Private client tax: planning for cross-border real estate issues

Real estate is static in a moving environment, which raises specific international challenges. Planning is therefore paramount. This essay focuses on the main considerations for non-resident clients investing in French real estate, notably upon the acquisition (I), during the holding (II) and at transfer of the asset (III).

I. Consequences upon the acquisition of the asset

Acquiring real estate in France begins with identifying the desired property and engaging in a thorough due diligence process, with the help of local real estate agents if needed. Once the property is found, a preliminary contract, often known as a “compromis de vente”, is signed with the owner, followed by a legally mandated 10-day cooling-off period. The investor has to determine how to finance the acquisition (A). The final purchase is then executed via a notary deed, or “acte authentique”, which transfers ownership to the buyer. At this moment, the price will be paid and taxes levied (B).

A. Financing the acquisition

The investor may finance its French real estate purchase through mortgage loans from French banks or from banks in its State of residence, comparing interest rates and currency exchange rates. Collateral may be required, noting that French banks may have specific requirements for non-residents, such as additional documentation due to Know Your Customer (KYC) and anti-money laundering regulations. Life insurance policy collateral might facilitate access to the loan.

Moreover, the interposition of a personal holding company to acquire the asset could notably increase the investment capacity and offer further leverage. The investor may grant a shareholder loan or take a bank loan, using the shares as collateral.

However, the indirect acquisition of a real estate asset should always be regarded carefully. For example, within the context of a further adoption of the ATAD3 European Directive, a foreign personal holding company might be presumed a “shell company”, notably if receiving more than 75% of its income from the rental of the French real estate. The company would therefore have to file a report to demonstrate its economic rationale and the absence of a tax rationale.

Furthermore, the acquisition through a trust mechanism might lead to further tax liabilities and reporting requirements, as it is an unknown concept in French civil law and French law provides specific rules for trusts located outside France. Once financing has been obtained and the acquisition plan defined, the deed is signed and taxes are paid.

B. Registration and notary fees

The buyer has to bear both the registration and the notary fees that are settled on the price of the asset (approx. 7%).

• Registration fees rates depend on the localities concerned and the kind of asset sold (future or present asset). For an already existing asset, the general rate is approximately 5.81%.
• Notary fees are progressive, with an applicable percentage rate. Between 0 and 60,000 € the rate is between 1.064% and 3.87%, and above 60,000 € the applicable rate is 0.799%. VAT is due on notary fees.
• In addition to the settled fees, notaries may also invoice additional discretionary fees for the completion of formalities, and annex fees, including third-party actions and legal publication.

Such taxes and expenses are usually not covered by double tax treaties.

II. Consequences during the holding of the asset

Once acquired, the investor may rent it, leading to the taxation of the rental income (A). Other taxes and requirements are due regardless of the use of the property (B).

A. Rental income

Non-French tax resident individuals are taxed in France on French-source income only, notably deriving from French real estate assets (1), or from foreign companies subject to corporate income tax in case of investment through a personal holding company (2). Double tax treaties concluded with France usually provide that income from immovable property is taxable in the State in which such immovable property is located.

1. For an individual

French-source rental income would be subject in France to personal income tax (PIT) at the progressive rate up to 45% (with a minimum rate for non-French tax residents of 20% to 30%) and to social surtaxes at a flat 17.2% rate. Note that non-French tax residents affiliated to the mandatory social security scheme of an EU member state are only liable for the solidarity levy (Article 235 ter of the FTC) at a rate of 7.5%, excluding CSG and CRDS (the so-called “De Ruyter” regime).

In case of furnished rental, two tax regimes are distinguished: professional furnished renters and non-professional.

• Are considered professional furnished renters (“loueur meublé professionnel”, LMP) for income tax purposes the renters who cumulatively meet two conditions stated in Article 155 of the FTC: the gross annual rental income exceeds 23,000 €, and it represents more than 50% of the net professional income of the tax household subject to income tax. For non-French tax residents, the preponderance of income is determined by taking into account only the income taxable in France and not exempted.
• When the conditions are not fulfilled to be considered a professional renter, the renter is by default considered a non-professional renter (“loueur meublé non professionnel”, LMNP).

In both cases, the investor may deduct from income all expenses relating to the operation of the property (e.g. works, loan interest, depreciation and amortization). However, under the LMP regime, the investor is liable to social security contributions (a variable rate between 35% and 40% of profits, with a minimum) and, in the event of disposal, the professional capital gains regime applies: depreciation on the property will be deducted from the acquisition price, which will increase the amount of the capital gain.

Furthermore, under both regimes, the taxable income may be determined after applying a flat deduction (the “micro-BIC” regime) or by deducting the real expenses.

• To be eligible for the micro-BIC regime, the annual turnover must not exceed 72,600 € excluding taxes. A deduction of 50% then applies for furnished rentals, or 71% for bed and breakfast or furnished tourist accommodation.
• Under the real regime, the investor may deduct establishment costs, acquisition costs, loan interest, management costs, insurance costs, property tax, deductible CSG, maintenance and repair costs, co-ownership costs, depreciation of the building and furniture, and social contributions paid. Note that the balance sheet has to be drawn up by an accountant.

The taxpayer should declare its activity to the French tax and social authorities and file its annual French tax return.

2. For a personal holding company

A foreign company renting a French real estate asset might be subject to French corporate income tax (CIT) on the profits derived from this rental. Profits generated are subject to CIT at a rate of 15% up to 42,500 € (for tax year 2024) and 25% above, plus a contribution on rental income of 2.5% on income derived from the rental of buildings built more than fifteen years ago.

