France: Real Property Law in France

Last Updated: 5 April 1995

Acquisition and development of commercial premises in France made more attractive for multinationals.

The French government has recently made France more attractive for foreign investors wishing to create jobs in France.

The SWATCHMOBILE project is a typical example of this.

The town of Hambach-Sarreguemine in Lorraine was selected for the SWATCHMOBILE project by a German investor after he had obtained the following from the government and local authorities:

- financial aid amounting to 17% of an investment of approximately 2.5 billion Francs.

- sale of land prepared for construction for less than 15 Francs per square metre, and

- temporary tax breaks.

Also, the position regarding exchange controls is now more favourable since they effectively no longer exist.

The major concern of a foreign investor planning to build commercial or industrial property in France for his own use is, naturally, to find a site which allows him to start up the project under the most advantageous financial and fiscal conditions.

I. Optimising the tax and financial aspects of the investment.

- The choice of tax structure

Various tax structures may be envisaged depending on investment and tax considerations.

Direct investment by a foreign company or subsidiary is not a satisfactory solution for a company intended to carry out industrial or commercial activities. Also, the subsequent sale of such a property would entail withholding at source of one-third of any capital gains realised.

If the group which wishes to build in France owns its own pension fund, the project can be carried out rough that fund. If certain conditions are met, in particular the investment must be carried out through SCI which is controlled by the pension fund, any profits earned by the SCI, including capital gains, will be tax-exempt.

Tax considerations also effect the choice of legal form considerations. The two common legal forms of company are taxed differently. These are:

- firstly, transparent companies whose profits are taxed directly at partner level, with losses deductible from partners' taxable income. There are usually no withholdings on profits retained by foreign partners, and

- secondly, companies which are not fiscally transparent whose profits are taxed directly at company level at a rate of 33.33%. Dividends paid to foreign partners are subject to withholding at source of 25% though this amount is substantially reduced in several international tax conventions. Under some tax conventions, a tax credit may also be granted to the partner in order to reduce the double-taxation** of the same income at company and partner level.

The legal form taken by the company may also be important when the profit is earned by a joint venture between two or more companies. French company law, which was often considered too restrictive and an obstacle to the creation of French joint ventures, has been greatly relaxed by the law of January 3, 1994. This law created a new type of company called an SAS where shareholders' agreements for the management of the company and the distribution of profits are almost entirely unrestricted.

However, the choice of a favourable tax structure is not the only way to optimise an investment. The financing technique applied is also a determining factor.

Financing and implementing the project

A) Classic loans

The immediate advantages of the classic loan technique is that instalments can be deducted from the taxable profits.

B) "Credit-Bail" Agreement - leasing with the option to purchase

These agreements are of particular interest to companies which do not want to acquire the land immediately but wish to keep open their option to acquire it in the future without affecting their lending capacity.

Under such a property leasing agreement, a company leases out unequipped commercial or industrial property which it has bought or built and gives the lessee the option of becoming the owner on the expiry of the lease. Generally, the lessee chooses the site and the type of construction and the lessor merely finances it.

This type of agreement is interesting since the property investment can be financed 100% without reducing the investor's investment capacity as it is recorded off the balance sheet. The property leasing agreement is also advantageous from a tax point of view since, for the entire term of the lease, the lessee can deduct the rent he pays to the lessor from his income, rents being considered as operating costs.

C) Construction lease

This is the last financial technique I will cover. Construction leases are signed for a long period (18 to 99 years). The lessee undertakes to build on the lessor's land and to keep the buildings in good repair for the entire term of the lease. Upon expiry of the lease, the buildings revert to the lessor, often without compensation, unless the parties agree otherwise. The lessor has direct rights to the property during the entire lease. This means, for example, that he can mortgage it to raise funds. The lessee can also depreciate construction costs by recording them as assets in his balance sheet.

II. Finding a site and complying with town planning and building constraints.

- The real estate agent

Foreign investors can, and often do, turn to real estate agents when looking for a suitable site. Real estate agents are subject to strict regulations and act as intermediaries between the sellers and buyers of real estate (land, buildings, planned buildings). According to the laws governing the profession in France, real estate agents must have a written agency mandate clearly defining their mission and the amount of commission due on completion of the transaction.

- Town planning constraints

Unfortunately, the best site in geographical and financial terms is not always the best when it comes to town planning regulations.

In their eagerness to attract investors, and particularly foreign investors, municipal authorities no longer hesitate to bend their own planning regulations.

These regulations are mainly found in the land use plans (POS) for each municipality. These plans define the urban areas, the zones to be built on in the future and nature zones to be protected. For each zone, the authorities decide the type of constructions allowed, their density, their outward appearance and the conditions for their integration into the environment.

The existing land use plan can be adapted to the project if necessary. However, as this is a complicated and politically sensitive procedure, the authorities generally prefer to use another method, which is the creation of special zone (ZAC). It is up to the municipal authorities to decide upon and to create any ZAC.

Once a ZAC has been created, the authorities can expropriate the necessary land. They can then sell it and entrust the preparation of the land and/or construction of the ZAC to the investor. This technique is also used if the investor already effectively owns the land in which case the aim is for the zone to be developed rapidly at the investor's risk. The municipality can take charge of installing some of the necessary utilities and services to the extent that this remains in the common interest.

Undertaking the construction

Once the project has been accepted by the town planners, the foreign investor has two alternatives: he can either purchase a building from plans (sale after completion) or he can carry out the construction himself by engaging various specialists each with a specific task to fulfil.

These specialists would include an architect, whose principal task is to lodge the planning permission application in accordance with the preliminary plans drawn up with or approved by the constructor. The architect is responsible for ensuring that the project complies with town planning regulations.

If he does not have the necessary skills, the Constructor may entrust the management of the construction and building work to one or more project managers.

The actual construction work can be carried out by a contractor on the basis of a works contract. The contractor can then sub-contract all or part of the work.

One of the peculiarities of French construction law is the existence of public security guarantees. The parties cannot waive these guarantees which relate to damage to the property caused by any party involved in the construction.

The ten-year guarantee, runs ten years from the delivery date. This covers any construction defects rendering the building unusable. Defects in equipment and utilities are subject to a two-year guarantee which, in practice, is largely covered by the ten-year guarantee.

These guarantees cannot be dissociated from the insurance for the parties in the construction, which is two-fold. Liability works damage insurance covers the cost of damage repair falling under the scope of the ten-year guarantee and operates regardless of liability. Liability insurance on the other hand, insures each party's liability. Anyone who may incur liability under the ten-year or two-year guarantees must take out both damage and liability insurance.

Generally, on major building projects, a multiple or unique policy is taken out for the project and a single insurer insures the Constructor and all the other parties.

In conclusion, investment projects for building commercial or industrial property for use by the investor touch upon almost every aspect of business law. In the past, France had the reputation of being a country where laws and regulations act as a hindrance to initiatives and ambitious projects. This situation is currently changing. Laws and regulations are being updated and the government and local authorities are becoming more flexible and cooperative. All this contributes to making France more welcoming and attractive for investors wishing to undertake major projects.
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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