Posts in category: Tax & Legal

SARL: Is it viable for your real estate project in France?

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The SARL, a limited liability company, is one of the most common types of businesses in France. That said, it is a bit unknown in the field of real estate. The company must be composed of at least two partners. If you are alone, you can create a EURL (a single-member company with limited liability). In the case of the Family SARL, this one obliges the SARL to be constituted of the members of the same family in the direct link (children, parents, grandparents, brothers and sisters, spouses, persons linked by a Pacs or marriage) and only that! The creation of a family SARL with his niece or uncle is impossible (for example). In this case, it will turn to the SCI (Civil Society for Real Estate).

Advantages:

In front of the law

The liability of the partners is limited according to the contribution to the capital of the company. However, it will be difficult to get a mortgage with small capital. It will then be necessary to increase the contribution or to stand surety for the SARL.

Flexibility

There are three major families of SARL, the “classic” SARL, the family SARL, and if you want to start alone, the SARL Unipersonal (or EURL). For the latter, you can at any time change its status upon the entry of a new partner.

Furnished rentals and social contributions

The notable difference between SARL family / EURL and SCI is that it is possible to obtain the scheme “rented-out, non-professional, furnished properties” (LMNP). It is possible to be taxed on income so it is important to be advised. In addition, when you are alone (EURL), you will not pay social security contributions if your income is equal to or less than 23,000 Euros per year. However, this is appreciated by family members in the company. For example, if you are four partners, this threshold is increased to 92 000 Euros!

Capital gains

Real estate gains are part of the professional gain regime because the company’s business is commercial. It is interesting to note that long-term real estate capital gains benefit from a 10% reduction per year of detention beyond the fifth year. In other words, capital gains are totally exempt after 15 years (against 22 years for individuals (or SCI) and even 30 years on the social security part).

Transmission of shares

The family SARL allows the dismemberment of shares (possibility of separating usufruct, and bare property). If you keep the usufruct (you continue to collect rents) and you give your children the bare ownership, the amount of inheritance tax will generally be very low since calculated on a lump sum according to the age at which you make the donation. One can see a certain advantage of passing on one’s shares when the company is in debt.

Reclaim VAT

When an LMNP investment is subject to VAT (20%), it can be recovered 6 months after the acquisition of the property. In order to dispose of this recovery, your property must be in one of the following categories:

  • Accommodation services provided in classified tourist hotels
  • Accommodation services provided in classified or approved holiday villages
  • Accommodation provided in tourist homes classified when they are intended for the accommodation of tourists and are rented by a contract for a period of at least 9 years to an operator who has subscribed to a tourism promotion commitment to overseas

You must also offer 3 of these benefits, whether for free or for a fee:

  • The breakfast
  • Daily cleaning of the premises
  • The supply of linen
  • Customer reception

It will not sell the property before 20 years, otherwise, the VAT will have to be refunded to the State pro rata. If you have a commercial lease, it will then be necessary to sell your property with the latter to avoid being liable.

Disadvantages:

Set up costs

It is necessary to write the statutes before depositing them at the clerk’s office of the Commercial Court and to advertise them in newspapers of legal announcements. This is between 1000 € and 2000 €.

Direction

The company is managed by one or more managers appointed from among the partners or outside them. They must be natural persons. The manager has powers which are defined in the statutes of the family SARL. The partners meet at least once a year in an ordinary general meeting. Decisions leading to a modification of the statutes are taken at an extraordinary general meeting.

Change of regime

When you choose the corporation tax, you can not go back to income tax. A change is possible the other way around…

If you choose the income tax

The SARL, since it carries out economic operations for a fee, is a taxable person and, as such, is liable for VAT. When you recover the VAT on the amount of the property, you will have to pay a VAT of 20% to the state on the rents perceived for the classical regime. For LMNP property in a senior, student, business or tourism residence, a rate of 10% applies. Finally, regarding the property Leaseback LHPE residence type, the VAT is 5.5%.

If you choose the corporation tax (IS).

For companies with a turnover of less than 7,630,000, the IS tax is as follows:

  • Profit range from 0 to 38.120 euros, the IS rate is 15%.
  • from 38,120 to 75,000 euros, the IS rate is 28%.
  • above 75,000 euros, the IS rate is 33.33%.

