Ronald S Austin
In a three-part article which appeared in these columns in June 1986, the writer reviewed various legal aspects to be borne in mind when entering the French real estate market, with particular reference to Paris offices. Such review was the subject of an overall update and expansion in a paper presented to the Continental Group of the Royal Institution of Chartered Surveyors in London, in June last year. The purpose of this article is to deal with five developments of particular interest which have occurred in 1987.
Exchange control
Whereas the previous position was that, subject to some exceptions, Bank of France consent was needed either for a non-resident company to purchase directly a site or building in France with a view to redevelopment or for such non-resident company to create a French company with a view to carrying out real estate activities of any nature in France, a circular issued in May 1987 removes the necessity to obtain prior exchange control consent in particular in the following cases:
(a) for the subscription to the initial capital and the taking of stakes in the capital of French companies having as their sole object the construction of buildings destined for the own use of the purchaser (or of a business which it controls), the holding or management of an immovable property portfolio, or the purchase of buildings with a view to sale;
(b) for the subscription to the initial capital of French companies having as their sole activity the construction of buildings destined to be let or sold.
It follows that, as regards immovable property (real estate) activities, Bank of France consent is now required only where a non-resident purchases (or subscribes to an increase in the capital of) a company which has a development activity (eg the construction of buildings destined to be let or sold). It is therefore not required for a non-resident to create a French company to purchase a fully let building.
As regards guarantees (eg in respect of finance), the circular provides that while guarantees given directly or indirectly by non-residents in respect of the obligations of a French company under their control are still considered to be direct investments in France, “only their calling is the subject of the procedures set out by the present circular” (which would not prevent payment being made).
As regards finance, the circular provides that loans obtained by French companies from non-resident shareholders (or non-resident companies within the group) do not require consent. Companies are considered to be part of the same group if they are controlled directly or indirectly at least 75% by the same non-resident persons.
As regards other non-resident sources of loan finance another circular of May 1987 provides that a French resident (such as a French subsidiary of a UK property company) can obtain a loan denominated in foreign currency from a non-resident without Bank of France consent.
Where the loan is denominated in French francs, it is provided that Bank of France consent is required only where the amount of the loan for a given operation exceeds Fr50m.
The current position, therefore, is that there are no longer any exchange control restrictions relating to the early repayment of loans obtained from non-residents. (The previous rule almost invariably being that such loans had to be for a minimum period of one year and where the loan was repayable in stages, a one-year period had to separate each stage.)
Readers may recall the obligation of authorised depositories to file certain statistical forms with the Bank of France regarding both operations expressly authorised or operations exempted from authorisation and that it was advisable to ensure that the authorised depository did file such declarations since, apart from sanctions, failure to do so may have held up subsequent exchange control applications.
The current position is that such statistical declarations need no longer be filed in respect of the exemptions referred to above regarding the subscriptions to capital and the taking of stakes in certain property companies nor in relation to loans granted to or guarantees given in respect of such companies by non-resident members of the same group.
As regards loans obtained from other non-resident sources, a statistical form still has to be filed (with the Balance of Payments Directorate at the Bank of France) upon both the obtaining of the loan and the repayment thereof.
User
Readers may recall that where premises in the Paris region are converted into offices, a tax known as the redevance is payable in respect of the office premises which are created. Whereas the maximum rate in practice in Paris itself was (subject to certain very limited exceptions) Fr400 per m2 in most districts, the maximum rate authorised by law was increased from Fr500 per m2 to Fr1,300 per m2 in 1982. There had been persistent rumours of an increase in rates and such an increase finally materialised in the form of a decree published in early September 1987 whereby the rate of the redevance was increased to Fr900 per m2 in the 1st, 2nd, 3rd, 4th, 6th, 7th, 8th, 9th, 14th, 15th, 16th and 17th arrondissements of Paris.
Rates in certain other parts of the Paris region are also increased and worthy of particular mention is that as a result of the abolition of a particular article of the Planning Code, the amount of the redevance in La Defense has been increased from Fr300 per m2 to Fr900 per m2. Such abolition also has the effect of increasing the rate in Les Halles from Fr100 per m2 to Fr900 per m2.
The decree provides that the increases therein apply to cases where the application for planning permission, the declaration in lieu thereof, or the declaration regarding the change of user, as the case may be, has been received by the relevant authority prior to the date of publication of the decree (September 11 1987).
