There are a number of measures that will impact the real estate industry contained in the Finance Bills published in December 2014.
Corporate Income Tax
SIIC and SPPICAV distributions have become eligible for the participation exemption regime
Further to the EU Directive dated 8 July 2014, the French participation exemption regime has been amended but the amendment has been partially blocked by the Constitutional Council. The unexpected outcome is that dividends distributed by SIICs and SPPICAVs to French companies, which were taxable without the possibility of applying the French participation exemption regime, become eligible for that regime subject to meeting its main conditions (namely, shares held as fixed assets for at least two years and representing at least 5 percent of the share capital). The exemption can also apply to distributions received from foreign companies having a similar regime to the SIIC and SPPICAV. It should be emphasised, however, that the availability of the exemption in these cases is only temporary and is likely to be withdrawn. In the meantime, there is an open slot.
Entry into force: applicable to FY open as from 1 January 2015
Increase in costs for share buy-back operations
Until now, the gain realised by a corporate shareholder resulting from the repurchase of its shares in a subsidiary (share buy-back) was treated in certain situations as a dividend and not as a capital gain, and therefore eligible for the French participation exemption. Further to a decision of the French Constitutional Council on the situation of individuals taking part in a share buy-back, the law has been amended in order to treat the gain resulting from a share buy-back as a capital gain in all situations. Within the real estate sector, this means that for corporates, such a gain becomes taxable at the standard corporate income tax rate and is no longer eligible for the French participation exemption.
Share buy-back schemes are mainly used within the real estate industry with a view to (i) repatriating trapped cash, (ii) increasing leverage or (iii) allowing a shareholder to exit or reduce its shareholding in a joint venture vehicle. This change significantly increases the cost of such operations.
Entry into force: applicable to share buy-back realized as from 1 January 2015
End of the need to appoint a tax representative
Until now, when a person (an individual or a company) who was not resident in France realised a capital gain on the disposal of French real estate or shares in a company with a real estate-oriented character, an accredited tax representative who was responsible for calculating and paying the tax related to the capital gain had to be appointed in France by the seller. Such an obligation triggered significant costs and was contrary the EU principles and tax treaties. The CJEU has ruled against this kind of obligation (concerning Portugal in particular).
The obligation to appoint a tax representative is now abolished for individuals and companies whose registered offices are located in a member state of the EU or the EEA (Iceland, Norway and Liechtenstein) that has entered into a tax administrative assistance agreement with France. This is a very interesting provision in the light of the future modification of the Luxembourg-French tax treaty (see below).
Entry into force: sales as from 1 January 2015.
The 5 percent transfer duty applicable on the sale of real estate rich companies is once again assessed on the sale price
Since 2012, the basis for the 5 percent registration duty applicable to sales of shares in a real estate rich company is the fair market value of the real estate property or property right held by the company, increased by the fair market value of its other assets reduced only by liabilities linked to the acquisition of the property. This measure has raised many issues of interpretation in particular, in cases of refinancing, construction, shareholding chain of companies, therefore creating uncertainty, tax risks and insecurity. The French tax authorities have never issued administrative guidelines on the application of this basis.
Following strong lobbying by the tax community, the Finance Bill has cancelled this specific provision so that the 5 percent registration duty is assessed under standard rules, i.e., based on the sale price of the shares (or their fair market value if higher) as it was prior to 2012.
Entry into force: applicable to sales as from 2 January 2015
The possibility to increase transfer taxes due upon the sale of real estate properties is now permanent
The Finance Bill for 2014 allowed departmental councils to raise the departmental registration rate of the transfer tax due on sales of real estate properties from 3.80 percent to 4.50 percent, increasing the total burden from 5.09 percent to 5.81 percent. This was supposed to be a temporary increase expiring on 29 February 2016, with most departments nevertheless making use of it.
The Finance Bill for 2015 makes permanent all rate increases decided prior to February 2016.
Entry into force: applicable to sales as from 1 March 2016
- The Luxembourg-France tax treaty was amended on 5 September 2014 in a way that will grant to France the right to tax any gain resulting from the sale of shares or rights in a company whose assets are mainly comprised of or which derives its main value, directly or indirectly, from real estate properties located in France. The amendment has not entered into force yet and is likely to be applicable as from 1 January 2016.
- Fiduciary arrangements: The parent subsidiary and tax consolidated group regimes can now apply subject to certain conditions where shares are held under a fiduciary arrangement. This opens new opportunities for the implementation of fiduciary arrangements such as guarantees (“fiducie-sureté”) of bank financing.
Penalties in case of lack of transfer pricing documentation have been significantly increased.