by Ronald Austin
In an article which appeared in these columns in May 1989, the writer updated his previous reviews of various legal aspects to be borne in mind when entering the French real estate market, with particular reference to Paris offices. The purpose of this article is to deal with developments of particular interest which have occurred in mid/late 1989 and early 1990.
Exchange control
The circulars of May 1987 and September 1988 have been repealed and replaced by a circular of January 1990. This maintains the previous position that no consent is required by non-residents for the creation of any new business in France nor for the taking of stakes in French businesses carrying out a property activity, other than the construction of buildings destined for sale or letting. It follows that consent is still required for a non-resident to acquire a stake in an existing property development company.
As a result of a decree of January 1990, purchases of property development companies by natural persons having their habitual residence in an EC member state or by a juridical person (such as a company), under the direct or indirect control of natural persons residing in an EC member state (or a public body situated in one of such states or one of such states itself), do not require consent.
The procedure to verify the EC status of the purchaser has been reduced to 15 days and there is a new (somewhat heavier) procedure for a non-resident investor to be granted permanent EC recognition.
Since a notice of June 1989, exchange control matters relating to French businesses carrying out principally property activities are now dealt with by the Treasury Directorate at the Ministry of Finance and no longer by the Bank of France.
The orders (decrees) of June 1988 and March 1989 have now been replaced by a decree of December 29 1989 which maintains that consent is not required for a French resident (such as a French subsidiary of a UK property company) to obtain loans (whether in French francs or foreign currency) from non-residents: but where such loans exceed Fr500m pa, a statistical declaration must be made to the Bank of France
User
Readers may recall that legislation exists to the effect that residential premises may not be used for any other purpose without the consent of the Prefet and that premises having a professional or administrative user cannot, if such user is not continued, be used other than as residential premises without such consent: in practice, the Prefet requires “compensation” so as to ensure that the housing supply is not reduced.
In the light of increasing concern regarding the reduction of residential premises in Paris, a circular-letter from the Minister of Housing to the Prefect of Paris of November 1989 lays down the principle that any change of use from residential to commercial should be refused. In those parts of Paris where there is a “clear tendency” of a reduction in residential premises, consent can be granted only in consideration of a “decommercialisation” of premises of at least an equivalent area in the same arrondissement or in a neighbouring arrondissement: the physical characteristics and environment of each set of premises must be of a comparable nature. Any compensation in the form of a cash payment (which was previously permitted to a limited extent) is now “strictly prohibited”.
The Finance Act for 1990 provides for a new tax on premises with office user in the Paris region. Such tax is the subject of an instruction of the tax authorities of February 1990. Offices are widely defined and cover in particular all premises used for commercial or professional purposes, with the exception of retail and warehouse premises, workshops, hangars and garages.
The tax is due at the following rates (for 1990, such rates being thereafter subject to annual indexation by reference to the cost of construction index):
(a) Fr50 per m2 in the 1st, 2nd, 3rd, 4th, 6th, 7th, 8th, 9th, 14th, 16th and 17th arrondissements of Paris and in Nanterre and Boulogne-Billancourt;
(b) Fr30 per m2 in the 5th, 10th, 11th, 12th, 13th, 15th, 18th, 19th and 20th arrondissements of Paris and in Antony, Seine-Saint-Denis and Val-de-Marne;
(c) Fr15 per m2 in Seine-et-Marne, Yvelines, L’Essonne and Val-d’Oise.
The area taken into account is that of both the premises themselves and any “indispensable” annexes such as sanitary facilities: canteens in an office are, however, exempt from the tax.
The tax is due by the owner of the building as at January 1 each year and whether or not the owner can recover tax from the tenant will, of course, depend upon the terms of the lease. A declaration must be filed along with the payment of the tax before March 1 each year, the delay for such filing in 1990 having been extended to April 2 1990.
Office development permit
The decree of January 1985 provided that no office development permit (agrement) was required for the construction of office buildings intended not for the use of the constructor but for sale or letting. A decree of January 3 1990 has reintroduced the necessity for an agrement for such properties where the floor area is 2,000 m2 or more in Paris intra muros and certain specified communes in the Paris area. The new rules apply where the time for examining an application starts to run on or after January 7 1990.
Registration duty and TVA
The relatively high rate (16.985% plus a local duty) of registration duty continues to be due upon the acquisition of commercial property where the acquisition does not give rise to TVA. As from March 1 1990 the 1.25% local duty in Paris has been increased to 1.4%.