For companies whose turnover is between 7,630,000 and 50,000,000 €, the tax is as follows:

  • Profit range from 0 to 75,000 euros, the IS rate is 28%;
  • above 75,000 euros, the IS rate is 33.33%.

For companies with sales of more than 50,000,000 euros, the IS rate is 33.33%.

Source: https://www.impots.gouv.fr/portail/professionnel/imposition-des-resultats

The territorial economic contribution

Like any natural or legal person who, in France, normally carries out a self-employed professional activity, the SARL is liable for the territorial economic contribution (formerly business tax). New businesses escape this tax for the year of their creation.

Conclusion:

A real estate company has more advantages for less inconvenience than SCI. However, it will be very careful to respect the requirements of a family SARL if you want to make the most of the furnished rental.


Why creating a SCI, and why not…

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An SCI, or “Société Civil Immobilière”, is a company that allows a number of individuals to share one or more real estate entities. The partners of the SCI can make contributions ‘in kind’; movable or immovable property that they already possess. These contributions, most often in kind or in cash, give entitlement to shares in the SCI  based on the total capital to partners share accordingly the profits and losses of the company. The SCI can be administered by one or more managers who are chosen by the partners. The managers may be physical or moral persons, for example, a company.

Pros of an SCI

Legal Protection

One of the advantages of an SCI is that it can protect the assets of the partners. Registered in the Trade and Companies Register, it has a legal personality and a heritage that differs from that of an individual. The SCI is the sole owner of the property. Therefore, in case of a dispute, creditors will first turn against the company. If their action proves to be unsuccessful, they can then bring an action against the partners. Only the shares can be seized by the creditors. In addition, it is difficult for creditors to sell the shares of another SCI associate or to know the extent of their wealth. In fact, the partners have an indefinite responsibility according to their participation in the share capital of the SCI, but not in solidarity. This implies that the creditors must act independently against each partner, to engage their responsibility.

Inheritance

SCI also gives parents the possibility to pass on their property to their children while maintaining the management of the property. They simply bring the property to the SCI and distribute the shares of the company to their children. They are the managers of SCI and thus retain control of the property. When parents and children of the same family are associated with an SCI, we are talking about creating a family SCI.

Taxation

The SCI makes it possible to have advantageous taxation. The transfer of a property is normally subject to capital gains tax, with a tax deduction depending on the length of ownership, and a total exemption from tax after 22 years. For the sale of the shares of SCI, the holding period is calculated from the date of subscription of the units and not from the date of entry of the property into the SCI. In addition, the transfer of shares is simpler than the sale of a building that must go through an authentic notarial act.

Investment

the SCI makes it possible to realize several real estate investments by gathering means, which can facilitate the obtaining of financing. It may indeed be intended, for example, to rent.

Business

if you are a business owner, you may also want to use the SCI to acquire the real estate necessary for your business. SCI will collect rents while deducting rental expenses. This arrangement also allows you to allocate shares of SCI to your children without being in your company. In addition, the creditors of your company will not be able to attack the SCI, so real estate is protected.

Cons of an SCI

Creation

The biggest disadvantage with the SCI is its creation. You must complete certain formalities to create it, in particular:

  • the drafting of the statutes,
  • registration of statutes in the tax department,
  • the publication of the constitution of the SCI in a Journal of Legal Announcements (JAL),
  • the registration of SCI with the Registry of the Commercial Court,
  • the declaration of the beneficial owners of the SCI.

These operations have a cost especially if you go through a lawyer to write the statutes. As for the legal announcement, it takes about 200 €.

Management

You must comply with the operating rules of the SCI such as holding an annual general meeting of partners or the keeping of accounts. Accounting is more rigorous if you have made the choice to submit the SCI corporation tax. The accounts should be handed over to the registry every year.

Engagement

You must also take into account the fact that as an associate of an SCI, you have an indefinite responsibility regarding the debts of this one. You commit your personal wealth in proportion to your shares in SCI.

Sell of shares

The sale of shares of an SCI can be complicated if a clause of approval is provided for in the statutes. Indeed, if you want to sell, it will require the agreement of other partners.

