by Ronald Austin
In an article which appeared in these columns in March 1988, 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 1988 and early 1989.
Exchange control
Whereas the previous position was that, as regards the creation of new companies or businesses, it was only in the case of immovable property (real estate) activities that no consent was required, a circular of September 1988 has now provided that no consent is required for a non-resident to create any new business or company in France.
Bank of France consent is still required where a non-resident purchases (or subscribes to an increase in the capital of an existing company) save where the sole object of the company is 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.
It follows that consent is still required for a non-resident to acquire a stake in an existing property development company.
It should be recalled that no such consent is required where:
(i) the purchaser is either a natural person habitually residing in an EEC member state or a juridical person (such as a company) having its registered office there; and
(ii) its central management is in an EEC member state and it is directly or indirectly controlled by one of such states, a public body in one of such states, or natural persons resident in one of such states. (The legal validity of this condition is, however, open to criticism.)
In such case there is a procedure to enable the Bank of France to verify the EEC status of the purchaser. In practice, in the case of an acquisition of a property development company, it may be quicker merely to apply for consent rather than to go through the verification procedure.
As regards finance, an order of June 1988 has abolished the limit of Fr50,000,000 beyond which Bank of France consent was previously required for a French resident (such as a French subsidiary of a UK property company) to obtain a loan denominated in French francs from a non-resident.
An order of March 1989 has replaced that of June 1988 and one of its effects is to remove the restriction on French banks lending French Francs to non-residents.
User
Readers will 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 current rate of redevance in many areas of Paris of particular interest to foreign investors was Fr900 per m2, a law of December 1988 has increased the maximum authorised rate from Fr1,300 per m2 to Fr1,600 per m2. A decree of February 10 1989 has increased the Fr900 per m2 rate to Fr1,600 per m2. Such new rate will apply, in particular, to planning permissions granted or declarations of conversion made, on or after February 13 1989. It follows that, unlike the case of the previous change in rate (in September 1987), the date of filing of the application for planning permission is not a criterion.
Planning permission
It will be remembered that a challenge by a third party as to the validity of a planning permission could be filed only within a period of two months after the expiry of a first period of two months during which the planning permission had been affixed to a notice board, both at the Town Hall (mairie) and on site (ie a four-month period). Certain difficulties arose regarding the interpretation of such a time-limit and a decree of April 1988 has provided that the time-limit for filing a challenge is now two months from the latest of the following dates:
(a) the first day of a continuous period of two months of publication of the planning permission on site:
(b) the first day of a continuous period of two months of publication of the planning permission at the town hall.
It should be pointed out, however, that within such period it is open to a third party challenging the planning permission to file such challenge either with the administrative court or with the person having issued the planning permission (eg the major) or with such person’s hierarchical superior (eg the prefect). In either of such latter cases the third party can subsequently file a challenge with the administrative court within two months of the rejection of its “administrative” challenge, a failure on the part of the recipient of the challenge to reply within four months being deemed to be a rejection.
Accordingly, as in the past, a prudent developer will obtain certificates as to the absence of challenge from the issuer of the planning permission, his hierarchical superior, and the administrative court: certain court registries, however, refuse to issue such certificates on the ground that they may be liable for damages in the event of an error therein.
TVA
Readers will recall that the sale of a building “on plans” or the first sale of a building within five years of its completion (sales to property dealers not being taken into account) is subject to TVA (VAT) at the rate of 18.6%.
Where the purchaser is a property investor (as opposed to a property dealer) and such investor then lets the building unequipped, it can only recover the TVA it paid in respect of its acquisition, if it opts to submit its rents to TVA. Such option can be made once there is in existence an agreement to lease even a mere part of the building.
The effect of the option is to give the investor an activity subject to TVA, thus giving him a right of deduction (right to recover) in respect of the TVA it has paid out. To the extent that the TVA received on its rents is insufficient, the investor has the right to a refund of TVA from the tax authorities.
Since, as indicated, the option can be made before any rents are actually due, let alone paid, the position could arise where many years would elapse before the amount of the TVA refunded would flow back to the tax authorities out of the TVA received by the investor on its rents.
