Capital Gains on Real Estate in France

Posted by admin in Property Investment, The Companies, The South of France | September 13th 2005

Disclaimer: Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of French tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.

Tax on Capital Gains on the Sale of Property in France

The following summary states the law for gains realised after 1 January 2004 on the sale of real estate, that is land and property. For gains realised before this date the “old” law applies see French Taxes and scroll down to “Capital Gains” subject to certain transitional provisions. Bilateral and connected sales are not considered below and are subject to a different regime.

On 1 January 2004 there came into force new regulations as to the tax treatment of capital gains that are a major reform of the taxation of gains made by individuals. The basic principles are similar to the law previously in force but the reliefs are more generous.

While the tax has been simplified, what follows is no more than a summary of some of the key elements :

When will it apply?

Capital gains made on the transfer of ownership of the property are subject to French capital gains tax and social taxes, the “CSG” and “CRDS”. A transfer of ownership will be a disposal of the asset by sale or an exchange for shares in a company.

The notaire instructed to act in the transaction is a public official. He will act as the tax collector and will withhold the tax due on the gain.

What is a “gain”?

Put simply, a gain is the difference between the original purchase price and the eventual sale price. The costs and expenses of the purchase and the eventual sale, and certain expenses incurred during the period of ownership can be deducted from the gain.
What is the position of residents?

If the taxpayer is resident in France for French tax purposes:
• a gain realised on the disposal of real property may have the benefit of allowances before being taxed at 26%; this figure includes social charges (CSG and CRDS) at 10%.
And the position of non-residents?

If you are non-resident for French tax purposes:
• But a resident of an EU member State, a gain realised on the disposal of real property will be taxed at a flat rate of 16%
• If you are a resident of a non-EU member State, the gain realised on the disposal of real property will be taxed at a flat rate of 33 1/3%

Are there any reliefs or allowances?

Yes. For French residents selling their home in France any gain might not be subject to tax, if the property was their principal private residence.

In certain circumstances a gain made on the sale of a second home might also be exempt, providing a number of conditions are satisfied, including that the individual does not own a principal residence or has been a resident of France for two years or more at any time.

Both French residents and non-residents might have the benefit of the following discount which is applied to a gain made on the disposal of real property, and is calculated by reference to the period of ownership:
• In the first five years of ownership there is no discount.
• In the following 10 years a discount of 10% a year is allowed, with the effect that after 15 full years any gain is not chargeable to tax.

For example, a property is sold after 9 full years of ownership. Any gain in the value will be discounted by 40% calculated as follows:

• Years 0 to 5 = no discount;
• Years 6 to 9 (4 full years at 10% a year = 40%).
• If the gain is €80,000 less 40% = €48,000 taxable gain at 16% tax = €7,680 tax

Certain works completed to the property might also be deducted from the gain, providing that the work was completed by a company or firm and the claimed figure is supported by receipted accounts. The cost of DIY work is not generally deductible, however, after five years of ownership the seller is allowed to add an additional 15% to the purchase price in place of the actual cost of works.

Work that is deductible includes extending the property, renovation and improvement work, such as a new kitchen or bathroom, but does not include decorative works such as painting, decorating and carpeting.
There are other deductions and allowances that are applicable in limited circumstances that we have deliberately omitted from this general summary.

From 1 January 2004 the re-evaluation tables, that sought to allow for the effects of inflation under the previous tax law, are no longer applicable.

Note: Subject to the transitional provisions, if certain assets were disposed of before 1 January 2004 the gain will be taxed under the law in force in 2003. When completing the tax declaration 2003 the “old” provisions will apply.

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Position stated is as at March 2004.

Please note: Taxation is a complex subject and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.

French Capital Gains Tax – New Rules for Property 2004

How have the Rules changed?

