The tax consequences of buying a French property with a foreign company

Buying a second home is a dream for many, especially when France is involved with its magnificent Alps, its famous French Riviera, its city of light and so on…

Once you’ve found the perfect property, you’ll have to deal with a lot of practical, legal and tax issues, including the famous one: buying in your own name? With a company? We will try to give you some tangible answers.

The « 3% tax »

Its real name is the Taxe sur la Valeur Vénale des Immeubles détenus en France (TVVI), and it is better known as the 3% tax. The reason? Under certain conditions, foreign owners of French properties must pay an annual tax equal to 3% of the value of the property. Every year.

Don’t panic: in fact, most of these owners are exempt from paying the said tax in exchange for the commitment to submit an annual tax return regarding the actual owners of the property using the Cerfa 2746.

It is strongly recommended that you do not forget to submit this return, otherwise you might be asked to pay the tax which can be a very costly omission.

Benefit in kind and corporate tax

French law, both in the General Tax Code (Code Général des Impôts) and in case law, states that all operations carried out by a commercial company on French territory must be subject to French corporation tax.

This means that if the property is rented, the company must obviously keep commercial accounts according to French rules, file annual accounts and pay French corporation tax where applicable. This makes total sense, I agree.

The part that is a little more surprising for foreign owners comes from the notion of « benefit in kind« : in fact, French law considers that in the case where the property is occupied free of charge by the operator, the partners or any other person, a benefit in kind must be reintegrated into the accounts in order to pay tax on the profits that should have been recorded.

In practical terms this means that the foreign company will have to book « fictitious » income corresponding to the rent it would have received if the property had been rented under « normal » market conditions and then pay tax on it.

Very few owners of foreign companies in this case actually declare these benefits in kind, which does not prevent the tax authorities from adjusting a certain number of them each year with calculation methods that are not very favourable to the owners and which ultimately result in large sums to be paid, which seem very unfair to the unfortunate owners…

Foreign companies & capital gains tax

Last but not least, the last purely tax consequence of the purchase of a French property with a foreign company concerns the calculation of the capital gain when the property is sold.

We have indeed read a number of absurdities on the Internet, such as the fact that these companies are totally exempt from capital gains tax for example – this could not be further from the truth!

In fact, French tax law requires that any capital gain made on a property located in France must be declared and paid to the French Treasury: thus no owner escapes it, regardless of their nationality, whether they are a company or in their own name.

The particularity of foreign company owners comes from the calculation of the capital gain itself: indeed, foreign companies are deemed to be commercial companies having opted for the French corporate tax for the calculation of taxes and duties. As far as the capital gain on the sale of real estate is concerned, it will therefore not benefit from the calculation for « private individuals » but from the calculation for companies subject to corporation tax (Impôt sur les Sociétés), which is totally different.

Without going into too much detail about the calculations so as not to make this article more indigestible than it already is, let us just say the following:

• There will be no deduction for the length of the holding period
• The property will be depreciated for accounting purposes, and the depreciation (whether or not it has been taken) will be added back into the calculation of the final capital gain
• The capital gain will be taxed at the French corporate tax rate of 25%.

Let's take a concrete example to help you understand the differences in tax treatment:

Mr X, a UK tax resident, bought a lovely property in Normandy 20 years ago for €200,000. He has not carried out any major works since then, simply maintenance work.
He is selling the property for €300,000.

If Mr X had bought his property in his own name, he would pay €3,998 in capital gains on the sale of his property.
If Mr X had bought his property with a UK company, he would have to pay €45,000 in corporation tax...

The purpose of this article is not to prevent any purchase of French property with a foreign company but simply to warn our readers and their advisers of the (heavy) tax consequences that would subsequently and irreversibly occur.

 

We advise all potential buyers to seek advice from seasoned professionals who are used to this type of arrangement: many real estate actors in France are not familiar with these situations and would not see the significant tax risk taken by their clients.

You can contact us on this subject at: info@theftr.fr to discuss in French or English with one of our experts.