When subject to CIT, the taxable result will be determined and paid at the level of the company, taking into account certain deductions including the amortization of the asset. The company will have to keep accounts and file an annual CIT return (form n°2065).

Notwithstanding the above, the concept of “acte anormal de gestion” (an abnormal act of management) allows the French tax authorities (FTA) to deny tax deduction for expenses which are not related to normal acts of management or could not be deemed to have been incurred for the benefit of the business. In this context, not charging rent for the provision of accommodation is regarded as such: the rents that the company should have received would then be subject to CIT. Therefore, if the real estate asset is acquired by a personal holding company subject to CIT and rented to the investor, the investor would be required to pay rent, on an arm’s length basis, for the time they use the property.

The investor has to be aware of the other impacts resulting from its holding to be fully compliant with the French tax and legal environment.

B. Other taxes and requirements

1. Property & occupancy taxes

Property tax is due if the investor owns the property on 1 January each year, noting that an additional business property tax (CFE) may apply in case of rental activity. Occupancy tax is due if they can use the property on 1 January each year. There is no reporting requirement specific to those taxes, except for the initial declaration of the real estate on the French tax authorities’ website.

2. French real estate wealth tax (IFI) and 3% tax

The IFI is due as long as the real estate assets held directly or indirectly (i.e. through a company) by a tax household exceed 1.3 million € for their net value as of 1 January each year. For non-French tax residents, only French-based assets are taxable.

In addition, a specific exemption from real estate wealth tax on any assets located outside France exists for individuals who move their residence from abroad to France and who have not been French tax residents during the preceding five civil years. This measure applies until 31 December of the fifth year following the year of the transfer of residence to France.

The IFI is a progressive tax up to 1.5% above 10 million € of net taxable assets. Note that holding the asset indirectly may offer a leverage effect, as the taxable basis will not be the asset itself but the company’s shares. Taxpayers liable for real estate wealth tax must indicate their net asset value on the 2042-IFI form filed with the annual income tax return; the tax administration then calculates the tax, which must be paid after receipt of the assessment.

Moreover, a 3% tax on the market value of immovable property applies to all legal entities that own real estate property or rights located in France on 1 January of the tax year, except if an annual return is submitted.

III. Consequences at transfer of the asset

The end of the ownership may be the consequence of a disposal (A) or of a gift/succession (B).

A. In case of disposal

1. For an individual

Capital gains deriving from the disposal of a French real estate asset are taxable at a PIT rate of 19% and subject to social surtaxes at 17.2%. Capital gains are reduced for each year the property is held from the fifth year of ownership, leading to a full exemption after 22 years for PIT and after 30 years for social surtaxes.

Other exemptions may apply, notably for expatriates. Only French tax resident individuals may benefit from a total exemption for gains derived from the sale of their main residence. However, non-French tax resident individuals may benefit from an exemption up to 150,000 € on the first sale during the five years following the year in which they transferred their tax domicile outside France. Note that a 2% to 6% supplementary tax applies to capital gains exceeding 50,000 €.

However, under the professional furnished renter regime, the capital gain would be subject to PIT at the progressive rate (up to 45%) or, after 2 years of ownership, at a flat rate of 12.8%, with 17.2% of social surtaxes still applying. A capital gain tax return (form n°2048-IMM) should be filed within one month following the disposal deed.

2. For a personal holding company

In case the real estate asset is sold by the personal holding company subject to CIT, the real estate capital gain would be directly added to the company result and subject to CIT. The real estate capital gain or loss is calculated as the difference between the sale price of the property and its net book value:

• Sale price: the price stipulated in the sales deed;
• Net book value: the acquisition price of the asset, reduced by the amortization/depreciation realized since acquisition, therefore increasing the amount of the taxable capital gain.

Note that there is no deduction for holding period in this hypothesis.

B. Upon gift/death and marital matters

The donation or succession of a French real estate asset, even if held indirectly, should always be taxable in France. According to Article 750 ter of the FTC, as long as the deceased/donor and the beneficiaries are French tax residents, the worldwide inherited/gifted assets should be taxable in France. However, when both the deceased/donor and the beneficiaries are non-French tax residents, only the French-based inherited/gifted assets should be taxable in France. Inheritance/gift tax is calculated on the net value of the asset(s) transferred.

In direct line, rates range between 0% and 45%, and a 100,000 € allowance is applicable every 15 years per child and per parent. It should be noted that, in France, the specific concept of dismemberment of ownership might be useful when planning an estate: Article 669 of the FTC provides for a reduced value of the usufruct and the bare ownership for inheritance tax purposes, based on the age of the usufructuary. Surviving partners (spouses or partners in a civil union, “Pacte Civil de Solidarité”, PACS) are exempt from inheritance tax.

Moreover, under the French marital regime, upon the death of one spouse the surviving one may be granted the whole property of the asset, or at least the usufruct. The extent of the spousal usufruct covers personal use or the collection of proceeds from the property, such as rental income; it is, however, governed by the stipulation that the usufructuary maintains the property and does not devalue the substance of the asset (Articles 589 to 591 of the French Civil Code). In France, the marital regime is, by principle, the community of property, which presumes that assets acquired during the marriage belong to both spouses.

Foreign investors might be under a different regime, which can affect both ownership rights and community/estate sharing. Opting for a postnuptial modification or interposing a personal holding company can safeguard their interests.

Finally, in terms of inheritance, in case of direct ownership, the real estate asset falls under the complex rules of “indivision” and cannot be divided equally, which frequently leads to the sale of the property. This situation has many disadvantages that are sources of instability and blockage. In contrast, the division of the shares of a company can be a satisfactory solution, both at the level of the transfer and of the management of the property: the by-laws may organize the management and a separation of ownership and power.