Our Suggestions

Creating an SCI is a good option if you are planning to simplify transmission and protect real estate assets, it permits to be flexible in the choice of the tax system and it adds the possibility to sell shares easily with the agreement of the shareholders. But the procedure may seem complex, you must be rigorous regarding the law concerning the organization of the general assembly and the accounting.


Deal or No Deal: How is Brexit affecting the French property market for UK buyers? by John Busby

Big Ben

Introduction

Whilst things remain uncertain in relation to the eventual form of Brexit, perhaps this is the beginning of the end of a period of uncertainty over the past two and a half years in the French property market for which British buyers make up the majority of foreign ownership.

In summer 2016, the French property market was buoyant with a strong pound and ultra low interest rates. Many British buyers were taking the plunge and buying a dream property in France, engaging in a new chapter in their family’s history. The Brexit vote caused the value of sterling to decrease by circa 10%, increasing purchase costs by this amount.

The effect of this increase in the upfront costs was mitigated by the low fixed rates on offer from French banks where you could still fix your interest rate at 2% for 20 years, thus many people have continued to purchase property over the past 2.5 years.

However, not all sections of the market were affected equally. The prime end of the market and those looking for a cheap and cheerful property were less concerned by this increase in real terms of the cost to purchase their property

The fact is that when you have the €280,000 available to purchase a prime property for €1m with 80% on finance, if the cost increases by 10% (€28,000), this is not necessarily going to stop the purchase in its tracks. Chances are that if you are looking at a property in this price bracket, you have the funds and the confidence available to continue with the purchase.

Likewise at the lower end of the market, where the banks have seen growing numbers of requests for loans in the €100,000 region in recent times, increases in initial purchase costs are perhaps only a few thousand euros and small enough not to be a factor relative to budgets and income.

It is the so called squeezed middle, whose aspirations for a property in France exceed what would be wise from a risk perspective given deposit and Brexit concerns, who have not had the confidence to buy in large numbers.

Brexit has been dragging on now for more than two years. A difficult negotiation has been made even more so by the high emotion which surrounds the issue. As we get to the business end of the horse trading, we will soon see the outcome or at least have some more visibility on the outcome to enable the middle of the market to begin buying in France at a higher volume.

Some scenarios

No Deal

In the event of a no deal Brexit, many of the agreements between the EU and UK would become null and have to be renegotiated. However, what wouldn’t change are the specific agreements which exist between France and the UK. These agreements relate mainly to double taxation and provide a basis for the ongoing relationship as they pre-date our membership with the European union and have been updated along the way. Of course a No-deal Brexit would be traumatic in the media and result in a tougher 2020 as businesses adjust, taking some time for the British economy to recover from all the bad press, the loss of income and the higher initial expenses.

Existing owners

The overall effect of a no-deal would be a lower value of sterling for an initial period and thus those with existing mortgage payments in euros would see the cost go up by another 10%. Of course, commensurately anybody who owned a property in France would see the value of the property increase by the same amount. This means we might see some more property come onto the French market in tourist locations which again might drive the price down a little, keeping the status quo.

Those seeking to buy in 2019

For people looking to purchase in France from the UK, a no-deal Brexit would push up costs on the purchase price by approximately 10%. A small amount to consider if you have found the property of your dreams and you can finance up to 100% of the purchase price (leaving 30% with the bank in a collateral), but a serious issue if funds are tight. For this reason, I would want to say that the lower end of the market might see falls in prices in popular areas but that would be tempered by the fact that we have seen a return of French buyers over the past two years  being quite active and looking for value in the prime tourist areas, exactly at this level between €300,000 to €750,000. Because of this, I am not sure we would see much of a change in property prices at those levels.

A deal of some kind, is the end in sight?

As we have seen recently, the risk of a no deal has been reduced with the UK Parliament taking more of an active role in the negotiations. This has lead to an increase in the value of sterling of roughly 3% in January. This is due to the fact that we have a relatively strong economy with a very low unemployment rate which can be invested in if we have some more certainty which in turn, will lead to higher interest rates and returns for investors in the future. In this scenario, the sterling will continue to appreciate, bringing down the cost of mortgage payments for existing mortgage holders and reducing deposit and property purchase costs for UK buyers. This should then bring the volume back to all levels of the market as we begin to get back to where we were in 2016.