Accordingly, in 1979 a decree was passed to the effect that where the annual rents received by the investor were less than one-fifteenth of the value of the building, the investor was obliged to pay back a part of the refund to the tax authorities. This was known as the “fifteenths rule”: its purpose was to ensure that the refund would flow back to the tax authorities over a maximum period of 15 years.
A decision of the European Court of Justice in September 1988 decided that such decree was in breach of the sixth directive on TVA of May 16 1977. The court held that it resulted from such directive that member states are obliged to enable persons carrying out activities subject to TVA to deduct (recover) the whole of the TVA paid by such persons in respect of such activities. Nothing in such directive enables such right to be limited.
A ministerial reply in February 1989 has stated that a decree will shortly repeal the “fifteenths rule”. It is, in any event, generally considered that taxpayers who have been obliged, as a result of the “fifteenths rule”, to repay a TVA reimbursement in whole or in part are now entitled to make a claim against the tax authorities in respect of such repayment.
According to the relevant article of the Tax Code, the option could only be made in respect of the letting of “unequipped premises for the needs of the activity of a person carrying out an industrial activity, a commercial activity or an activity consisting in providing services”.
In its published instruction, the tax authorities stated that accordingly such option could not be made in respect of premises which were let to public law bodies (eg government ministries) who were not subject to TVA.
A decision of the Supreme Court in January 1988 stated, however, that it was irrelevant whether a tenant was or was not subject to TVA: the option could be validly made if the tenant carried out on the premises an industrial or commercial activity or an activity consisting in providing services (this latter activity was the relevant one in the case under consideration which concerned a family allowance body).
A law of December 1988 has, however, reversed the position and has modified the relevant article of the Tax Code, so that the option is now valid only to the extent that the tenant carrying out a commercial or industrial activity or an activity consisting in providing services is itself subject to TVA.
The effect of this change is that where an investor is purchasing a new building, paying TVA on the acquisition price, it should continue to give careful consideration as to the nature of its tenants, since this will affect its ability to recover TVA. (There is, however, now a concession regarding certain family allowance bodies). It should, however, be pointed out that a ministerial reply in October 1987 confirmed a practice which already existed whereby a tenant such as a government ministry or local authority paid, in addition to the rent (subject to registration duty), an amount in lieu of TVA in order to compensate the investor for its inability to recover such latter tax.
Corporation tax
Since January 1 1988 the standard rate of corporation tax in France has been 42%, a special reduced rate of 15% applying, subject to certain conditions being met, in the case of long-term capital gains.
A law of December 1988 has reduced the standard rate of corporation tax to 39% in respect of profits realised in financial years commencing as from January 1 1989. If, however, profits are distributed, then a complementary amount of corporation tax is payable equal to 3/58 of the dividend, bringing the effective rate of corporation tax in respect of distributed profits up to the old standard rate of 42%.
Registration duty
There is a relatively high rate (16.985% plus a local duty of 1.15%) of registration duty payable upon the acquisition of commercial property in Paris where the acquisition does not give rise to TVA (cf above). No changes have been made to these rates in 1988, but as from March 1 1989 the 1.15% local duty in Paris increased to 1.25%.
The rate of registration duty on the purchase of a business undertaking or of a commercial lease has, however, been reduced from 16.6% to 14.2% with effect from October 1 1988.
As regards companies, where the initial capital of a company is subscribed for in cash, registration duty is payable at the rate of 1%.
A law of December 1988 has limited the amount of such duty to Fr430, whatever the amount of the initial capital. It should be remembered that since June 1 1985 registration duty is no longer payable in respect of the increase of the capital of a company where such increase is subscribed for in cash.
Group relief
The possibility for the fiscal consolidation of the accounts of a group of companies (other than as a result of a special ministerial approval) is a new idea in France which has been open to companies in respect of financial years commencing on or after January 1 1988. As will be appreciated, this subject is a complex one and is certainly outside the scope of an outline review of this nature.
