Under French law, companies who are non-French resident and own one or more properties in France have to pay tax at 3% on the market value of the property. There is no deduction for any mortgage on the property. The idea of the law is to prevent offshore structures being set up to hide the true ownership of a property in order to avoid French taxation by falsely making use of a double tax treaty.
For instance, a resident of a tax haven could form say a Luxemburg company to own a French property and conceal his name using a nominee on the shareholders register. The French tax authorities often use the relevant law for this purpose but it also affects the very wealthy who for legitimate reasons conceal the true ownership of high value properties.
In short, French law allows you to conceal the true ownership of the property but the price is 3% per annum in tax.
The French Revenue currently requires companies shown as owners of French property to complete form 2746 which is short and clear. If you are willing to pay the tax all that is required is a declaration as to the market value.
If you seek exemption from the 3% tax the full names of all shareholders including the number of shares held by each and the rights under which they are held must be disclosed.
The French legislation exempts you from this tax if the company owner is resident in a country which has a double tax treaty with France containing an exchange of information provision. All that is required in this case is for a declaration at the latest on 15th May disclosing the beneficial owner for properties owned on the preceding 1st January.
As there is a double tax treaty in place between the UK and France, the provision does not usually apply to UK residents provided they give the relevant information to the French tax authorities.
However, many UK buyers are unaware of this provision until they are contacted by the French tax authorities with a demand for the 3% tax.
Based solely on the interpretation of the French law there are ways around the 3% tax. These techniques are accepted by the French tax authorities and make it possible to avoid the tax either for a certain number of years or indefinitely. One such method involves residents of a country with which France has a double tax treaty in place buying a property on say 2nd January 2007 and selling it before 1st January 2008. No declaration would have to be made on 15th May in either year as the property was not owned on the 1st January in either year.
The French legislation has been tested in the recent case of Elisa before the Court of Justice of the European Communities. In this case a Luxembourg-based company owned a property in France. Although there is a Double Tax Treaty between France and Luxembourg, it does not apply to this particular type of company. The company was therefore charged the 3% tax by the authorities.
The company appealed against this and their case was referred to the Court of Justice of the European Communities. The Court was asked to decide whether the 3% tax is compatible with the provisions of the EC Treaty on the free movement of capital. It is important to appreciate that the facts of this case were quite unusual.
The Court came to the conclusion that the tax was covered by the European Directive on Mutual Assistance. This Directive provides that countries must assist each other by providing information needed in the application of direct taxes. The Court considered that this directive meant that there is sufficient protection for France to protect its tax base.
There is no need for France to adopt the position that all companies had to pay the 3% tax unless they make the full disclosure as to beneficial ownership. From this conclusion it was prohibited for France to discriminate against companies in EU states which do not have double tax treaties with France – as this goes against the principle of freedom of movement of capital.
The decision means that French internal law in so far as EU countries are concerned will have to be amended in order to make it compatible with European Law.
In practice the procedures will have to change and form 2746 will doubtless have to become a lot more complicated.
The Court’s ruling does not seem to prevent France from establishing the ultimate beneficial owner of the French property. At a practical level matters have not changed significantly for British buyers using UK companies or for non-EU residents seeking to purchase French properties using EU companies. Any person in receipt of an enquiry from the French tax authorities relating to the 3% tax may consider whether they should wait clarification of the French rules following the recent EU ruling.
Please note that French tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case. This article does not constitute financial advice.
Helen Belle and Graeme Perry