Before 1st January 2004 the gain was computed by the French resident taxpayer and included in their annual Tax Return Form 2042. There was no deduction by the notary on completion and to a certain extent the French Revenue relied on the honesty of the taxpayer. There was a special regime for non-French resident taxpayers. The notary dealing with the sale deducted 25% of the net gain made by non-resident individuals and 33 1/3 % made by non-resident companies and paid it direct to the French Revenue. There were regular arguments about whether invoices from non-French VAT registered builders could be deducted in working out the gain. The system has been simplified and both French and non-French resident taxpayers are now broadly treated in the same way as non-residents: deduction by the notary on the sale.

What are the new rates?

The rate of Capital Gains Tax (CGT) for both French and non-French residents, who are residents of an EU country is 16% of the net gain. If you are French resident you pay an extra 10% in French National Insurance making the effective rate 26%. In other words non-resident’s tax rate has been reduced by 9%, which on the face of it should encourage more foreign purchasers in France and will probably drive up prices. Once the 16% has been paid the non-French resident individual taxpayer can have no further French tax liability.

From a tax perspective is French property attractive as an investment?

Yes very much so. The popular perception of France as a high tax country is out of touch with reality. In many cases France is a lower taxing country than the UK and from a tax point of view an attractive place in which to invest in property. The problem for UK investors is that UK CGT rates are now much higher than French CGT rates as you will see from the example below.

What are the rates if you are not a resident of a EU country?

The rate goes up from 16% to 33.3%. This is subject to any applicable Double Tax Treaty, which may improve the position. If you are not an EU resident and plan to buy a French property you need to think about a suitable EU, and probably French, vehicle to buy it in.

Does it matter if you are say an Australian national but a tax resident of the UK?

No, for these purposes the test is tax residency. There is however a surprising sting in the tail for non-EU nationals who live in an EU country and buy a second home in France. Under the new rules non-French residents are exempt from French CGT on any sale of a property provided they have lived in it and been French tax resident for at least 2 years at some time. You do not have to be a French tax resident when you sell the property. You are only allowed this exemption once and you can rent the property provide it is vacant when you sell it.

How does this affect a non-EU citizen who is a UK taxpayer?

Quite simply this two-year exemption does not apply to them. However a UK citizen who is an Australian tax resident qualifies.

Any other exemptions?

Yes. You are exempt from French CGT if you are in receipt of an old age pension or are an invalid. This applies even if you are a non-resident. This is subject to some fairly detailed conditions set out in the tax code. There are a number of other more detailed exemptions. The main residence exemption which is similar to the UK one and which can only apply if you are French resident appears below.

How is the gain calculated for individuals?

This is best illustrated by an example (which is one given by the French Revenue). On 20th January 2004 an individual sold a second home he bought 10 years earlier. No particular exemptions apply. He sold for €120.000 and bought it for €60,980. When he bought the property he had it rewired for €4,753 and changed the Central Heating the following year for €1,206.

EUR Comments

Sale price 120,000 Agent’s costs can be deducted. Other deductions are very limited
Purchase price 60,980
Purchase costs
(7.5% of 60,980) 4,574 7.5% is the default amount. You may be able to claim more
Works
(15% of 60,980) 9,147 Default amount is 15% no proof needed. Otherwise very restrictive and need proof
Amended purchase price 74,701
Gross gain
(120,000 – 74,701) 45,299
Reductions (5 years)
(5 x 10% = 50% x 45,299) 22,650 You deduct 10% for every year after the 5th. So after 15 years you pay no tax
Fixed allowance 1,000 €1,000 always deducted
Net gain 45,299 – (22,650 + 1,000) 21,649
Taxed at 16% 3,464 French and EU residents pay 16%
Non-EU residents pay 33.1/3%
National Insurance 2,165 Only French residents pay this

Who works out the tax and pays it over?

The notary dealing with the sale. He is required to complete a tax return and work out the gain. He pays the money to the French Land Registry and if there is a problem the land may end up not being registered. There is accordingly a lot of pressure on the notaries and I suspect in practice if they have any doubts they will hold back money due to the seller until matters are clarified. It is up to you to give him invoices for works. Although not in the legislation the notaries have been told not to allow as a deduction any invoices, which do not have a French VAT number on them. This is a problem for people who have informal arrangements with British builders and suppliers. A hard line will be taken here on the basis that the 16% tax is very low and UK owners are not paying the extra 10% French residents have to pay. However, there seems no reason to disallow costs incurred with bona fide British buildings and suppliers who provide an invoice with a British VAT number of it. If you have any difficulties please let us know.

