Taxation and legal structuring of a real estate investment in France

Acquisition costs (“notary fees”).

The buyer, whether French or foreign, must pay the purchase costs when signing the authentic deed. These fees mainly include registration fees (taxes paid to the State and local authorities) and notary fees. For an old property, the total represents about 7 to 8% of the purchase price (compared to ~2 to 3% for a new home subject to VAT). No mark-up is applied because the buyer is a foreigner. In practice, on €100,000 in prices for example, you have to plan for ~€7,500 in additional fees to cover taxes and notary. These fees are paid by the buyer to the notary who pays them for the tax part to the Public Treasury. It is important to note that the notary may take charge  of other disbursements on behalf of the buyer (cadastral extract, mortgage statement, etc.) but their budgetary impact is marginal. Foreign investors simply have to integrate these percentages into their financing plan (sometimes forgotten due to lack of knowledge).

Annual taxation: local taxes and wealth taxes.

Owning a property in France means paying property taxes (local tax on built and unbuilt properties) every year. This annual tax, payable by the owner on 1 January of the year, varies according to the municipality and the surface area/consistency of the property. Historically, a housing tax was added, but this has been abolished for primary residences – however, a foreigner who owns a second home continues to pay the housing tax in many municipalities, sometimes with a surcharge on vacant or occasional housing (especially in large cities). There is no differentiation in rates between residents and non-residents for these local taxes. On the other hand, the France has instituted a real estate wealth tax (IFI) that can concern wealthy investors: if the net value of all the real estate held in France by the household exceeds €1.3 million, a progressive tax is due each year. Non-residents are not exempt (the only difference is that they only count France property). Example: a foreign resident owning two apartments in Paris with a total value of €2 million will have an IFI to pay in France each year, calculated on the share above €1.3 million. It is therefore crucial to assess your overall assets and possibly seek optimisation advice (life insurance, dismemberment of ownership, etc. can reduce the IFI base). In short, real estate investment in France comes with recurring tax charges that should be included in the profitability of the project.

Rental income and tax treaties.

Many foreign buyers buy to rent (rental investment). Rents derived from a property in France by a non-resident are taxable in France, according to the income tax scale (with a minimum rate of 20% for non-residents on the taxable bracket) unless tax treaties apply. Most double taxation treaties stipulate that real estate income is taxed in the country where the property is located, i.e. in France, often with a tax credit in the investor’s country of residence to avoid double taxation. It is therefore important to declare your rental income in France every year, even if you live abroad. In practice, an expatriate owner will have to file a French tax return (non-resident form) for his rents, and he will be able to benefit from the same deductions as residents (loan interest, works, etc. in the real regime) in order to pay tax only on the net income. Please note that a withholding tax (non-resident deduction) is often made by the tenant or the agency on the rent, which constitutes a tax instalment. It is better to be accompanied by a chartered accountant familiar with non-residents to optimize these obligations.

Taxation of capital gains in the event of resale.

When a foreigner sells a French property with a capital gain, he or she is subject to  French real estate capital gains taxation, in the same way as a resident. The basic tax rate is 19% on the net capital gain, with allowances for the period of holding (total exemption after 22 years for tax, and 30 years for social security contributions). In addition, there are social security contributions (17.2%) – however, since 2015, residents of the EU, EEA or Switzerland have only paid 7.5% of social security contributions (instead of 17.2%) thanks to the abolition of the CSG/CRDS for French non-affiliates. Non-EU nationals remain subject to 17.2%. In addition, sellers who are not residents outside the European Union must use an accredited tax representative at the time of the sale, responsible for guaranteeing the payment of the tax to the notaires.fr Treasury. This obligation entails costs (fees of the representative, often a specialised body), but is waived for EU residents. Due to the complexity, many non-residents ask their notary to calculate and declare the capital gain. International tax treaties generally provide that the capital gain on real estate is taxable in the country where the property is located – the investor will then have to declare the capital gain in his country of residence but benefiting from a tax credit equal to the French tax (according to the treaties). A concrete example: a Canadian investor sells an apartment in Lyon with a capital gain of €100,000 after 10 years of ownership. He will pay about 19% + 17.2% in France on part of this capital gain (30% allowance acquired in 10 years), while he will receive an equivalent tax credit on his return in Canada to avoid double taxation, in accordance with the French-Canadian tax treaty.