Reversal of the referendum

In the event of a “People’s Vote” which resulted in the cancellation of Article 50, we should work our way back to 2016 levels, sterling at €1.35 to the pound and French property looking even more attractive. The ultra low interest rates will begin to disappear as Europe and the UK pick up investment and we all wonder why we wasted two years. There will still be some uncertainty caused by the Brexiteers complaining and asking for a best of three with a neverendum situation as they have in Canada, with constant talks and threats of a new vote which may be a bit of an economic drag.

Extension of Article 50

This option also seems quite likely and would simply preserve the status quo, perhaps it might strengthen sterling which seems most sensitive to the prospect of a No deal. This would continue things as they are. Buyers continue where deposit costs are not a factor and avail themselves of mortgages at 80% LTV and in some cases at 100% LTV (with 30% collateral with the bank). The truth is that many see buying a euro denominated asset as a hedge and security against a downturn in the UK’s economic fortunes.

 

Buy now or wait?

So to the question of what is the best thing to do. Well like any good adviser, I would say it depends entirely on your situation. If the place of your dreams has been found and you have the deposit for it and it does not present a risk to your family, then now is a good time with low long-term mortgage rates available. This advice stands at any stage of the market. The French property market is known for long steady growth rather than the boom and bust of the UK, so providing the mortgage is affordable, it is a good long-term investment to be enjoyed for generations.


New French Property Wealth Tax: Why not to under value your property?

French Property Wealth Tax: How to value your property?

The latest iteration of the French wealth tax in France, L’impot sur la fortune immobiliere (IFI) came in force in December last year focussing this tax on net property assets only and excluding financial assets from the overall French wealth tax calculation. This tax will generate far more that the predicted 850M initially. French sources suggest 1.2BN this year and 1.5Bn in 2019! Good work it seems from Monsieur Macron.

The main reason for this increase is that property owners are increasingly likely to reevaluate the declared value of the property which will lead to the tax windfall. The main driver for this comes from the upcoming anti-fraud law due to be passed in 2019 which will penalise owners for undervaluation of their property to reduce their tax bill.

What are the main ways to value a property in France?

The main and preferred method to value a property is the comparison method which establishes the market value by looking at recent sales of similar properties in the area local to the property. For buy to let properties, the rental yield can also point to a value for the market value by looking at what the property is renting and taking the average yield from similar properties and extrapolating the price at which a property could be sold in this manner.

A simple valuation of the property costs in the region of €1000 to €2000 depending on the purpose of the valuation. The survey is usually undertaken by chartered real estate professional in France who could be either an estate agent, surveyor or even a Notaire, though it is important to note that a professional valuation is not required for the wealth tax declaration. It is possible to simply ask an estate agent for a report on value which can usually be procured without payment.

What allowances are made?

It is normal practice for properties held in either SCIs or SARLs to benefit from a reduction of 10-15% in the value of the property as the property is deemed to be slightly less liquid. It is important to check your declaration and any reductions with a tax specialist.

What are the potential risks?

If an error in the valuation is found during a check of the property by the tax authorities then the size of the gap will be important. Less than 10% and all should be fine, more than 10% and penalties can be imposed not only for the year in question but the previous three years. In addition to late fees, a further penalty of 40% to 80% of the amount of tax which is being recovered may also be levied. If you have failed to declare the property at all, then the sanctions can be even greater with the tax authorities going back 6 years and the likely additional penalty being nearer the 80% mark especially in cases where bad faith can be established.


French Capital Gain Tax discount for 2013 to be reduced

Another change to the French property tax rules.

The French Senate has adopted an amendment to the 2013 French Tax law reducing the rate of the exceptional discount from 20% to 15% on the capital gains tax levied on the sale of a second home or a land to build in 2013.

Introduced by Senator Marc Francois, the amendment aims to help the government to avoid the loss of 285 million euro in tax revenue. According the amendment, the reduction in the allowance will moderate the cost to the French government of the  property tax discount without undermining the incentive to boost the French property market.