PLD tax
Readers will recall that in 1975 a maximum legally permitted plot ratio (plafond legal de densite — PLD) was created and that this had been increased from 1.5 to 3 by the Paris Municipal Council. A tax was payable (PLD tax) where such PLD was exceeded, such tax being, broadly speaking, the equivalent of the value of the additional land which would have had to be purchased in order for the PLD to be respected.
As a result of a law of December 1986, since the Paris Municipal Council did not decide, by June 24 1987, to maintain the PLD, the latter (and thus the PLD tax) has been abolished in Paris. It follows that the PLD tax will not be due in respect of planning permissions issued in respect of sites or buildings in Paris after June 24 1987.
The Planning Code provides, however, that the Paris Municipal Council does have the right to re-establish the PLD (and thus the PLD tax) at any time. In such a case, however, the minimum PLD cannot now be less than 1.5 and there is no longer a maximum limit.
As regards France as a whole, according to a survey effected by the National Group of Developers of the National Building Institute, the PLD has only been maintained in 6.2% of the 28,769 communes which were the subject of the survey.
3% annual tax
As indicated in our previous article, this tax can be due either where a company having its “seat” (place of management) outside France possesses immovable property in France directly or where it owns such property via an “interposed” person. Accordingly, the tax authorities took the view that where, for example, a Liechtenstein Anstalt owned the shares of a UK company which in turn owned the shares of a French company, whose sole asset in France was a building which was let, the tax was due by the Liechtenstein Anstalt.
A recent decision of the court at first instance in Paris, however, held that a position taken by the tax authorities was wrong in law. The case concerned a Swiss company (60% of whose capital was owned by a Swiss bank and 40% by Swiss citizens) which owned 91% of the share capital of a French company which owned various buildings in France which were let. The court stated that the question to be decided was whether the Swiss shareholder could be considered to have the “possession” of the buildings of the French company because it was the majority shareholder thereof.
The court held that it was clear that the material possession was that of the French company which must also be presumed to have the intention to possess (possession under French civil law requiring physical, or material, possession and an intent to possess). The court accordingly concluded that since the Swiss shareholder had always only acted as a shareholder, respecting the rights of the minority shareholders, it could not be said to have had the possession of the buildings in France so that accordingly the tax was not due.
It must be emphasised that this decision is not conclusive since it is understood that the tax authorities have appealed to the Supreme Court. (For a more detailed analysis of this decision readers are referred to an article by H Lazarski published in European Taxation in November 1987.)
Readers will also recall that the tax was not payable in respect of immovable property used for the taxpayer’s own industrial, commercial, agricultural or non-commercial professional activity.
The tax authorities took the position, however, that on one hand the tax could be due in respect of immovable property let to third parties (ie as part of a letting activity) and on the other hand to immovable property held as stock by dealers in immovable property.
The tax authorities have now revised their position on such second aspect, on the basis that the tax applies only to immovable property held as fixed assets rather than as stock-in-trade, so that it does not apply to property dealers. This change is particularly relevant to companies carrying out development activities with a view to selling the development.
The tax authorities continue, however, to take the view that immovable property let to third parties and held in the books of the company as a fixed asset is subject to the tax.
Withholding tax on interest paid abroad
The position under French law was that where a French borrower (such as a French subsidiary of a non-resident property company) obtained a loan from a lender fiscally domiciled abroad, interest payable under such loan was subject to deduction of a withholding tax at a rate of 45%, which was usually reduced (sometimes to nil) by tax treaties. Thus, in the case of the France-UK tax treaty of May 22 1968, interest paid by a borrower resident in France to a lender resident in the UK was subject to withholding tax at 10%, while under the France-Netherlands tax treaty of March 16 1973 interest payable by a borrower resident in France to a lender resident in the Netherlands, being a bank, was subject to withholding tax at a nil rate.
Interest payable under certain loans obtained from a lender fiscally domiciled abroad were, however, exempt from withholding tax if certain conditions were met and if a special authorisitation was obtained from the Ministry of Finance.
A law of June 1987, however, has modified the above, so that interest payable by a borrower fiscally domiciled in France to a lender fiscally domiciled abroad is no longer subject to withholding tax provided either that the loan is exempt from French exchange control consent (see above) or that such consent has been obtained. As has been seen above, the latter case would now only concern loans obtained from a non-resident lender (not being a member of the same group as the borrower) denominated in French francs for an amount in excess of Fr50m. This exemption from withholding tax applies whatever the form of the loan, eg an ordinary term loan, issue of debt securities, etc.