Choice of legal structure: direct purchase or via company (SCI).

Acquiring “directly” (in one’s own name) is not the only way for a foreigner. In France, it is common to create a Société Civile Immobilière (SCI) to hold a property. The SCI is a civil company under French law, fiscally transparent (by default to income tax) and dedicated to the management of real estate assets. For an international investor, the SCI has several specific legal and tax advantages:

• Facilitate joint ownership and family transmission. An SCI allows several people (for example members of an expatriate family) to hold a property together via company shares rather than in joint ownership. The articles of association organise the powers of management, avoiding the blockages of traditional joint ownership. Above all, it is possible  to gradually give or transfer SCI shares to your children, taking advantage of tax allowances on credit-international.com gifts every 15 years. This encourages a spread over time, optimising gift tax. Control of the property can be retained by the managing parents while preparing the succession. For a foreign family, the SCI is often an international wealth planning tool.
• Easing of the constraint of the French reserved share. Under French law, the children of the deceased are in principle entitled to a reserved share of any real estate located in France, which can contradict the testamentary dispositions of a foreigner (whose country of origin would allow him to bequeath freely to his or her spouse, for example). However, holding the property via an SCI changes the legal nature of the asset: it is no longer directly buildings, but shares (movable property). For a non-resident, this can make it possible to avoid the application of French inheritance rules and to transfer the property to the beneficiary of his choice. Indeed, “buying a property via an SCI avoids French laws on inheritance tax, which do not allow complete freedom to dispose of one’s assets”. As SCI shares are movable property, the estate may be governed by the law of the deceased’s last domicile (or the law chosen by him via the European Succession Regulation), offering greater testamentary freedom. Case in point: an expatriate couple living outside Europe buys a house in France via an SCI. Years later, one dies, leaving his sole spouse as heir, in accordance with their national law. Thanks to the SCI, the house is held via shares that are passed on to the widow – escaping the constraints of the French reserve that would have imposed a share on the children eventually. Thus, the property could be freely transferred to the surviving wife. In addition, in some cases, international inheritance tax treaties provide that company shares are taxable only in the country of residence of the deceased. If this country does not apply inheritance tax, the transfer of the French property via the SCI can be done without any inheritance tax in France. However, this optimisation is not universal and depends on each bilateral agreement.
• Taxation of capital gains and income identical to direct purchase. Contrary to some preconceived ideas, the SCI does not provide an immediate tax advantage on rents or capital gains: being translucent, the taxation is done in the hands of the partners according to their own situation (resident or non-resident). The capital gains regime in the event of the sale of SCI shares is calculated on the underlying fraction of the building, with no loophole. On the other hand, the SCI may allow you to choose corporate income tax (corporate income tax option), but this option is rarely favourable for a foreign individual unless there is a very specific project, because it complicates taxation (capital gain heavily taxed on exit).

In short, the structuring of an SCI appears to be a wise choice for many international investors seeking legal flexibility and estate preparation. However, it is necessary to be aware of the associated obligations (articles of association, simplified accounting, annual declaration of results, etc.). The support of an advisor (notary or lawyer) is essential to create the SCI and optimize it according to the personal situation and the applicable tax treaty. Finally, it should be noted that it is not mandatory to go through an SCI: a foreigner can buy directly. But in the case of a purchase by several people or a transfer objective, the question deserves to be asked from the start. An indirect advantage: the resale of a property held by an SCI can be done by transfer of shares, avoiding the need to re-enter into an expensive real estate deed, even if the administration is careful to tax the “disguised real estate sale” despite everything.