Readers may recall that the so-called “fifteenths rule” (where annual rents received by the investor were less than 1/15 of the value of the building, the investor was obliged to pay back to the tax authorities a part of the TVA refund obtained) was declared illegal by a decision of the European Court of Justice and that a ministerial reply announced its repeal. Such repeal duly occurred by a decree of May 1989 which also extended (from five years to 10 years) the duration of the option made by the investor to submit rents to its TVA (such option being necessary to enable the investor to recover the TVA paid in respect of its acquisition).
Corporation tax
A law of December 1989 has reduced the standard rate of corporation tax to 37% in respect of profits realised in financial years commencing from January 1 1990. If, however, profits are distributed, then a complementary amount of corporation tax is payable equal to 5/58 of the dividend, bringing the effective rate of corporation tax in respect of distributed profits up to the old standard rate of 42%.
The special reduced rate of 15% applying, subject to certain conditions being met, to long-term capital gains has been increased to 19% with respect to long-term gains realised as from October 20 1989.
While a law of December 1984 introduced the possibility for French companies to carry back losses to previous years, property investment and management companies were specifically excluded from such possibility (as were, in practice, property dealing companies, because one of the conditions for the possibility to apply was an investment in depreciable fixed assets).
A law of December 1990 has removed such restrictions so that as regards financial years ending on or after December 31 1989, any company subject to corporation tax can opt to carry back its losses so as to set them off against the profits of the three financial years preceding the making of the option. This results in the taxpayer having a claim against the tax authorities which is payable at the expiry of five years, unless, in the meantime, it is used by way of set-off against tax due.
Readers may recall that, subject to exceptions previously reviewed in these columns, a tax of 3% of the market value on January 1 of immovable property in France directly or indirectly owned by foreign companies is due each year and that a decision of the Supreme Court of March 1989 held that, in the case of a chain of companies, in order to see whether the tax was due, one must examine the position of the ultimate company in the chain (to see if it is exempt or not) and not take account of companies which were mere links in the chain (eg a UK company owning a Liechtenstein anstalt owning a French company owning a French property: provided the English company files the declaration referred to at (a) below by May 15 each year, the tax is not due according to such decision, but see (b) below).
Readers may also recall that a decision of the Supreme Court of February 1989 stated that the tax was not due where the company concerned was resident in a country with whom France has concluded a tax treaty containing a non-discrimination clause: the question arose as to whether, therefore, such companies need file the declaration referred to at (a) below at all in order to be exempt from the tax.
These two important cases have been “overruled” by a law of December 1989 (which is stated to be “by way of interpretation”, and thus of retroactive effect). Following from such law:
(a) The nationality of the company becomes irrelevant once its “effective seat of management” is situate abroad: accordingly, irrespective as to whether the company in question is resident in a country having concluded a tax treaty with France containing a non-discrimination clause, it will still be liable to the tax (unless it has its “seat” in a country or territory that has concluded a tax treaty with France which contains a clause for the provision of reciprocal assistance with a view to fighting tax fraud, provided that a special declaration is filed at the latest on May 15 in each year indicating, in particular, the identity of the shareholders and the number of shares held by each).
(b) In the case of a chain of companies the position reverts to that laid down by the tax authorities prior to the decision of the Supreme Court of March 1989, namely, the tax is payable once a company in the chain is liable thereto, the tax being due by the company in the chain nearest to the property.
(c) The position taken by the tax authorities in an instruction of August 1987 that stock held by property dealers is not liable to the tax has now been confirmed by law: such stock is, however, taken into account to determine whether more than 50% of the French assets directly or indirectly owned by a foreign company consist of immovable property, thus giving rise to a liability to the tax.
(For a more detailed analysis, readers are referred to an article by H Lazarski published in the March 1990 issue of European Taxation.)
Leases
A law of December 1989 has improved the position of a defaulting tenant: whereas previously the decree of September 1953 relating to commercial leases provided that the lease could not be rescinded for failure to pay rent before the expiry of one-month from the issuing of a formal notice (“commandement”) to pay, the position now is that such one-month period applies to any default by a tenant under a commercial lease (ie not only that relating to non-payment of rent).
Furthermore, while previously a court could grant time to the tenant and suspend rescission for failure to pay rent at the due date, the court can now grant the tenant time to execute in the case of any default under the terms of a commercial lease.
