Structuring the investment
Real estate investments are usually made through SPVs incorporated as French companies, listed property investment companies (SIICs) or OPCIs.i SPVs
SPVs can either be tax vehicles subject to corporation tax or transparent tax vehicles, in which case profits are determined at company level but will be taxed in the hands of shareholders.ii SIICs
The SIIC regime (largely inspired by the US REIT regulation) applies to real estate investment companies that:
- have a minimum share capital of €15 million;
- are listed on a French regulated market;
- have a minimum floating shareholding of 15 per cent at the date of the election for the SIIC regime (floating shareholdings are those held directly or indirectly by legal or natural persons with less than 2 per cent of the total share capital and voting rights); and
- do not have more than 60 per cent of their share capital or voting rights held directly or indirectly by one shareholder (or by different shareholders in a joint control situation) unless the shareholders are also SIIC-qualifying companies.
The SIIC regime also applies to SIIC subsidiaries subject to corporation tax that are at least 95 per cent held, directly or indirectly, by the SIIC and have the same corporate purpose.
The SIIC regime provides for a full exemption for corporation tax purposes on profits deriving from real estate investments (rents and capital gains), provided that certain distribution obligations are fulfilled (95 per cent of net rents, 60 per cent of capital gains and 100 per cent of dividends received from SIIC subsidiaries). Tax is therefore passed on to investors, who are subject to French personal or corporation tax if they are French residents (in this case, the distribution cannot benefit from the parent subsidiary regime if the amounts distributed correspond to tax-exempt profits), or French withholding tax if they reside abroad.
Distributions paid out of tax-exempt profits are subject to a 20 per cent levy if they are paid to corporate shareholders that hold, directly or indirectly, more than 10 per cent of the dividend rights at the time of the distribution, and that are not subject to French corporation tax or to an equivalent tax amounting to at least one-third of the French corporation tax on the distributions received. Such levy is not payable where tax-exempt profits are paid to entities that have an obligation to distribute 100 per cent of received dividends (e.g., French SIICs and OPCIs and foreign equivalents), where the shareholders of such entities that hold, directly or indirectly, more than 10 per cent of the dividend rights are subject to French corporation tax or to an equivalent tax amounting to at least one-third of the French corporation tax on the distributions received.
The 3 per cent contribution on dividends was struck down with retrospective effect by the French constitutional court (Conseil constitutionnel, 2017-660 QPC) on 6 October 2017, and has then been abolished by the 2018 Finance Bill.
Companies electing for the SIIC regime are entitled to step up the tax basis of their eligible assets at a reduced tax cost (19 per cent corporation tax rate instead of 33.33 per cent), payable in four years.iii OPCIs
OPCIs are fully exempt from corporation tax, but are subject to distribution obligations (85 per cent of net rents, 50 per cent of capital gains and 100 per cent of dividends received from subsidiaries exempt from corporation tax on their real estate activities). Their main business purpose must be direct or indirect investment in real estate assets with a view to carrying out rental activities.
OPCI subsidiaries that are subject to corporation tax can elect for the application of the SIIC regime described above if they are at least 95 per cent held, directly or indirectly, by the OPCI and have the same corporate purpose.
The creation of an OPCI is subject to the prior approval of the French Stock Exchange Commission.
Distributions paid out of the tax-exempt profits of SIICs and OPCIs to French UCITS, certain alternative investment funds or foreign equivalent entities are subject to a 15 per cent levy.
Foreign investment in France is subject to declaration obligations to the French authorities if certain conditions are met.
As a general rule, direct foreign investment is subject to mandatory declarations for statistical or administrative purposes to the French central bank or to the French Economics Ministry (or both); however, exemptions from such declarations may apply. For this reason, the implementation of any declaration obligations must be reviewed on a case-by-case basis.
In terms of timing, such declarations must be made within 20 days of the date of the operation or at the date of the execution of the relevant operation depending on the kind of declaration (i.e., statistical or administrative). Breach of such declaration obligations is subject to criminal sanctions (including imprisonment).
By way of exception, certain real estate investments listed by decree are subject to prior administrative authorisations. These investments mainly concern sensitive sectors, such as national defence.
Transfer or direct acquisition of real estate, acquisition or purchase of a stake in French real estate funds (OPCIs) or in any special purpose vehicles (SPVs) made by foreign investors may also be subject to mandatory declaration. For instance, administrative declaration is not required for investment in real estate companies unless they carry out a construction or development business; statistical declaration is required for investment in real estate companies or real estate assets for value exceeding €15 million.
From a tax perspective, foreign legal entities (but not individuals) that hold, directly or indirectly, real estate located in France must pay an annual tax equal to 3 per cent of its fair market value, regardless of any acquisition debt. Such entities can, however, be exempt from this tax by complying with certain filing obligations required by the French tax authorities.
The following are automatically exempt from this tax:
- international organisations, sovereign states or one of their institutions, including legal entities, bodies, trusts or equivalent institutions that they control and have a majority interest in;
- entities whose French assets do not mainly comprise real estate;
- entities whose shares are significantly and regularly exchanged on a regulated stock exchange, including any subsidiary entities whose total shares they hold directly or indirectly; and
- entities with their registered office located in France, in an EU Member State or in a country or territory that has concluded a reciprocal tax or mutual assistance treaty with France and that:
- have a share in properties located in France representing less than €100,000 or 5 per cent of the property's market value;
- are established to manage pension funds (including partnerships between entities), or as charities with acknowledged public utility or a not-for-profit purpose, if their activity or financing justifies the ownership of the real estate assets or rights; or
- are incorporated as an OPCI (subject to the conditions it complies with certain prudential ratios and is not restricted to qualified investors), or a form regulated by similar rules in the country in which they are incorporated.
Pursuant to Decree No. 2017-932 of 10 May 2017, those transactions that were subject to the requirement of a prior declaration with the French Economics Ministry are now exempted.