The new tax rules contained in the local-development act and applicable from January 1, 1996 for realty leases are consistent with the decision made in December 1990 to gradually eliminate the special tax treatment of SICOMI's. All contracts made by a SICOMI after January 1, 1996 shall be subject to the new standard rules of taxation. The SICOMI treatment will accordingly be applicable only to contracts made before that date.
The new standard tax treatment is identical in general with the former tax treatment of leases granted by SICOMI's. The novelty is not so much the tax treatment it provides for, as the extension of a treatment applicable regardless of the lessor's tax status, regardless of the building's use, regardless of the lessee's activity in the building and regardless of the contract's term.
This tax treatment provides in particular:
- for a professional lessor (lending institution), for the option to fund a tax-deductible operating provision to take account of the difference between the sales price and net book value for the building and, as regards registration duty, taxation at the reduced rate of 0.60% of realty acquisitions by lease-back;
- for the lessee, for the option to treat as expenses the leasing fees, except those relating to acquisition of the land. As the land is deemed to be acquired last (after constructions, in particular), the fees at the end of the lease shall be recaptured for tax purposes. The lessee will also be required to add back, in the event of assignment of the lease, the portion of fees not deductible for the computation of the capital gain. This will be added to the cost of acquisition of the building by the lessee. The lessee will also be allowed the reduced registration-duty rate of 4.8% (plus regional taxes) on the realty purchase.
Contracts for terms in excess of 12 years made after December 31, 1995 shall be registered, payment of the land-registration tax of 0.60%; this shall put an end to the practice of failure to register such contracts.
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. For additional information contact Pierre Knoepfler on +33 (1) 46 93 70 00 or enter text search: "Ernst and Young" and "Business Monitor".
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