France: Property Market - Stamp Duty: A Restraint On Property Investment In France?

Last Updated: 1 June 1995
The unusually high rate of stamp duty appears to be one of the major restrictions on investment by foreign buyers and institutions in the French property market. Indeed, the fact that the acquisition of a building for commercial use (hotel, offices, shops, etc...) is subject to stamp duty at a rate of almost 19%, while, for example, in Great Britain the rate is 1%, is enough to make most investors, apart from the most optimistic, hesitate. At the moment optimism is not really the mood in this sector.

Indeed, the purchaser of buildings who has paid stamp duty at the above mentioned rate will have to wait until his investment has increased by 20% in order to simply recover the purchase price. To redress this drawback, the purchaser will exact a higher return. When making a purchase offer he will take into account the impact of this duty and it will have repercussions in the price he is prepared to pay. This situation leads to a certain stagnation, if not standstill, of the property market.

The fact that stamp duty can be deducted from the purchaser's profits - if these profits are not sufficient to absorb the amount of the rights the resulting deficit can be carried over for five years - is slim consolation. Indeed, most investments do not produce sufficient profits in the first five years of working to effectively absorb the stamp duty.

Property professionals have often drawn the attention of the authorities to this situation and periodically (during election times?), promises have been made to lower the rates to a more acceptable level and more in line with the practice in other developed countries.

However, if we look more closely at the possibilities offered by tax law, we can see that there are many ways in which one can in all legality avoid, or at least considerably reduce the impact of stamp duty.

The sale of "new" property, i.e. property, the construction of which has been completed for less than five years, will, in case of the first sale after completion, be subject to VAT at the current rate of 18.6% (this rate will also apply to the second sale if the first sale was made to a property dealer).

The main attraction in an operation submitted to VAT lies in the fact that this tax can be totally recuperated, generally fairly soon after the sale, on the condition that the purchaser is himself subject to VAT for all his business activities.

Most buildings, at least in the commercial sector, are owned by companies. Nowadays it is possible to acquire 100% shares in a property company without running any risks of requalification on the fiscal level. This is how, recently, a certain number of large buildings changed hands through the assignment of shares. Buying shares in a company, rather than the building, entails far lower stamp duty. Thus, if the owning company is a public company (S.A.), the assignment of shares will only entail transfer rights for about 1%, limited to 20,000 FF. per transfer (and even this small amount will not be due if the transfer is made just by a transfer order). If the owning company is a limited liability company (SARL) or a civil company, the assignment of shares of such entities will be subject to stamp duty at a rate of 4.80%.

Of course there are a few drawbacks in buying shares in a company rather than a building, but these can be smoothed away with an appropriate legal construction.

As an example, the interest on loans contracted by the purchaser in order to acquire a building can be deducted from the pre-tax profit on the condition that the loans (even those contracted abroad) had been granted for the needs of the acquisition. Since the introduction of tax integration, in the case where the purchasing company holds 95% or more of the shares of the owning company and on the condition that both companies are French, the purchasing company could opt for the consolidation of its results with those of the owning company. In this way the purchasing company could receive the pre-tax results of the owning company and could deduct the interest on the contracted loans from its taxable income. Therefore through tax integration, interest on loans can effectively be deducted from rents received from the building, whether they have been acquired directly or whether the acquisition was made indirectly, as, for example, by way of a share assignment.

Another drawback connected with buying shares rather than a building: taking into account the very limited character of legal guarantees covering the sale of shares it is absolutely necessary to conclude an agreement called a "liabilities warranty" ("garantie de passif") at the same time as the sale of the shares. This contract should protect the purchaser against the risk of possible pre-existing corporate liabilities appearing after the share-transfer, such as a tax demand or legal action against the company, which would have the effect of increasing the debts or reducing the assets of the company. Here again, a well drawn up liabilities guarantee should mitigate the problem.

The situation is more difficult when a company owns several buildings and the purchaser is only interested in one of them.

It should be noted that the contribution of a building by a company subject to corporation tax to another company submitted to the same tax is now only taxable at a fixed rate of 500 FF. We saw earlier that if the company benefiting from the contribution is a public company, the transfer of shares will be subject to a duty of 1% limited at 20,000 FF.

Can one, in such a case, rather than sell one of the buildings, make a contribution of it to a public company specially created for the purpose and then transfer the shares?

It is difficult to reply positively for the moment, although the only caselaw that we have been able to discover shows a glimmer of hope. In a recent matter, the Tax Authorities considered that such an operation would constitute an abuse of law and should be requalified as a sale of the company's assets and therefore liable for stamp duty. The Cour de Cassation rejected these claims. It is true that this matter concerned the contribution of a department of an industrial group. Even though the same principle should apply in the case of the contribution of a building, there is nothing to prevent the Tax Authorities from attacking this sort of operation again with the motive that the exclusive aim is to evade transfer rights. However, it is possible that taking into account the present situation of the property market, and faced with the position adopted by the Cour de Cassation, the Tax Administration would soften their position in this respect. While waiting for other decisions or a decisive stance taken by the Tax Administration on this point, one would have to tread very carefully.

It could be quite different if a "joint-venture" was to be concluded, say, between two investors. In this case nothing would stop, in our view, the company from contributing one of its buildings to a company specially formed for this purpose, and transferring, for example, 50 % of the shares to its partner.

In our opinion, taking into account the fact that the aim of such an operation would not be exclusively fiscal but would be to constitute a partnership, any attempt at requalification by the Tax Administration would be doomed to failure. Consequently the combination of a reduction of the contribution tax to 500 FF., added to the fact that it is possible to eliminate the problems resulting from a share acquisition, gives an indication of interesting possibilities.

The special situation regarding foreign pension funds

A certain number of foreign pension funds have been actively interested in property investment in France and, once again, tax regulations seem to do everything to dissuade them. It is worth recalling that these investors can benefit from a special tax treatment which can sometimes go as far as a complete exemption from French tax.

First of all, foreign pension funds can benefit from the same tax reductions on corporation tax as their French equivalents on the condition that the French Tax Administration recognises their character as a non-profit making organisation. In this case, corporation tax would be, at worst, reduced to 24%. Then, if the investment is structured through a civil company, the profits arising from the rent of buildings in France would be completely tax free. This unique situation results from a legal vacuum which has existed for quite a few years and which the Tax Administration does not, to the best of our knowledge, intend to fill. Indeed it periodically reaffirms its position when questioned on the subject.

Taking into account the fact that most foreign pension funds could benefit from a similar situation in France, this should encourage them to invest in France.

Conclusion

In a few examples - and there are many others - we have been able to see that the impact of stamp duty can be considerably softened. Nevertheless we hope that the new Government, for whom the revival of the property market is a priority, will deal with this problem.

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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