Relatively unknown, the French 3% tax on the market value of real estate properties owned in France (Taxe sur la valeur vénale des immeubles détenus en France, hereinafter “TVVI”) can have dire consequences, if one does not pay attention.
Designed and adopted as a tool against tax evasion, the TVVI seeks to dissuade taxpayers, subject to the French impôt sur la fortune immobilère (ISFI), from escaping it by acquiring properties or real estate rights in France, through legal entities established in tax havens.
This article will help you know: if you are concerned by this tax (1); if so, which exemptions are available (2); and, finally, which steps you must take to benefit from them (3).
1. Are you concerned by the 3% tax?
The rule is rather simple: in principle, the TVVI applies to all French and foreign legal persons, bodies, trusts or comparable institutions (hereinafter “entities”), whether or not they have legal personality, which own real estate or real property rights in France on the 1st of January of each year, directly or through an intermediary (article 990 D of the Code Général des Impôts).
The tax amounts to 3% of the market value of the property.
For example, an English private limited company owning a French property worth €300.000, could be liable to €9.000 of TVVI each year.
One should also be careful when several entities are interposed between the property and him/herself. Indeed, the 3% tax applies just as well to entities (eg. holding companies or trust arrangements) who have ownership interest within the entity(ies) which effectivey own(s) the property (no matter how many links in the chain).
In light of its broad scope of application and substantial rate, one can wonder how the TVVI ever goes unnoticed… The main reason, is that there are so many and so broad exemptions that it rarely applies in practice. In some cases however, the benefit of these exemptions requires the proactive provision of certain information to the French tax authorities.
A failure to make such declarations can prove very costly! This is precisely what this article aims at avoiding.
2. What are the TVVI exemptions available under French law?
Let’s see some of the main TVVI exemptions, provided for in article 990 E of the Code Général des Impôts.
2.1. The exemption by virtue of minority ownership
First, the TVVI does not apply to legal entities whose French real estate property(ies) amount to less than 50 % of their total French assets. This is quite logical, given the rationale for the TVVI.
Thus, to get back to our first example, if the English private limited company owns the €300.000 property besides owning €400.000 of French stock, it will not be liable to TVVI.
2.2. The exemption applicable to publicly listed companies
Second, companies whose shares and/or securities are significantly and regularly traded on a regulated market are not concerned by the TVVI. The 3% tax is indeed primarily aimed at combating tax evasion by individuals subject to the French wealth tax. That is why it only applies to private companies.
2.3. The exemptions due to the location and characteristics of the legal entity
Finally, legal entities can be exempt from the TVVI if they cumulatively meet specific criteria relating to their location and characteristics.
a. The location criterion
When it comes to the location, article 990 E of the CGI provides that:
“Legal entities: […] which have their registered office in France, in a Member State of the European Union or in a country or territory which has concluded an administrative assistance agreement with France to combat tax evasion and avoidance, or in a State which has concluded a treaty with France allowing them to benefit from the same treatment as entities which have their registered office in France [can benefit from a TVVI exemption]”.Art. 990 E 3° of the French Code Général des Impôts
In the aftermath of Brexit, the question arose, as to whether the United Kingdom could be considered a Country, territory or State having concluded such agreements or treaties with France.
The answer to this question (recently confirmed to our Firm by the Direction départementale des Finances publiques de Lot-et-Garonne) is positive. Indeed, articles 25 and 27 of the 2008 double taxation avoidance convention between the UK and France (as amended by the 2017 multilateral convention) provide for a mutual assistance between both Countries and the reciprocal non-discriminatory treatment of their nationals and entities.
It thus makes no doubt that UK entities meet the location criterion of article 990 E. For entities whose headquarters are located in a Member State of the European Union, the answer would be the same. On the other hand, for entities whose headquarters are located in a third Country, it will be necessary to verify, on a case-by-case basis, the existence of such cooperation agreements or treaties with France.
b. The 5 alternative grounds for a 3% tax exemption
Entities who meet the location criterion, can invoke one of the 5 grounds for exemption listed in the Code Général des Impôts:
- 1°) their share of the property situated in France, or the real rights they hold directly or indirectly in respect of such property, is less than €100,000, or 5% of the market value of such property;
- 2°) they have been set up to manage pension schemes, recognised as being of public utility, or their management is disinterested, and their activity or financing justifies the ownership of buildings or property rights;
- 3°) they are a specific type of French real estate investment companies or investment funds (this category is very specific and the readers of this article are quite unlikely to be concerned by it);
- 4°) they communicate each year or undertake and respect the commitment to communicate to the tax authorities, on request, key information relating to the real estate owned on the 1st of January of each year and the identity and address of the beneficiaries; or, finally
- 5°) they declare to the tax authorities each year, and by the 15th of May at the latest, key information relating to the real estate owned on the 1st of January of that year and the identity and address of the beneficiaries.
In most cases, it will be one of the last 2 of these 5 grounds that will benefit foreign entities threatened by the French TVVI.
3. What must you do, in practice, to benefit from a 3% tax exemption?
The first thing to do is to ascertain whether i) your entity is liable to the 3% tax; and ii) if so, whether it already benefits from one of the “automatic” TVVI exemptions (2.1., 2.2. and grounds 1, 2 and 3 of 2.3. above).
Should it not benefit from any of these, the last 2 grounds for “voluntary” exemption should be seriously considered.
Right from the stage of acquisition, the TVVI issue could be appropriately discussed with your Notary. Indeed, the commitment to communicate relevant information to the tax authorities on their request (ground 4° above) must be made on the date of acquisition. In many cases, this – rather simple –formality would be sufficient to benefit from the exemption, and thus enjoy some peace of mind.
Otherwise, you could still file the annual declaration of information before the 15th of May of each year.
This “last recourse option” is a little bit more of a constraint. The declaration has to be made online. It will thus require the prior opening of a professional account on the impots.gouv website. This actually takes some time, as a first step is to obtain an INSEE company number. Consequently, if you are in this situation, we advise not to wait!
Should you have any question regarding the TVVI, please contact us. Citizen Avocats regularly acts as tax agents for foreign companies or individuals. We are aware that French tax formalities can sometimes be tricky. The assistance of qualified legal professionals can save you both time and mistakes.