their shareholders may be liable. It is applicable to individuals on net assets in France exceeding Euro 720.000. The scale of tax is 0,55% at Euro 720.000 rising to 1,8% above Euro 15.000.000. The tax is payable on net assets and thus if real estate is subject to a mortgage, the amount of such mortgage will reduce the taxable value. The tax is payable on assets owned on 1 January in each year.
Succession duties are on a graduated scale according to the relationship of the beneficiary to the deceased person. For a surviving spouse and children of the deceased there is an initial exemption on the share of each and thereafter the rate is on a sliding scale up to a maximum of 40%. A maximum rate of 60% is payable on transfers to remoter relations and to unrelated third parties.
vi)Value added tax - TVA (taxe sur la valeur ajoutée)
The present standard rate of tax is 19,6% with various lower rates for such items as books and food, and also renovation works at 5,5% in respect of residential properties more than two years old. The reduced rate for renovation work applies until 31 December 2002, which may be extended.
Capital gains tax is generally payable on the disposal of property in France unless it is the vendor's principal residence.
The amount of the tax payable will to some extend depend on whether the property is registered in the personal name of the vendor or in the name of a company.
The current rate of tax for a non-resident of France is 33 % on the actual gain, less various personal reliefs. The gain is effectively the difference between the purchase and the sale price, less the costs of acquisition and sale and less the cost of any works carried out to the property for which proper supporting documentation exists. The gain is further reduced by:
a) an annual inflation factor and
b) from the third year of ownership on, by 5% per annum; thus over 22 year period, the amount of the gain is reduced to nil.
A similar capital gains tax calculation applies if the property is sold by a "société civile immobilière" (SCI) since this particular type of company is treated as effectively "transparent" for tax purposes (as described in iv (a) above).
A foreign company is, however, at a capital gains tax disadvantage insofar as the tax reliefs allowable are not as extensive as those for an individual, and the capital gain will be calculated on an increased gain due to the French tax regulation which obliges the reduction of the purchase price by 2% for each year of ownership. In addition to capital gains tax, corporation tax will also be applied, calculated at 33 1/3% on the gain, plus 6% of the corporation tax payable. There is no refund if the amount of capital gains tax exceeds the corporation tax.
The amount of the capital gains tax payable in France will generally be withheld from the sale proceeds by the notary and paid to the French tax authorities, who have the right to ask for an unlimited guarantee, for the remainder of the year in which the sale occurs plus 3 years, regarding additional capital gains tax, if any, which may be payable. This should not apply to a sale by a SCI.
When filling the capital gains tax declaration with the tax authorities, the vendor will request dispensation to provide such a guarantee, prior to signing the "acte de vente". Dispensation is often granted, however, if refused, a guarantee must be provided, before completion of the sale, by either a French bank or one of the two French financial companies who specialise in issuing such guarantees at a cost of approximately 1% of the sale price. Sometimes it is necessary to leave a part of the sale price in escrow for the period of the guarantee, interest thereon being for the vendor.
Finally, it may be necessary to declare the capital gain in your country of resident. Normally, double tax treaties allow that the capital gains tax paid in France can be set off against tax payable in another country.