Overseas buyers  are still enjoying the best French mortgages rates for many years and with rates predicted to remain stable over the course of the next year, the future looks bright for those seeking to buy a property in France


Finance Act 2013: real estate tax exemptions will be spared

2013 promises to be a good year for real estate investors in France. After seeing the tax reductions from the “Loi Scellier” diminish each year, the latest announcements and rumours spread around the future Finance Act 2013 suggest that the coming year will be particularly good for those who wish to invest in France as these tax breaks will support the market.

The renewal of the “Loi Girardin” for housing in the Dom Tom, the overseas departments and territories of France, will see the continuation of a tax deduction capped at 18,000 euros for investors fiscally resident in France. The “Loi Malraux”, for investors in Historic Monuments, will also be renewed under the same conditions. Finally, the “Loi Scellier”, which was so popular and helped keep transactions numbers up over the past 3 years, will be discarded in favour of a new law which will have a tax benefit capped at 10,000 euros.

 

As the majority of the existing tax laws will be maintained, investors will benefit from as many tax reductions in 2013 as 2012. The French government has decided to take a little more time to take the full measure of the housing market and levers at its disposal to stimulate the construction of social housing. The tax incentive to increase the sale of construction land, which was recently passed by the National Assembly, will lead to the creation of new housing in 24 to 48 months. The Hollande Government think it is necessary to maintain the current tax advantages for investment in property for rental until the increase in new property construction kicks in as more land is sold for construction.

In this tense economic climate, it is likely that 2013 will be the last year to take advantage of significant tax cuts on investment in private rental investment for those fiscally resident in France. The Duflot law should allow French investors to get an interesting net investment profitability despite the capped rents provided by the law. This activity will help to support the French property market and French property prices. For the international investor, France continues to offer an attractive mix of soft property prices and French mortgage options at extremely low rates.


Last day to pay French land tax

Notice to all French property owners. Today is the last day to pay your French land tax. Payment to the tax administration must be done by midnight on Monday 15th of October. Those who wish to pay online can wait until Saturday 20th midnight before a penalty could be issued. If you are paying online for the first time, you need to have your tax assessment and bank account details ready as they will be required as well as your tax reference number and tax assessment number.

Note that the calculation of the French land tax is automatically done by the fiscal administration and doesn’t need any declaration except if landlords have proceeded to major changes such as building a new room.


French land tax has soared over the past five years

French land tax (Taxe Foncière) increased by 21% nationally between 2006 and late 2011, three times faster than inflation and the rent price index.

Local Councils and Authorities increased Taxe Foncière, which is paid by the owners of a property and not by the tenants, by 21% nationally between 2006 and late 2011, three times faster than inflation, the rent price index or the revaluation of retirement pensions, according to a study of the National Union of Property Owners (UNPI).

Rental value

The tax base for Taxe Foncière is the land rental value, which is the calculated annual rent estimation done by the Local Authority, which is the average market value less 50%. “Today, some owners are forced to pay almost the equivalent of an annual rent when you add up the various costs: Taxe Foncière (35% of the rental value which represents four months of rent), Taxe d’Habitation, VAT pay for the maintenance, etc… “Jean Perrin, president of the UNPI said.

Properties are easy to tax as they are assets that you cannot relocate. “Taxe d’Habitation weighs more on the household budget owners as it is paid by those renting a property from an owner, sometimes they represent up to the equivalent of three months rent, salary or pension,” says the UNPI, which represents small private landlords. At the end of 2011, the national average for Taxe Foncière reached 35.65% of average annual rent of a property as estimated by the local council (excluding additional fees for equipment and garbage collection).

Financial needs

The fast rise of the Taxe Foncière reflects the growing financial needs of local councils and authorities due to the recent decentralization and the decrease of income related to the drop in real estate transactions. “A Taxe d’Habitation increase is politically more difficult to announce, so we have increased the Taxe Foncière, which affects only the owners. In the past five years, Taxe Foncière has risen twice as fast as the Taxe d’Habitation.” Jean Perrin said.

On the 50 largest cities in France, Paris has known the highest Taxe Foncière increase between 2006 and the end of 2011 (+68%) due to the introduction of a city tax in 2009. In three other cities, this tax has increased by more than 30%: Argenteuil (+ 34.79%), Nantes (+ 30.64%) and Saint-Denis (+ 30.15%). However some cities have experienced five years of tax increases below average: Toulouse (+ 18.42%), Marseille (+ 15.34%), Lyon (+ 15.11%), Strasbourg and Bordeaux (14% each).