Briefly, a French company owning, directly or indirectly, at least 95% of the capital of one or more other French companies can elect for group status, provided each of such other companies also so elects. Such elections must be made annually before the beginning of the financial year in respect of which they are made, transitional provisions having applied in respect of the first financial year commencing on or after January 1 1988.
The capital of the ultimate parent company in the fiscal group must not be directly or indirectly owned as to 95% or more by another French company: a foreign company can, however, hold 95% or more of the capital of such (French) parent.
Each of the companies in the group files a tax return in respect of its own taxable profits or its own losses admitted for tax purposes. In addition, the parent company files a return showing the group profit or group loss, defined as being the algebraic sum of the profits and losses of all the companies within the group. Corporation tax on such group profit is paid by the parent company though each member of the group is jointly and severally liable for a proportion of the tax, being the corporation tax which it would have paid, but for the fiscal grouping, in respect of its own profits.
Various adjustments are made before arriving at the group profit (for example, in the case of a loan made by one member of the group to another, interest which would otherwise have been taxable income in the hands of the lender and a tax deductible expense in the hands of the borrower is not taken into account, the expense cancelling out the income). Furthermore, dividends can flow from the subsidiaries through to the parent without the intermediate taxation which would normally be levied. There are particular consequences where a company leaves or is deemed to leave the group within five years and losses which have arisen before a company became a member of the group can be used only by the company concerned and cannot be surrendered up to the parent.
Wealth tax
Wealth tax (originally known as the “tax on large fortunes”) originally existed in France from January 1 1982 until January 1 1986 when it was abolished.
A law of December 1988 has, however, reintroduced such a tax (now known as the “annual solidarity tax on fortunes”) with effect from January 1 1989. The tax is levied on net wealth as at January 1 each year, at a rate on a sliding scale between 0.5% and 1.1%, on net wealth in excess of Fr4m, the top rate applying to net wealth in excess of Fr20m.
Such tax is only payable by “natural” persons (ie individuals) and not by “juridical” persons (such as companies).
It should, however, be borne in mind that individuals who do not have their fiscal domicile in France are liable to wealth tax in respect of their French assets. These include shares held by them in a company not quoted on a stock exchange, not subject to the 3% annual tax (see below) and whose assets in France are principally (more than 50%) constituted by immovable property or immovable property rights situate in France.
Property used for the company’s own industrial, commercial, agricultural or professional activity is not taken into account for the purpose of such latter calculation.
While it is arguable that this exclusion covers stock held by property dealers, it does not cover immovable property held as a fixed asset for letting.
Only a proportion of the value of the shares is taken into account, namely the value of such French immovable property or immovable property rights in relation to the world-wide assets of the company.
Broadly speaking, the 3% annual tax is payable by a company having its “seat” (place of management) in a tax haven country (as defined) and possessing immovable property in France (constituting more than 50% of its French assets) held for investment rather than property dealing purposes.
It should, however, be pointed out that wealth tax is not due in respect of professional assets which can include shares in companies provided certain conditions are met, but this would not be the case of a company having property investment as its principal activity.
3% annual tax
The position of the French tax authorities was that where a building was owned through a chain of companies, the tax was payable once a company in the chain was liable thereto, irrespective of the fact as to whether the ultimate company in the chain was so liable.
A decision of the Supreme Court of March 7 1989 concerned the case of a Swiss company which was itself owned by a Canadian company, the Canadian company being exempt from the tax. The Supreme Court held that in order to see whether the tax was due, one must examine the position of the ultimate company in the chain and not take account of companies which were mere links in the chain.
It follows from this decision that, for example, where a building in France, let to a third party, is owned by a French company which is in turn owned by a Liechtenstein Anstalt which is in turn owned by an English company which (subject to what is said below) files the relevant annual declaration as to, in particular, the identity of its shareholders, the tax would not be due.
A decision of the Supreme Court of February 28 1989 has stated that the tax is not due where the company concerned is resident in a country with whom France has concluded a tax treaty containing a non-discrimination clause (such as clauses 23 and 25 of the Franco-British Tax Treaty of May 22 1968). Accordingly the question arises as to whether such companies need file a declaration at all.
The reaction of the French tax authorities to the above cases is currently awaited.