Do non-French residents still have to appoint a French Inland Revenue approved tax agent to deal with their tax affairs when they sell?

Previously you had to do this and the notary held back money until your tax affairs were settled. You also had to pay the tax agent’s fees which people resented as he was really working for the French Revenue. This was where arguments about deductions of bills for works often took place. This has changed now. If the sale is for less than €150, 000 no tax agent is appointed. You simply fill in form 2090 which the notary will have. If the sale price is over €150, 000 you still need a tax agent. If you have owned the asset for more than 15 years there is no tax agent regardless of price.

What about a main residence?

This is exempt broadly as in the UK. If the property is entirely residential but you run a business from it, it is still exempt. However if parts of the property are used exclusively for business purposes then only the private part qualifies for the exemption.

If I have two properties in France how do they decided which one is my main residence?
Normally it is where you are most of the time. If in doubt it is where you claimed your reduction for taxe d’habitation (local rates) as a main residence.

My house has various outbuildings, which I want to sell separately. Are they exempt?

They can be if the outbuildings are “next to and necessary to” the main private residence. The rules here are different from the UK ones. An important condition for exemptions that the house must be sold at the same time as the outbuildings though not necessarily to the same person. It is likely to be easier to have it exempt if it is seen as part of the garden rather than a building.

How does this tie in with UK CGT?

It is likely that French CGT will be nil or far less than UK CGT. There are other French CGT exemptions for instance for landlords of furnished properties who have owned them for 5 years. You are taxable in the UK on any French gain if you are resident or ordinarily resident in the UK. There are exemptions from UK CGT for non-UK domiciled individuals who do not remit the sale proceeds to the UK. Similar planning incidentally applies to avoiding UK income tax on the rental income from the French property. Tax planning for UK investors who have seen sharp rises in French property over the last few years focuses on avoiding or mitigating the UK liability. I can assist here though the detail is outside the scope of this article.

It seems unfair that I pay no Capital Gains Tax in France but 40% in the UK. How is the UK gain calculated?
Agreed in many parts of France this is a serious problem. Many UK investors in say the Alps have made staggering gains, which are exempt in France but potentially taxable at 40% in the UK. UK CGT is worked out using UK rules. You cannot claim any French exemptions. Taking the example given above the UK CGT in pounds will be calculated as follows (£1 = €1.40 used throughout for simplicity):
Amount in GBP Comments
Sale price 85,715
Purchase price 43,557
Purchase costs 3,267 Using the French figure, as this is likely to be close to real figure
Enhancement costs 6,533 Using French figures.
Note: UK Revenue may want actual figures
Gain before indexation 32,358
Indexation 43,557 + 3,267 + 6,533= 53,357@15% = 8,004 From January 1994 (141.3) to April 1998 (162.6)
(162.6 – 141.3) ÷ 141.3 = 15%
Chargeable gain 24,354
Taxable gain after non business Taper relief 24,354 @ 80% = 19,483 From 6 April 1998 to 20 January 2004 = 5 complete tax years plus bonus year = 20%
Annual Exemption 7,900 2003-2004 = £7,900
Taxable gain 19,483 – 7,900 = 11,583
Charged to CGT 11,583@ 40% = 4,633 Taxed as top slice of income assumes you are higher rate UK taxpayer
Set off French Tax Paid Additional payable in UK
4,633 – 2,474 = 2,159 This is the additional amount you pay the UK Revenue
I want to buy and sell regularly. I also want to divide up land into plots and do some new build.
You are likely to be outside these rules. You are likely to be classified as a marchand des biens i.e. a property dealer which puts you under a different (and higher) taxing regime. There is the temptation to try to come within the new rules here but it is high risk. You may get away with it if the development is small and the overall sale price is less than €150, 000 so no tax agent is appointed and you have an understanding notary! The best advice is not to chance it. You will probably be better off using a UK company and relying on the UK France double tax treaty.

