by Ronald Austin
In an article which appeared in these columns on May 12 1990, the writer updated his previous reviews of various legal aspects to be borne in mind when entering into 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 1990 and early 1991.
User
Readers may recall that the rates of the tax on premises with office user in the Paris region are subject to annual indexation by reference to the cost of construction index.
Accordingly, pursuant to an order of December 1990, the rates applicable in 1991 are:
(a) Fr51.4 per m2 in the 1st, 2nd, 3rd, 4th, 6th, 7th, 8th, 9th, 14th, 15th, 16th and 17th arrondissements of Paris and in Nanterre and Boulogne-Billancourt;
(b) Fr30.8 per m2 in the other arrondissements of Paris and in Antony, Hauts de Seine, Seine-Saint-Denis and Val-de-Marne;
(c) Fr15.4 per m2 in the departements of Seine-et-Marne, Yvelines, l’Essonne and Val-d’Oise.
A ministerial reply of October 1990 has confirmed that the tax is due by the owner of the premises: while the owner and the tenant can agree that it will ultimately be borne by the tenant, this is not binding upon the tax authorities, who always have recourse against the landlord.
An instruction of the tax authorities of February 1991 has provided further clarification as to the extent to which, in particular, premises open to the public are exempt from the tax.
Registration duty and TVA
Where immovable property is purchased by a property dealer (marchand de biens) the somewhat high rate of registration duty (16.985% plus a local duty of 1.4% in Paris) is reduced to 0.615% provided that such purchaser fulfils certain formalities and undertakes to sell within five years. A law of December 1990 reduces this five-year period to four years and provides that a sale must take place within such period to a person who is not a property dealer. In default, a person purchasing as a property dealer will be considered not to have fulfilled his undertaking to sell within four years, thus giving rise to a liability to pay the balance of the duty which otherwise would have been payable, an additional duty of 6%, and interest for late payment of 0.75% per month.
As from March 1 1991, the 1.4% local duty in Paris referred to above has been increased to 1.5%.
A landlord can opt to submit rents to TVA in order to enable the recovery of TVA paid in respect of the acquisition of a “new” building. Such an option could be made only in respect of premises where the tenant was carrying out a commercial or industrial activity or an activity consisting of providing services and where the tenant was itself subject to TVA. Accordingly, the option could not be exercised in respect of premises let to the French state, local authorities and other public bodies: TVA in respect of such premises was thus not recoverable as such, but usually the tenant paid the landlord an indemnity in respect of the latter’s inability to recover TVA.
A law of December 1990 has provided that, with respect to leases signed from January 1 1991, the option can be exercised in respect of premises let to a tenant who is not subject to TVA, provided that the lease expressly refers to such an option. The tax authorities have stated in an instruction of February 1991 that the option can concern only premises which are let to the tenant for its “economic or administrative activity” (ie it cannot normally apply to residential premises).
3% annual tax
A law of December 1989 modified the criteria for the liability to this annual tax payable, subject to certain exceptions, by a foreign company on the market value of immovable property directly or indirectly owned by it in France. This modification was an attempt to counter a decision of the Supreme Court, which held 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.
In a decision of December 1990, however, the Supreme Court stated that, since the criterion of liability to the tax resulting from the law of December 1989 is that a company must have its effective seat of management abroad, this is tantamount to stating that the tax applies only to a company which has foreign nationality. Accordingly if such a company is a national of a country with whom France has concluded a tax treaty containing a non-discrimination clause, the tax is not due.
Readers may recall that, where a tax treaty with France contains a clause for the provision of reciprocal assistance with a view to fighting tax fraud, if 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 of them in the foreign company owning immovable property in France, the tax is not due. In the light of the decision of December 1990 such declarations need no longer be filed where the non-discrimination clause contained in the relevant tax treaty extends to fiscal obligations (eg the France-United Kingdom tax treaty).
The tax authorities have not yet commented on the above decision: accordingly where a foreign company would have been exempt from the 3% annual tax had it filed the above-mentioned special declaration, it would be prudent for such company to file it unless there are very serious reasons for not doing so.
Corporation tax
The Finance Act for 1991 has again reduced the standard rate of corporation tax to 34% in respect of profits realised in financial years commencing from January 1 1991. It must, however, be remembered that, if profits are distributed, then a complementary amount of corporation tax is payable equal to 8/58 of the net dividend, bringing the effective rate of corporation tax in respect of distributed profits up to 42%.
Acquisition of shares
Readers may recall the advantages and disadvantages of acquiring shares in a property company (as opposed to acquiring the underlying assets). A law of December 1990 has provided that, in the case of a sale of shares in a societe anonyme, the rate of registration duty payable is reduced from 4.8% to 1% of the higher of the purchase price and the market value of the shares (with a maximum duty of Fr20,000 per transfer) in respect of transfers entered into, on or after January 1 1991. This reduction in rate applies to all transfers of shares in a societe anonyme and is not limited to property companies.
Readers may, however, recall that, in the case of a societe anonyme, such registration duty is due only where there has been an agreement in writing in one or more documents signed by the vendor and the purchaser setting out the price and subject-matter of the sale: the problems arising out of such criteria are now likely to be far fewer in view of the reduction in rate and the introduction of a maximum duty.
Finally, it should be recalled that sales of shares in other forms of company (eg societes a responsabilite limitee, societes civiles, societes en nom collectif) continue in any event to be subject to a registration duty of 4.8% on the higher of the price and the market value of the shares.
