Canada: How To Choose The Right Tax Structure When Purchasing A French Residential Property

Last Updated: November 18 2016
Article by Frederic Mege

Many wealthy individuals and families own a secondary home in France.

With low rates of tax in certain countries, one could be excused for not attaching enormous importance to tax issues. Sadly, the French tax environment is not so benign and failure to adopt the right structure of ownership can have costly tax consequences, in particular in respect of valuable properties.

In order to limit the tax consequences, it is essential to consider the tax aspects at the early stage of the acquisition process and definitely before completion. Further, depending on the structure of ownership, the owner might face various tax issues, including, among other things, corporation tax when a company is used and trust issues when a trust is involved.

We will address here some of the main issues that people purchasing a French residential property should consider.

1) Properties owned through a French or Monegasque civil company (an "SCI" or "SCP")

For French tax planning purposes, a French property can often be owned through a French or Monegasque civil company ("SCI" or "SCP"). These are the types of company most commonly used to own residential properties.

In particular, the use of a Monegasque SCI or SCP might help to mitigate French inheritance tax which can reach a rate of 45% on transfers in the direct line of inheritance (i.e. transfers to children). Death transfers between spouses are not taxed. For technical tax reasons, residents of CIS countries should own their French properties through a Monegasque SCI or SCP (rather than a French SCI) to mitigate or avoid their potential French inheritance tax exposure. Indeed, when a French SCI is used, it has to be structured with a bank loan to reduce the potential French inheritance tax liability, whereas such a bank loan is not strictly necessary when a Monegasque SCI or SCP is used.

In addition to the tax benefits, an SCI or SCP allows for a simple structure of ownership which does not require a lot of formalities or costs. Indeed, an SCI or SCP which does not generate any income and whose sole activity is to provide its shareholders with the free use of the French residential property is, without doubt, the most simple and least expensive company to run.

Provided that some tax formalities are undertaken on constitution, the ongoing filing obligations can be minimal (or even non-existent). There is, in principle, no need to annually file an income tax return for the SCI or a 3% tax return. In practice, the main formality which should be carried out is for the company to have its annual financial accounts regularly prepared; however, the cost of preparing them is quite negligible. These accounts are crucial to establish the financial situation of the company for French tax purposes on an annual basis.

As these accounts might be requested by the French tax authorities within the course of a tax reassessment, we recommend that they are prepared and signed off by a chartered accountant ("expert comptable").

2) French Wealth tax

Non-French tax residents are subject to wealth tax on their French sited assets, if the net value of these assets exceeds €1,300,000, at the following progressive rates:

Net taxable value of the French sited assets Rates
Up to €800,000 NIL
Between €800,000 and €1,310,000 0.50%
Between €1,310,000 and €2,570,000 0.70%
Between €2,570,000 and €5,000,000 1%
Between €5,000,000 and €10,000,000 1.25%
Above €10,000,000 1.50%

Shares in foreign companies owning French real estate are considered as French sited assets under French tax law.

Wealth tax is self-assessed. When the €1,300,000 threshold is reached, taxpayers must lodge a return disclosing the value of their assets and pay the tax due.

As for French inheritance tax, solutions exist to avoid or mitigate wealth tax such as, using debts (third-party loans but not shareholders' loans) or splitting the ownership of the property between different shareholders (e.g. parents and adult children of the same family). In some cases, when the property has already been purchased and has substantially increased in value, restructuring the ownership and/or the debt may be envisaged to reduce future tax liabilities (including wealth tax and inheritance tax liabilities).

However, unlike French inheritance tax, only bank loans and true third-party loans might help to reduce wealth tax liability. Therefore, when a Monegasque SCI or SCP is used, while a mere shareholder's loan will help to mitigate the potential inheritance tax liability, a bank loan is still required for the wealth tax liability. Taxpayers will have to do some calculations and decide which is the most cost effective solution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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