The three following Tax aspects are to be explained:
(a) the cost of a Real Estate purchase;
(b) the cost of a Real Estate ownership; and
(c) the specific aspects concerning non-resident investments.
(a) The Cost of a Real Estate Purchase
Registration taxes must be paid to the State upon each transfer of title in France. These taxes are collected by the Notaires and refunded to the State.
There are two Tax status concerning Real Estate transfers in France, depending on whether the Real Estate has been built more than five years ago or less than five years ago:
i) the V.A.T. status, which concerns new buildings;
ii) the registration tax status, which concerns buildings completed more than five years ago.
(i) The V.A.T. status
When an uncompleted building, a new building or a building completed less than five years ago is sold, the Tax status to be applied is the Real Estate V.A.T., at a rate of 19.6%. The expressed price in the deed of sale always includes tax. The real price is actually the tax non-included price, to which the seller adds the V.A.T. to reach the final price.
The above-mentioned tax status directly concerns French or foreign construction companies. Because V.A.T. is paid only once for the same product, the companies have a tax credit that is repaid upon the sale of the building. The Real Estate V.A.T. is one of the most complex aspects of the French Tax system and requires a professional such as the Notaire to safely advise investors.
An American or an English company is entitled to build Real Estate for the purpose of sale if a specific company is created that will dissolve after the last apartment or shop has been sold. The investor’s Notaire counsels the company on each specific operation and draws up the corporate charter.
The seller is always the V.A.T. subject, except when it is the buyer who assigns the transaction to V.A.T. For instance, this is what happens when the building to be sold is an old one, and when the buyer intends to rebuild it within four years. In this particular case, the price is the former one to which V.A.T. is added, always at the rate of 19.6%. This last example is given only to a professional buyer since a private buyer is exempted from paying V.A.T. in this case since 1998.
(ii) The Registration Taxes Status
All the transactions concerning Real Estate completed more than five years ago are subject to the Registration Taxes status. The Tax amount changes according to the area of taxation, because of local taxes. It also used to vary according to the destination of the Real Estate to be sold; the tax status for apartments was less expensive than for shops or offices.
Commercial Real Estate transfers were subject to tax at a rate of 18.6%. Since 1999, all transactions are subject to the same tax of 4,89%.
(b) The Cost of Real Estate Ownership
Being a Real Estate owner in France requires the annual payment of several taxes. The Real Estate Tax is the most important one and has to be paid by all owners, whether they are private individuals or companies. The amount is calculated according to the total surface of the ownership.
The Residential Tax is to be paid by the inhabitants of the buildings. The amount is determined according to the inhabitable surface. This tax is local and thus differs from one area to another. In some areas of France, it may be more expensive than the Real Estate Tax, as it may be the only local tax resource for the municipality.
The Professional Tax is paid only by companies. Several criteria are necessary for calculation, such as the revenue and the number of people employed by the company.
(c) The Specific Aspects concerning Non-Resident Investments
The following points are to be explained :
i) the currency of the contract ;
ii) the non-resident accounts in France ;
ie) French and foreign loans ; and
iie) non-resident capital gains.
i) The Currency of the Contract
As French Law considers that paying for Real Estate with foreign currencies requires a flowing back which is obviously impossible with buildings, the Real Estate price purchased by non-residents must thus be paid in French Francs. This payment, however, can take many forms, such as a cashier’s check or a money transfer. This obligation leads foreign investors to open accounts in France.
ii) Non-Resident Accounts in France
This account must be opened by English or American investors with a bank in France. According to the freedom of exchange principle, private individuals may freely exchange capital. The American investor must thus only open an account only within an enabled bank such as the “Banque de France”. The account may be supplied by very simple recordings such as international money transfers from bank to bank.
On the day of the Real Estate purchase, the foreign investor pays the price with a cashier’s check. This check is given to the Notaire, and thus the entire price transits within the Notaire’s accounting. This ensures the transaction because the Notaire may thereby pay any recorded creditor before refunding the balance to the seller. These proceedings ensure the purchaser’s acquisition since the Real Estate is guaranteed to be transferred without any creditor remaining recorded.
ie) French and Foreign Loans
An American or an English investor may need a loan to pay for his/her French Real Estate purchase. The loan contract may be granted either by a French bank or by a foreign one.
Many guarantees may secure a loan contract. The Notaire counsels investors on the least expensive security and he advises the bank as to the most appropriate guarantee for each specific transaction.
Any Real Estate security must be drafted by a Notaire in an authentic agreement. The most frequent one is the mortgage.
iie) Non-Resident Capital Gains
Any capital gain carried out within a Real Estate sale is subject to tax. As the American investor is a non-resident, he must obtain a banking accreditation before the final sales agreement. This ensures the payment of the capital gain to the Tax services.
If a given transaction does not generate any capital gain, an exemption may be required from the Tax services. Unlike the resident’s capital gain, the non-resident’s one is paid by tax with-holding exempting him from all future taxation at a rate of 33,33%.
The Notaire may also advise investors for all proceedings, tax filing rules, and rates of the Capital Gain Tax, as he may execute tax filing rules for his clients.