When considering the purchase of property in France, it is important to be aware that property ownership will have consequences under French inheritance laws, and can generate French inheritance tax, capital gains tax, income tax, social charges and wealth tax liabilities.
In specific cases, typically new builds, VAT at 19.6%, is also a factor to be considered as this is applied to the purchase of new and relatively-new French property, although this VAT can be claimed back under certain conditions.
If the purchase is made with the intention of selling after a short period of time, or even if this is what happens in practice, great care must be taken as whilst the French tax administration may well consider the sale to have been effected by you personally, they can consider you to have been acting as a property developer. If so, the applicable tax regime is then very different from the one applicable to private individuals since the requalification is to a business activity, with all the consequences that this would entail.
In light of the above, it is essential to seek professional advice in order to properly structure the ownership of any French property and mitigate any fiscal impact in the event of a potential sale or inheritance.
Fortunately France offers several options as to how property can be held, as one need not only own property directly in the names of the purchasers, since it is possible to own property through a French civil company or a commercial company, and sometimes foreign trusts can also offer interesting tax planning opportunities for wealthy clients. However, ownership of a French property by a commercial company can create fiscal nightmares, which issues invariably always require the ownership to be restructured, and at some cost.
With French inheritance tax, if neither the deceased nor their heirs are tax resident of France, upon the demise of an owner it is only the directly-held property assets in France that are taxable. These rules are subject to international tax treaty provisions which, whilst of a standard nature as far as France is concerned, may have different applications according to the foreign country concerned. Evidently, for French tax residents, the value of the property is included in the overall value of the Estate.
Where France does have the right of taxation on inheritances, it will assess the net value of the asset, so taking into account debts (such as bank loans and mortgages) as deductions against the property value, so sometimes rendering the use of loans or mortgages quite advantageous (in particular interest-only loans). It can also be beneficial to bequeath or donate some of the shares of the civil company owning the French property and, these bequests and donations can be very tax efficient if they include the retention of a ‘life-interest’ in the property. There is no longer any inheritance tax between spouses, and whilst current French inheritance tax rates range from 5% to 45% between parents and children, children do also benefit from an inheritance tax allowance, so further reducing any potential liability. One reason for being extremely careful as to who property is left, even under a foreign Will, is that France applies a 60% tax rate on inheritances by anyone who is more than a niece/nephew or uncle/aunt of the deceased.
An area of issue related to taxation is that of the impending European Succession Certificate, since whilst this may make the Estate ultimately assessable in a country other than France, France will still apply taxation on property on the basis of its laws, which French tax can then be used as a credit against the fiscal liabilities of the foreign country. However, the issue lies in the fact that if the foreign inheritance tax is less than the French inheritance tax paid, there is no refund of the excess French inheritance tax suffered. Given that France would apply taxation under its inheritance laws, this could also give rise to some beneficiaries having French inheritance tax liabilities although they may not have inherited anything under the foreign Will.
With regards to French inheritance laws, children are entitled to a minimum part of the estate of the deceased parent by basic law, which creates a problem if wishing to protect the surviving spouse. As a result, there are means whereby delays can be created in the children inheriting, as there are to ensure the children do not inherit on the first of their parent’s death. For French tax residents, one such method is through the use of marriage contracts since through these it is possible to have a ‘joint-ownership‘ status where the survivor automatically recoups the deceased’s property share, but this is not a contract that is available, or even suited, to all couples (the same ends can be achieved for non-residents, though this applies on a property-by-property basis). One further advantage to non-residents of the Société Civile Immobilière for inheritance law purposes is that it can assist in avoiding France’s forced succession rules since as the asset inherited is the share in the SCI, and not the property itself, the inheritance law applicable is that of the country of residence of the shareholder.
For French capital gains tax (CGT) on all properties other than the main home, the issues can become more involved since, firstly, irrespective of whether the property is owned directly or through an SCI, French personal capital gains tax rules will be invoked. Secondly, where non-residents are concerned, they are now required to use a Fiscal Representative who takes legal responsibility of their fiscal liabilities in France, but which responsibility comes at a cost, and a compulsory cost at that. Thirdly, the rules have changed each year over the last few years, and are again different for 2013.
So, for 2013, the gain is first calculated, then benefits from an abatement of 2% per year as of the 5th year of ownership and until the 17th year, then a 4% per year abatement between the 18th and 24th year, and lastly an 8% per year abatement from the 25th year to the 30th inclusive. Therefore, after 30 years of ownership there is no assessable capital gain, so no tax. Tax on the resultant net gain is at 19% for French and EU residents, non-EU tax residents pay 33.33% (and 50% for those of countries whom France considers ‘non-cooperative’). However, there is now an additional levy due which is dependent on the amount of the gain itself over 50 000€, and in essence starts at 3% on amounts between 50 000€ and 100 000€, and increases by 1% per 50 000€ tranche to a maximum of 6% on amounts over 250 000€, though there is a small tapering relief for the first 10 000€ of each tranche.
