Realised gains on French property

For various reasons, you decided to sell real property that you own in France. You would be happy if you gain some profit from the sale,– but so would the French tax administration! Indeed, the Franco-British Tax Treaty of May 22, 1968, in Article 13 states that the gains of a resident of a contracting State resulting from alienation of real property (…) and located in another State, are taxable in that other State. In other words, if a British resident were to sell real property in France, that person will be taxed in France. We will therefore examine how that tax will be established. The developments below take account of the amendments proposed by the draft Finance Law for 2004 (indicated in italics) and which shall not come into force until the final adoption of the draft law by the French Parliament.

The Principle

You understand that all gains realized on the sale for consideration by private persons (sale, contribution, exchange, and expropriation) fall within the scope of realised gains on real property. These concern sales for consideration pertaining t

converted real property (purchased or built by the assignor) or not converted, regardless of the function of the buildings sold
on the rights relating to buildings (usufruct, bare ownership, servitudes, high-elevation rights)
on sales of rights in non-transparent real property companies provided that such company is not subject to corporate tax

However, the realized gains resulting from the free transfer (gift) inter vivos or on death (succession) are not subject to tax.

Calculation of the realized gain

The gross realized gain or realized loss is equal to the difference between the transfer price and the acquisition price. A certain number of adjustments are provided to establish the taxable realized gain.

The transfer price

This is the price stipulated in the deed, increased by the amount of expenses in capital and indemnities paid to the assignor (for example: the amount of reimbursements to be paid by the purchasers, a price indexing clause for the transfer price, subject to the condition that the buyer may defer payment of a portion of the price, etc.).

The acquisition price

This is the price that the assignor actually paid, as stipulated in the deed, or in the event of a gratuitous acquisition (succession or gift), the market value of the building upon acquisition. This acquisition price may be increased in certain cases. Thus, the following may be added:

Costs related to the gratuitous acquisition :the transfer duties would be taken into consideration in calculating the realized gains on real property. The other costs related to the acquisition, and which would be added to the acquisition price, shall be established by decree.
Costs related to an acquisition for value: The following may be used, either at their real value (upon proof), or in a fixed amount of 7.5 %.
Construction : the acquisition price is (upon proof) increased by expenses for construction, reconstruction, expansion, renovation and improvements which the seller paid and which were performed by a company. The tax payer who sells an asset more than five years after acquisition, without providing proof of work, may simply increase the acquisition price by 15 %.

Once the gross realized gain is calculated, the net taxable realized gain must be established by applying a reduction for term of holding and a fixed reduction.

Reduction for term of holding

The gross realised gain on real property or real property rights shall be reduced by 10% for each year of holding, after the fifth year.

Fixed reduction

A fixed amount of 1,000 euros shall be deducted from the amount of the taxable realized gain.

Exemptions

French non-residents enjoy the same exemptions as French residents:

Exemption due to expropriation performed following a public utility declaration, on condition that there is complete re-investment of the compensation
Exemption for consolidation of real property and assimilated operations
Exemption for all transfer where the price is less than or equal to 15,000 euros
Exemption if the term of holding of the asset is greater than 15 years (due to application of the 10% reduction)
Exemption for transfer of a primary residence by certain tax payers. This exemption applies to transfers of buildings, portions of buildings or rights related to assets "that are lodgings in France for individuals who are non residents in France, who are citizens of a Member State of the European Community, within the limitation of one residence per tax payer, and on condition that the assignor was tax domiciled in France for a continuous period of at least two years at any moment prior to the transfer". In other words, the non-resident individual who has a residence in France of any kind may, if such person can provide proof that he/she had been tax domiciled in France for two years, claim benefit of an exemption on sale of the building. The exemption may only be applied once, that is to say, generally, upon the first sale performed as from January 1, 2004. Comment - if the non Resident decided to establish his Residence in France and thus his tax residence, he may benefit from the exemption of habitual residences applicable to French residents.

Terms of taxation: withholding

The net realised gains for non residents, as calculated above are subject to a fixed tax set forth in Article 244 bis A of the French General Tax Code:

The rate of withholding applicable to realized gains obtained by individual residents of the European community shall be set at 16 %.
The applicable rate to other non residents shall remain one third (33.1/3%).

Payment of the withholding: the accredited representative key player

For non residents, the withholding is paid under the responsibility of an accredited representative, upon performance of the registration formality. Declaration of the realized gain is mandatory, even in the absence of any taxable realized gain. This declaration is made on form 2090. Function of The representative : the representative undertakes to perform all formalities to which a non resident is subject, and to pay the withholding in his/her place.

The administration thus has two potential debtors which it can institute proceedings against on a joint basis, for the payment of its claim. For assignors, who are individual persons, two circumstances may be possible:

Either there will be an automatic waiver of a tax representative, without any prior request being made (1) for sales whose global price was equal to or less than 100,000 euros, regardless of the number of assignors and (2) for sales on goods held for more than twenty years (this term may be brought down to 15 years under the draft Finance Law).
There will be systematic accreditation of a representative in all other cases. To do this, a request shall be made with the French tax services or the real property tax inspector's office having jurisdiction over the asset in question ; to appoint such a person as approved representative for a given operation. Of course, this provision does not apply in the case where the tax representative appointed by the non resident benefits from a permanent and general accreditation issued by the tax authorities (examples: SARF, Financière Accréditée, SARL Azur etc…). The subscription by these companies for a general approval for tax representation waives them from requiring approval for each operation. Therefore no prior approval need be requested from the administration. This representation mechanism may thus result in the naming of an accredited representative, even in the absence of any realized gains…

Cost of representation

Representation may costs nothing if the seller is successful in obtaining approval by the tax administration of a person who has his tax residence in France. However, the accredited representatives benefiting from a permanent and general accreditation involve a cost which varies depending upon the amount of the sale. In general, these entities request as fees a percentage of the sale price (check with each entity in order to establish a competitive rate).

The French notary: an essential advisor

The establishment of the declaration and the payment of the corresponding tax shall as a general rule, be performed by the notary on behalf of the seller upon recording of the deed. Due to the number of formalities to be performed, and the number of conditions to be fulfilled to claim exoneration, and of course any new modifications in the law which may occur or which have occurred (for example, the final provisions of the draft Law on Finance) the notary is a vital advisor. We will encourage you to meet with a notary in case you have a plan to purchase or sell, since many topics which were not dealt with in this note should be reviewed with such an advisor, such as:

What happens if the seller is a non resident legal entity?
Would one consider holding real property in France via an SCI (a non trading real estate investment company) governed by French law?

The notary can provide guidance on these questions and more.