Real Estate in France: Purchase directly in owners’ names or indirectly through a holding company?

January 9, 2014

The question raised in the title to today’s Blog has been posed to me innumerable times. There is no stock answer. Different facts for different folks call for a tailored solution in a given case. There may be more than one possible plan that fits a purchaser’s needs. Clearly, planning for the purchase of French real estate has implications that must be considered, at the risk of suffering significant penalties, high tax costs, and eventually possible lawsuits among heirs.

Example: A client, non-resident of France, just asked whether he and his wife should purchase their dream secondary residence in the South of France jointly in their own names or through a holding company such as a French SCI. They wanted to know the ins and outs of each alternative. Here is my answer, somewhat modified and broadened:

The downside of buying in your own names is that you are bound by the French forced heirship laws with respect to that property, so each and every child of yours, present or future, born in wedlock or outside, and even born of one of you and a third party, will at the time of the decease of one of the joint owners, have a fixed inheritance interest in that property, whether or not the deceased owner is a resident of France at the time of death. Consequently, the principal reason for non-residents making their property purchase through an SCI or other form of holding company, is to avoid the French forced heirship rules. What is the underlying legal reason for this? The holding company shares are considered in international law as “intangible property”, and as such are governed by the law of the deceased owner’s domicile. If that domicile is in the US or England (for example), which does not have forced heirship in their law, then the holding company shares can pass freely in accordance with the deceased’s last will and testament, without giving preference or, indeed, any interest at all, to any person, child or not.

The fact that the forced heirship rules are avoided does not mean that the underlying French property is not subject to French inheritance tax; it surely is!)

If the property is owned directly by the individuals, it is best to have separate French wills relating to the real estate, which gives flexibility to an estate plan.

Caution: If you plan to rent the apartment furnished to third parties, use of an SCI or any holding company has distinct tax disadvantages. In effect, the company is treated as a commercial company, requiring a full set of financials, including a corporate tax return, to be prepared each year by a French “expert comptable” (CPA) and, moreover, as a commercial company, the owners do not get the benefit of the 22-year write-off for French capital gains purposes that would be available were the property owned directly by the owners or via an SCI that is not classified as a commercial company (i.e., has no furnished rental activity).

Worth mentioning here is the scourge faced by short-term renters in France. A long-standing French rule barring short-term renting (short-term defined as a lease of less than 12 months, or 9 months for students), is now being enforced with a vengeance, at least in greater Paris, with stiff fines being imposed on those caught doing it. It is not clear whether enforcement is so prevalent outside of Paris and its environs, but the risk is surely there.

Another downside to the use of an SCI or other holding company is the annual tax form (Form 2746) that must to be filed each May 15th to avoid the 3% annual tax imposed on companies owned by a corporation or other entity. Granted, if done in a timely fashion, filing is merely a nuisance, but it is still another item that must be on your checklist. (One can avoid the annual filing by sending the tax people a “lettre d’engagement”, that is, a pledge to provide the information requested in the Form 2746 upon request from the fisc.)

I don’t here consider issues of divorce or other forms of termination of ownership by one a co-owner, but for some people that subject is on the list of what should be considered in structuring real estate ownership.

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Tax and inheritance issues for non-residents seeking to purchase property in France

April 4, 2012

The following is based on a letter I wrote to a client, a non-resident of France, who plans to purchase property in France.

Allow me to outline the area of French law that you should be aware of, as well as pointers related to your proposed real estate acquisition.  

 1)          French income tax issues.  As a non-fiscal resident, the only income tax issue you need to concern yourself with is French income tax on rental income.

2)         Tax on wealth.  If the net value of your French residence does not exceed 1.3m euro, that tax will not be a concern for you.  If it does exceed that amount, we should explore that further.

3)         Inheritance tax.  At the death of the owner(s), there is a potential inheritance tax.  Estate planning is indicated:  Should you make lifetime gifts to children—what are the pros and cons?  What inheritance tax rates apply to each of the parties in this scenario?

4)        Rights of children.   The French have what they refer to as “forced heirship rules”, meaning that a child has an enforceable right to a share of his or her parents’ estates.  This sometimes uncomfortable and unwanted rule (especially if there are children of a prior marriage) can be circumvented for a non-resident by purchasing through a holding company, or else, in certain cases, by executing a French will relating to the French property and its contents.  This very important issue, the choices, and the consequences of each should be thoroughly understood by you.  

5)         Local taxes.  Not many to consider, but they should be known and understood.

6)        Capital gains on sale.  These rules have been changed recently and should be explored. As you are a U.S. citizen, any capital gain is reportable both in France and in the U.S., with appropriate tax credits.  French capital gains rates change, but the rate applying to a U.S. resident (more broadly, to most anyone outside the EU), has remained at 33.33%.  There is a reduction of taxable gain, related to the period of holding, so that after 30 years, the residence may be sold tax-free (in France, that is).

7)         Purchasing the property.   When you have chosen a property, you should consult with us before you sign any document, e.g., a promesse d’achat; promesse de vente or  compromise de vente.  Brokers and sellers are often to eager for you to obligate yourself and will urge you to sign prior to a thorough vetting of the documents.   Brokers will often tell you that signing a promesse d’achat is necessary to hold the property.  That may be true, but you also may be taking the first step toward entering into a binding countract with conditions you may regret.  This is certainly true with the contract of purchase and sale (“promesse de vente” or “compromis de vente”).  Property searchers who you meet on the internet or otherwise may state that they know the legalities because they have been through it a thousand time, and therefore consulting a lawyer is not necessary.  Not so.  Not at all.   A lawyer is an essential part of the deal, and often is the cheapest in terms of cost.   

          We will vet the document for a variety of elements that should or, in come cases, shouldn’t be in it.  We will discuss questionable or unclear points with the seller’s Notaire.  We will advise on the surrounding issues as enumerated in this blog, as well as the overall cost of the purchase, including notarial fees, transfer taxes, etc.  In short, a lawyer, especially one versed in French and U.S. law, is indispensable.  You must have a good Notaire.  Notaires come in all shapes and sizes.  Some are excellent—i.e., reactive, proactive, intelligent; but many are otherwise—the source of frustration, delays and sometimes worse.  We work with an excellent firm here in Paris.  As a Notaire has national jurisdiction, one located in Paris does not compromise your position if you are buying in the provinces.   We will introduce you to our Notaire, but then we do all of the intermediary work and coordination of the deal.  We will “hold your hand” from the get-go up to and including the final closing, which may be two or even three months after signature of the initial contract of purchase and sale. 

8)        You should decide whether to take title in your name individually, in joint names with your wife, or otherwise (e.g., through a holding company, as mentioned above).  Part of this depends on the property regime that applies to your marriage.  Is it separate property or community property?   This crucial fact has to be carefully determined.  

9)     If you plan to finance the purchase, other points come into play.

10)      If you rent out the property at any time during the year, as you indicate you may, there are certain rules concerning short-term rentals of which you should be aware. 

11)       If you set up a holding company, you will need a bank account for the company and you will need to gain familiarity with the rules concerning how such a company is run and what French (and possibly U.S.) reporting requirements exist.

12)      As I am assuming you do not plan to move here, I will not discuss visa requirements, but otherwise, we should consider visa issues and the effect French residence might have on your French income tax and other taxes.  If you are planning to become a resident, that would influence some of the points discussed above.