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Overview

i Investment vehicles in real estate

Vehicles commonly used in France to invest in real estate properties include both unregulated and regulated vehicles.

Unregulated vehicles usually take corporate form, such as simplified joint stock companies (SASs). Entities that are transparent for tax purposes are also often used – for example, private property companies (SCIs) or, in certain specific circumstances, general partnerships (SNCs). The SCI is a corporate form that is well suited to the operation of one or more buildings but is not, in principle, best suited for use as an investment company open to a large number of shareholders.

Regulated vehicles may be listed vehicles, such as listed real estate investment companies (SIICs), or non-listed vehicles, such as collective investment funds in real estate (OPCIs) or real estate investment trusts (SCPIs). OPCIs themselves take one of two forms: either a SPPICAV (open-ended investment company with predominantly real estate assets) or an FPI (real estate investment fund).

Which vehicle is most appropriate will depend on a number of factors and circumstances relating to the investor's status, the nature of the transaction, expected return horizon and certain tax issues (e.g., transfer taxes and value added tax (VAT)).

ii Property taxes

Real estate investments in France may be subject to various taxes.

Income and capital gains taxes

Income derived by French corporate investors from real estate assets located in France (rental income and capital gains) is subject to corporate income tax (CIT) in France at 25 per cent (or 25.83 per cent when the additional surcharge applies). However, income derived by certain regulated vehicles such as SIICs or SPPICAVs may be exempt from CIT, subject, in particular, to compliance with distribution requirements.

Income derived by French tax resident individuals from real estate assets located in France is subject to the following taxation:

  1. rental income: progressive income tax rates of up to 45 per cent and social contributions at the flat rate of 17.2 per cent (i.e., an overall rate of taxation of up to 62.2 per cent); and
  2. capital gains: income tax at the flat rate of 19 per cent and social contributions at the flat rate of 17.2 per cent (i.e., an overall rate of taxation of 36.2 per cent, although rebates apply after a certain period of ownership).

Additional taxes may apply if the capital gain exceeds €50,000 (2 to 6 per cent) or if the taxpayer is subject to the contribution on high income (3 to 4 per cent).

For non-residents, rental income derived from real estate assets located in France is subject to CIT or individual income tax in France, and capital gains arising from the disposal of properties or of shares in land-rich entities are subject to a specific withholding tax.

Real estate transfer taxes

The direct acquisition of real estate assets is usually subject to transfer taxes at a rate of 5.81 per cent or 6.4 per cent, depending on the type and location of the property, a land registry fee of 0.1 per cent and notarial fees of 0.799 per cent (excluding VAT). However, subject to certain conditions, the transfer taxes may be reduced to (1) 0.715 per cent if the real estate asset qualifies as a new building for VAT purposes or if the purchaser undertakes to resell the building within five years or to (2) €125 if the purchaser undertakes to build (or rebuild) within four years.

The acquisition of shares in a company (whether French or foreign) whose assets are mainly composed (directly or indirectly) of French real estate assets is, in principle, subject to a 5 per cent transfer tax. However, subject to certain conditions and limits, acquisitions of shares in an OPCI may be exempt from transfer taxes.

VAT

As a general rule, sales of buildings completed for more than five years are exempt from VAT (but in certain cases the seller may have to elect for VAT to be able to deduct input VAT). Sales of new buildings or building plots are, in principle, subject to VAT at the standard rate of 20 per cent.

Sales of shares in companies are exempt from VAT.

Annual 3 per cent tax on French real estate assets

All entities (regardless of their nationality) that directly or indirectly own real estate assets located in France are, in principle, subject to an annual tax equal to 3 per cent of those assets' fair market value, as determined on 1 January of each year.

However, in practice, the 3 per cent tax is limited in scope because of the large number of exemptions that are applicable.

Local taxes

French property tax (taxe foncière) applies to both developed and undeveloped property located in France. It is a direct local tax that is payable annually by the legal owner of the property as at 1 January of the year in question.

Real estate wealth tax

Real estate wealth tax applies to individuals (whether French or foreign) who own real estate assets, either directly or indirectly through real estate companies or real estate investment funds, with an overall net value of more than €1.3 million as at 1 January of the year in question.