July 2010

Property in FranceThis article is currently being reviewed by the author and will be updated shortly. Please contact the editor if you have any questions at sylvia@frenchentree.com

It is often thought that by purchasing French residential property through a UK limited liability company, French inheritance rules can be circumvented on the death of the members of the company. Whilst this is true, it is only the case where the members of the company die domiciled in the UK.

If, since purchasing the property through the company, the members of the company take up residence in France such that they die domiciled in France, then French succession rules will nevertheless apply to their shares in the company.

There are very often better alternative mechanisms for dealing with perceived and actual problems with the French inheritance rules rather than purchasing through a UK limited liability company, such that they are rarely recommended as a purchase vehicle.

Moreover, there are even more compelling tax reasons why it is not advisable to purchase and own French property through a UK limited liability company, notwithstanding section 45 of the Finance Act 2008 which removed the possibility of directors’ of the company being subject to a benefit in kind charge by virtue of the French residential property being available to them.

French tax law itself is designed to discourage the ownership of French property by overseas companies (particularly those in jurisdictions which have no double tax treaty with France).

It does this through the following mechanisms:

1. Annual 3% tax (CGI Article 990D): An annual tax on the market value of property in France held by companies. There is an exemption for UK registered companies provided they comply with annual disclosure requirements but form 2746 must be filed by 15th May each year otherwise the tax will be imposed.

2. Capital gains tax (CGI 244bisA) (assuming holding company and not trading): Tax arising on a sale of the property by the company is imposed at the commercial rate of 33.3% on the sale price less the depreciated (at 2% per annum) acquisition price (plus any capital expenditure). Thus even if there has been no capital growth in the value of the property, the company would on any sale incur a tax liability of 33.3% of the sum by which the acquisition cost has been written down! Compare this to the position where property is held directly by individuals where there is total exemption from capital gains tax if the property is the main home. Sales of second homes are totally exempt from capital gains tax after 15 years and any sales within 15 years by a national of an EU Member State (but not French residents) are taxed at 16% and other discounts apply after 5 years ownership.

3. Corporation tax (CGI Article 206-1): 33.3% on any profits. If not trading, then no tax is payable.

What therefore if you have purchased a French property through a UK company and, after advice, consider that it is not the most advantageous vehicle to continue to hold the French property?

Selling the property to one or more of the members is of course a possibility. However, quite apart from issues of how to fund the purchase, any sale will be subject not only to potential capital gains in France and the UK (subject to the provisions of the double tax treaty) but will also be subject to a transfer tax in France of 5.09% of the sale price.

However, assuming the company’s sole purpose is to hold the French property, that it has no other assets apart from the French property and depending on how the company was financed, there may be a much more cost effective approach.

If the company was capitalised by way of loans from the members, then it might be possible for these loans to be repaid by the company attributing its entire asset (the French property) to the members. If these steps are taken preparatory to an application to remove the company from the Register of Companies under section 1003 of the Companies Act 2006, this arrangement can be assimilated to a transfer of the assets of a company without formal liquidation under Article 1844-5 of the French Civil Code, known as TUP (transmission universelle de patrimoine).

Even if the company was financed by way of equity share capital rather than loan, it would still be possible to use the TUP route although there may well be additional tax considerations in the UK as any transfer is likely to be considered as a distribution to the members.

A transfer of assets to the members under the TUP regime is not subject to the transfer tax referred to above but to a different tax (taxe de publicité foncière) at 0.6% of the market value of the property at the date of the transfer.

In certain circumstances therefore this may represent a less costly option in transferring the property directly into the ownership of the members of the company.

© Edward Coxall – Mayo Wynne Baxter LLP