The texts relating to the fifth part of the French tax regime of the "Société d’Investissements Immobiliers Côtée" (hereafter referred to as the "SIIC Regime") have been adopted by the Commission of Finances of the Senat on November 12, 2008, in the form of several amendments to the draft finance bill for 2009.
The text was finally enacted on December 27, 2008 and affects (1) the SIIC regime but also (2) the tax regime of transfers of real estate.
Extension of the Scope of the SIIC Regime and Softening of the Condition to be met in terms of Shareholding
As a reminder, the SIIC Regime offers an option, for a minimum 10-year period, to certain listed real estate investment companies and their 95 percent direct or indirect subsidiaries, to benefit from a tax exemption on profits and gains derived from its real estate properties, if the entities meet the following conditions (Article 208 C of the French Tax Code):
- to be listed on the Paris Stock Exchange;
- a minimum share capital of €15 million;
- their main activity must consist of acquisition or erection of buildings for the purpose of their letting, or the direct holding of participations in partnerships or companies having the same activity (possibility of ancillary activity to a certain extent);
- to have less than 60 percent of their capital and voting rights held, directly or indirectly, by one shareholder or group of shareholders acting in concert. This condition must be complied with as from January 1, 2009 for pre-existing SIICs and as from January 1, 2007 for newly created SIICs. However, please refer to our comments below;
- on the first day of the year in which they elect for the SIIC regime, a minimum floating requirement of 15 percent of their share capital must be held directly or indirectly by shareholders who own less than 2 percent of the share capital and voting rights.
Provided that these conditions are met, the SIIC and its appointed 95 percent subsidiaries may, upon election, benefit from a tax exemption from corporate income tax on the following profits:
- profits derived from the lease or sub-lease of real estate properties (which includes real estate purchased under a leasing agreement) provided that 85 percent of the exempt income is distributed before the end of the following fiscal year;
- capital gains derived from the sale to third parties of (i) real estate properties, (ii) shares in partnerships or subsidiaries subject to the SIIC regime and (iii) rights derived from real estate leasing agreements provided that 50 percent of the exempt gain is distributed before the end of the second following tax year; and
- distributions received from subsidiaries benefiting from the SIIC regime provided that 100 percent of the exempt distribution is redistributed before the end of the following financial year.
As a counterpart to this exemption, the SIIC is subject to an exit tax, payable over a four-year period, at a reduced rate of 16.5 percent (19 percent as of January 1, 2009) on latent capital gains derived from its real estate properties and shares.
Finally, please note that dividends paid out by a SIIC do not benefit from the French parent subsidiary regime and that a specific 20 percent tax is levied on dividends paid by a SIIC to its corporate shareholders who (i) are not a SIIC or equivalent, (ii) hold directly or indirectly 10 percent or more of its share capital and voting rights and (iii) are imposed at a low tax rate.
The Finance Bill for 2009 provides for an extension of the SIIC regime to:
- the whole real rights ("droits reels") as mentioned in Article R 214-161 of the Monetary and financial code and in particular concessions, and
- the rental income arising from properties which possession is temporarily given to the SIIC by the State, its public institutions, the local authorities or one of their public establishments.
Regarding the 60 percent holding threshold, the Finance Bill for 2009 plans:
- to postpone until January 1, 2010 the entry into force of this 60 percent test;
- to amend the tax consequences of both definitive and temporary exit of the regime as follows.
In the event where the 60 percent test is not met, the stockholders can regularize the situation until the end of the fiscal year following the one in which the 60 percent threshold was exceeded.
During this period, the SIIC and its subsidiaries will be subject to standard corporate income tax, save that the computation of the taxable capital gains, in case of sale of real estate properties, will be decreased by the depreciation allowance recorded during the tax exemption period. SIIC qualifying subsidiaries would still be allowed to buy under the SIIC 3 regime during that period.
Upon the re-entry into the tax exemption regime, a 19 percent exit tax will become payable on the amount of the latent gains incurred during the temporary period of taxation.
If the situation is not regularized before the expiry of the above-mentioned period or if the test is not met for a second time,2 either during the ten years after the election for the SIIC regime or during the ten following years, the consequences of the exit from the SIIC regime would be the following:
- retroactive payment of an additional exit tax of 17.93 percent or 15.43 percent3 assessed on the latent capital gains upon the entry into the tax exemption regime;
- standard CIT (34.43 percent) would become payable on the profits which have been exempted during the previous past fiscal years and which have not been distributed yet;
- 25 percent taxation on latent capital gains that have arisen during the application of the SIIC regime, reduced by a 10 percent annual depreciation;
- payment of an additional tax of 19 percent on the latent capital gains incurred during the temporary exit of the regime.
Deadline Extension of Incentives on Capital Gains Derived from the Transfer or Real Estate
In order to facilitate the transfer of real estate, the French legislator implemented in the Finance Bill for 2005 capital gains tax incentives that were supposed to last until December 31, 2008.
This so-called SIIC 3 regime allows companies to sell their real estate assets, shares in real estate companies or rights in real estate financial lease agreements to publicly traded companies (such as SIICs) or entities agreed by the Paris stock exchange authorities (such as SCPI or SPPICAV) having a long-term real estate investment activity, under a favourable tax regime. Under this regime, capital gains are taxed at a reduced rate of 16.5 percent provided that the acquiring company keeps the assets purchased for a minimum 5-year period.
The Finance Bill for 2009 extends the application of the SIIC 3 regime and plans the following amendments:
- to extend the SIIC 3 regime until December 31, 2011;
- to increase from 16.5 percent to 19 percent the reduced tax rate for transactions realized as from January 1, 2009;
- to clarify the provisions relating to the acquisition of buildings aimed at being materially refurbished;
- to facilitate the financing of the acquisition of assets through financial lease ("Crédit-bail") in allowing lease-back operations without triggering the breach of the five-year commitment. Therefore, the SIIC or its subsidiaries having acquired the building within the framework of the SIIC 3 regime will be allowed to sell the acquired building to a financial institution under the form of a lease-back and still be deemed to comply with SIIC 3 regime.
Finally, please note that the French tax authorities are drafting administrative guidelines to comment on this specific regime. Based on the drafts disclosed so far, companies which will realize capital gains taxed at the reduced rate of 19 percent will be allowed to offset these gains against their ordinary tax losses.