After being partially censored by the French Constitutional Court (Conseil Constitutionnel) in a decision dated on December 29, 2013, articles 27 and 28 of the 2014 Finance Law amend several aspects of the French tax regimes applicable to real estate capital gains.
In any case, the flat income tax rates (19%, 33 1/3% or 75%) are not modified by the 2014 Finance Law, as is the 15.5% social tax applicable to French-source real estate capital gains realized by both French tax residents and non-French tax residents.
- Modification of the rebates for holding period for sales of built real estates
The scale of the rebates for holding period is increased for income tax purpose, resulting in a full exemption after a 22-year holding period. The full exemption for social tax purpose remains granted after a 30-year holding period.
The 2014 Finance Law thereby enacts the administrative guidelines, which already provide with these new scales, that apply to real estate capital gains on built real estates which have been realized since September 1, 2013.
The new rebates for holding period are summarized in the following chart:
Click here to view chart.
- No modification of the rebates for holding period for sales of non-built real estates
The 2014 Finance Law was about to abolish any rebate for holding period for capital gains on sales of non-built real estates realized as of March 1st, 2014. The French Constitutional Court censored the provision which was considered as contravening to the principle of equality vis-à-vis public burdens for taxpayers due to the fact that monetary erosion was not taken into account.
In practice, the rebates for holding period applicable to sales realized before September 1st, 2013 (date of the French administrative guidelines which modified the rebates) will therefore continue to apply for income tax and social tax purposes.
- Exceptional 25% rebate for sales of built real estates
The exceptional 25% rebate on net taxable capital gains (i.e., after applying the regular rebates for holding period) of sales of built real estates, which has applied through administrative guidelines since September 1st, 2013, is legalized.
Individuals and real-estate oriented entities (Société Civile Immobilière) located in France and individuals subject to the 33,1/3% withholding tax pursuant to Article 244 bis A of the French Tax Code who directly or indirectly realize capital gains on sales of real estates located in France or of related rights, benefit from this exceptional 25% rebate until August 31st, 2014.
The rebate applies to capital gains for income and social taxes purposes.
The rebate does not apply to sales within a family-owned group (the spouse, partners, common-law spouse, ascendants and descendants of the seller or of one or more of these persons) or when the buyer is an entity controlled by a family-owned group.
- Narrower exemption for capital gains on sales of non-residents’ real estate located in France
Article 28 of the 2014 Finance Law narrows the scope of the exemption mechanism that can be used by non-French tax residents, nationals of the European Union, Iceland, Norway and Liechtenstein who had continuously resided in France for at least 2 years at any time before the sale.
Henceforth, the portion of net taxable capital gain above Eur 150,000 is subject to income tax at the applicable rate pursuant to Article 244 bis A of the FTC.
In addition, it is no longer required to have the free disposal of the property since January 1st of the year preceding the sale for sales occurring by December 31st of the fifth year following the year during which the taxpayer transferred his/her tax residence outside France. Two situations may now be considered:
- If the sale occurs within 5 years after the transfer of the tax residence: the property does not have to be at the free disposal of the seller. Hence, even in the case the property is rented out, the seller may benefit from the partial exemption.
- After the 5th year following the year of the transfer of the seller’s tax residence outside France, the property has to be at the free disposal of the seller since January 1st of the year preceding the sale.