But the change must be compared with the existing tax rate. For instance, despite a moderate raise, the land tax rates of Nimes and Orleans are among the highest at the end of 2011 (respectively 52.9% and 45.6%). Even if the tax has jumped in Paris, it remains one of the lowest in France (13.5% at the end of 2011). The lowest rates are for property in Paris and its close suburbs.


New French Tax proposals for 2013

The government presented the budget for 2013 last Friday. As expected, the taxation of real estate will be revised. Let’s have a look on the main reforms that will apply next year, subject to ratification.

 

A new rental investment tax system

The Scellier law is to be replaced by the Duflot law. From January 1st 2013, individuals who buy a new property for rent will benefit from a tax deduction equivalent to 18% of the amount invested in the limit of 300,000 euros. The tax deduction will be spread over nine years. To take advantage of the law Duflot, landlords will have to lower the amount of the rent of their flats by 20% compared to the average price of the market.

The new system will apply to homes situated in Zone A and Aa (Paris and its suburbs, a part of the French Riviera and the French Genevois, some cities located in Haute-Savoie, Var and Alpes-Maritimes), B1 (urban areas with over 250 000 inhabitants, Corsica, Paris suburbs, and the small towns). Cities in the B2 zone may also be included if they have more than 50,000 and less than 250,000 inhabitants, subject to the authorization of the local government prefects.

The goal set by the government is to generate the construction of 40,000 new homes in 2013.

 

Capital gains tax reduced

To generate a bigger turnover, taxes in capital gains (excluding principal residences that will remain exempt) will be temporarily reduced. A further discount of 20% on the CGT bill will be given to the owners who sell their property in 2013.

Currently, capital gains tax is 19% for the first five years of ownership to which  social security contributions of 15.5% are added,  making the effective tax rate 34.5%.

At the moment, the property owner receives a discount via taper relief of 2% per year between the sixth and the seventeenth year of ownership, followed by 4% per year after the seventeenth year, and finally 8% annually after twenty-four years which lead to a total exemption after 30 years.

In 2013, the 20% discount will be exceptionally added. For instance, an owner will now benefit from a reduction of 22% (20% + 2%) if he sells his second home after six years of ownership, 24% after 7 years and so on…

 

Higher taxes on building land

The French Government wishes to increase the number of house being built. Therefore, they plan to discourage investors from holding on to a piece of land to build on in areas where housing needs are the strongest by increasing taxes and discontinuing allowances.From January 1st 2013, the allowances on capital gains from the sale of a land to build on will be removed together with all the allowances acquired under the previous tax regimes.Only transactions with an agreement to sell  signed before January 1st, 2013 and whose final signature is made before January 1st 2014 will continue to benefit from these allowances. If the law is passed without any changes, it should encourage owners to sell by the end of 2012. In all cases, capital gains will remain taxed next year at 19% (34, 5% with social contributions). However, this taxation will end on January 1st 2015. At that time, any capital gains will be taxed according to the scale of income tax (plus social contributions). If the law is passed in the current state, this will disadvantage the wealthiest who already pay the highest tax rate.

 

Tax on vacant properties spread out

The tax on vacant properties will be extended to cities of over 50,000 inhabitants (versus cities of 200,000 previously) where there is a significant difference between supply and the demand of rental properties.

The new tax will be applied to the properties left unoccupied for over a year. The rate will be 12.5% for first year and will increase to 25% for the next year of ownership. This tax is based on the rental value of the property and according to the government, this should bring 150 million euros in 2013 and 180 million in 2014.


New French Capital Gains Tax to encourage speculation

A new method of calculation of Capital Gains Tax announced by French Prime Minister, Francois Fillon last week, which may well give rise to an increase in transactions and property speculation by both French and non-resident buyers of French property.

Previously French the CGT rate applied to any capital gains made on French property would have reduced by 10% annually after the fifth year of ownership until there was effectively a zero rate applied in year 15. This 10% reduction after year five has now been scrapped in favor of an alternative calculation which instead allows sellers of French property to deduct the official amount of inflation during the period of ownership from any capital gain before the flat rate of tax is applied.

Example of Non French resident from the EU with a 19% rate