There is no legal obstacle to the acquisition by a foreign company of property located in France. However, the taxation applicable may, be a source of difficulties and litigation.
The taxation of rents and real estate capital gains.
As soon as the profit derived from the rental of properties will have its origin in France, the income generated will be subject to corporate tax rates. The rules for determining the profit are those of industrial and commercial profits (BIC) scheme.
The distribution of profits to shareholders will be taxed as dividends and will also be subject in most cases to the taxation applicable in France.
With a few rare exceptions, capital gains from the sale of real estate are taxable in the country where the building is located. Most foreign companies are then subject to a taxation system similar to French companies which makes this operation prohibitive: the capital gain is calculated according to the accounting value which corresponds to the acquisition price less depreciation previously registered. The capital gain thus calculated is subject to corporation tax. Unlike the rules for calculating personal capital gains tax, there is no allowance for the length of detention.
The tax calculation rules therefore make the purchase of french property by a foreign company prohibitive.
The 3% tax and the threat of declarative obligations
Companies and organisations holding property in France are automatically subject to a 3% tax calculated on the market value of the property. There exist various cases of exemption and in particular, one where a company declares every year its capital share. The absence of the annual declaration can cause a tax control.
The use of a holding company to avoid French taxation: warning!
Some set-ups were entitled to tax benefits. Nevertheless, the tax administration is now carrying out extensive assessments on the effectiveness of the set-up. In the case where the domiciliation abroad of the company is used for a strictly fiscal purpose, that is of evading the tax paid in France, the tax authorities may institute proceedings for abuse of rights.
This risk is even more important when the company has no substance in the third country.
The example of Luxembourg companies is emblematic of the change in tax policy that has taken place over the past ten years against aggressive tax arrangements. Until 2008, the Franco-Luxembourg tax treaty allowed Luxembourg investors to benefit from an almost total exemption from the capital gain on the sale of a building located in France.he signing of two amendments to this agreement put an end to this peculiarity.Going further, the Council of State (Judgment of the Council of State of 25 October 2017, No. 396954) recently condemned a tax scheme using a Luxembourg company as constituting an abuse of law. This montage had been made at the time of the old tax convention.
The capital gain realized on the occasion of this sale by the Luxembourg company had benefited from a total exemption from tax in France, under the Franco-Luxembourg tax treaty then in force.
The tax authorities, however, ruled that the company’s intervention was not opposable since the company did not operate any permanent establishment in Luxembourg. The Court of Cassation has proved them right.