The social charges at 15.50% applicable to French tax residents are now also applicable to foreign residents, though the legal validity of this remains to be established.
As to French income tax, any letting or rental income effected in your name, whether a French fiscal resident or not, will fall to be liable to this tax, and likewise if you have chosen for your unfurnished rentals effected through an SCI to be taxed personally.
The provision of furnished rentals in France is considered to be a commercial activity, so cannot be carried out through an SCI, a Société Civile Immobilière, since this is a civil company, though it is possible for an SCI to rent property out unfurnished. The advantage of nonetheless using an SCI, however, is that where ultimately offering furnished lettings, it can open up opportunities for structuring the furnished rental income activity in more tax-efficient manner and enable the profits to be exposed either to income tax or capital gains according to the owner’s desire. Or then enable the income to be directed to the SCI or the owners directly.
As to the manner in which you your rental income may be assessed, this is largely by choice and would be through one of the following methods:
- the ‘micro’ regime which entitles you to deduct an allowance amount from the income received, in lieu of the actual expenses. The amount of the allowance is dependent on the nature of the lettings or rentals, and income limits do apply to be able to benefit from these forfeit expense rates :
- Unfurnished rentals up to 15 000€ income per year - forfeit expense deduction of 30%
- Furnished rentals of a tourist or seasonal nature up to 81 600€ - forfeit expense deduction of 71%, but proof of formal registration with the Mairie is increasingly being requested by the Fisc to benefit from this rate
- Furnished rental of all other natures up to 32 600€ income per year - forfeit expense deduction of 50%
- the income less expenses regime, which entitles you to deduct all valid expenses incurred in the daily management of the property (interest on your loan, property taxes, insurance ...). This is also the default system if not entitled to the ‘micro’ forfeit rates. However, this system tends to lead to the existence of a proper business activity, where the various social and other associated levies can collectively attain 34% annually.
The current French income tax rates applicable to residents range from 5.5% to 45%, though there is still speculation of an additional rate for annual earnings over 1 000 000€ per person. Non-residents are liable to a flat rate of tax at 20%, and again, like for residents, will from now be assessed to the social charges at 15.50% though the legal validity of this also remains to be established. French tax residents need to file annual income declarations by 30th May of the year following the taxable year, and other EU tax residents need to file before June 30th together with those resident in African and North American. Americans and for the rest of the world, the deadline date is 15th July.
Insofar as French wealth tax is concerned, French tax residents are liable to wealth tax on the net value of their worldwide assets (assets less liabilities), except that new tax residents are exempt on foreign assts for the first five years of their residency, and do benefit from an abatement on the value of their French home. Non-French tax residents are liable to French wealth tax on the net value of their French property, whether owned directly or through an SCI, but these rules are subject to tax treaty provisions that may provide otherwise. All estates over 1,300,000€ in net value (assets less liabilities) are assessable as at the 1st January each year, and then the calculation of the liability begins on the net value in excess of 800 000€. Current French wealth tax rates start at 0.50% for net values between 800 000€ and 1,300 000€ and increase to 1.50% for net estate values in excess of 10 million euros. Filing dates vary according to the values of the net declarable values, and do remember that Wealth tax is a self-declaration return and tax.
French property ownership has many legal and fiscal ramifications, especially if a non-resident, highlighting the need for appropriate patrimonial advice. If further seeking tax efficiency and planning, patrimonial advice is, today, an absolute necessity.
 In most cases registration or stamp duties, at 5, 09%, are applicable. Notary fees, amounting to approximately 1% of the purchase price are charged. Compulsory tax representative fees, amounting to 1% of the purchase price, are charged if the sale is made by a non-French tax resident (they are due by the seller). The purchase of a constructible plot of land is subject to VAT, except if purchased by an individual for habitation. The purchase of a new built property less than 5 years old and which has never entered the scope of VAT is also subject to VAT. If important works are carried out on the property, the French tax administration could requalify the property as a constructible plot of land. A special VAT regime known as the “livraison à soi-même” regime is also applicable upon completion of some construction works.
 If the property is rented out after purchase and if specific services are provided, such as breakfast, cleaning, laundry, reception...
 This ownership structure through a company generates French corporation tax at 15% or 33.33% on income, depending on the amount of the profit, and a benefit in kind is created for the company shareholder using the property. Also, French accounting will need to be carried out for the foreign company and a French corporate tax return filed with the French tax administration.
 Children benefit from an exemption allowance of 100 000€ per child and per parent.