I am interested in “turning” (i.e. selling a contract on before completion) some new build contracts on a new development of Paris apartments.

With sharp price rises in better Paris postcodes last year and no notary fees investors in this market certainly got sparkling returns! This is a specialist area though the use of an offshore company in a country with a suitable double tax treaty with France is likely to be the way forward.

I understand the new rules only apply to sales of private property as opposed to property used for business purposes. Sales of property used for business purposes are taxed under the business capital gains rules (regime des plus-values professionnelles)

This is correct in most cases.

What is the position if you rent furnished property, which is trade in France, and are taxed under Micro-Bic? Are you within the new rules or the professional regime?

The new rules apply to you so long as you are not a “professional landlord” i.e. have registered with the Commercial Registry and generate a certain income. The rules on taxing professional landlords have changed slightly for 2004 but essentially the property is still exempt from French CGT after 5 years of letting. It is accordingly likely to be better to register as a “professional landlord” but advice in this area is essential.
What happens if I have elected to pay income tax under one of the “Real” regimes rather than Micro-Bic?
This depends on whether you have put the property on your balance sheet (bilan). If you have done this then you will pay CGT on a sale of the property under the professional CGT regime, if not you are likely to be taxed under the new regime.

I understand certain companies and trusts come within these the new Rules and the shareholders or partners are taxed as individuals i.e. the company is transparent for tax purposes. Which ones are they?
Things start getting a bit more complicated here, which also means more good tax planning opportunities, are thrown up! Essentially these are companies, which are not subject to French corporation tax. They are generally viewed as transparent for tax purposes similar to English partnerships. They are called sociétés de personnes. They include SCIs, SARLS which have elected for personal as opposed to corporate taxation and regardless of any election the sole shareholder of a SARL who is an individual. This will extend to non-French companies, which French law classifies as having the requisite characteristics. The new rules cover either a sale of a property by such a company or the sale of shares in such company, which broadly is a property company. There is a problem with SCIs if they, say, carry out furnished lettings, which is taxed as a trade in France because they cease to be tax transparent.

So the French Revenue looks through the company and taxes the underlying owners of the company direct?
Broadly yes. If the société de personnes has its registered address (siege) in France it probably will be French resident under a relevant Double Tax Treaty. The shareholders or partners, whether or not French resident, will be taxed accordingly to their shares as a French resident. No tax agent under is needed. This also applies if the partner is not a EU resident. The partner then is only taxed at 16% not 33.3%. This advantage should not be overlooked when structuring non-EU property investment into France.
What happens if the tax transparent company has its registered office outside France?

If the société de personnes has its siege outside France then this means tax at 33.1/3% is paid if the partner is not a EU resident individual. You pay the 33.1/3% if you are not EU resident even if you are a EU national. The tax position and different rates are summarised below. I have also indicated whether you need to appoint a French Revenue approved tax agent to finalise your affairs before the notary can release all the sale proceeds to you.

Taxpayer Rate French NI Tax Agent Y/N
Individuals
1: French resident 16% 10% N
2: EU resident (any nationality) 16% 0% N if less €150, 000
3: Resident outside EU 33.1/3% 0% N if less €150, 000
Tax Transparent Company resident in France with gains taxed direct on individual shareholders/partners
1: Partner French resident 16% 10% N
2: Partner EU resident 16% 0% N
3: Partner resident outside EU 16% 0% N
Tax Transparent Company resident outside France with gains taxed direct on individual shareholders/partners
1. Partner French resident 16% 10% N if less €150, 000
2: Partner EU resident 16% 0% N if less €150, 000
3: Partner resident outside EU 33.3% 0% N if less €150, 000
Non Tax Transparent Companies: traditional UK opaque company taxation
1. Resident in France Applicable Corp tax rate N
2. Resident outside France 33.1/3% Y any price

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