Please find the latest update about CGT on French property (Sept 2011) click here.

After the purchase of a French house, taxes become digressive as the years go by. Normally, up to 15 years after the purchase of your French property there will be no more taxation. In all cases, the French tax is applied at the time of the sale in the offices of the notaire, and will be deducted from the sale proceeds before the cheque is handed over. According to the latest figures in 2011, the applicable French tax rate is 31.3%. It seems quite high but this tax rate is regressive. This sum comprises capital gains tax at the rate of 19%, plus 12.3% of social charges.

If you’re not classed as a resident in France but you are in the EU, then the applicable tax rate is 19%, as no social charges are payable. It is therefore far more profitable than if you are resident in France. Furthermore, the tax rate lowers to only 10% five years after the purchase as you can see on the graph below:

If you’re interested in making as many exemptions as possible, the most important exemption from capital gains tax in France regards the family home. For the tax to become effective, the property must be occupied by you on a habitual basis up to the time of the sale, although you don’t need to actually occupy it at the time of sale. This concession may be available for up to a year, but you will need proper reasons if so.

How to avoid paying this tax?

You are exempt of paying capital gain tax if it was your main residence. In order to benefit from this exemption, you are not allowed to let out the property during the sale period, or to leave family members in occupation. Fortunately for you, the French law does not state how long you need to have occupied the property for it to be considered as your main house. Generally, it is accepted that eight months is a minimum period for it to be considered as your main house (in order to escape the attention of the tax authorities). However, there are concessions, such as force majeure (natural disasters for instance), job relocation, death of a spouse…

Likewise, the tax authorities will normally expect you to have made an income tax declaration and you will need to be able to produce a taxe d’habitation (housing tax) in your name, in order for it be considered to have been your main residence. Should you live in two main properties all year round, then you will similarly need to supply a copy of the taxe d’habitation in order to prove your residence exists. It may well be preferable to have previously notified the tax office as to which of the two properties you consider your main residence.

The United States is desperately trying to stimulate the economy using the interest rates.

On this side of the Atlantic a dangerous denial reigns with the upturn of bonuses and exorbitant advantages of banks and even more of the so-called “ghost banks”. The Dow Jones is well ahead as if the outside world didn’t exist. It has risen by 200 points (1.7%) while Bagra is being bombed by Gaddafi.

This increase is a complete surprise for everyone. Indeed, markets and investors thought that the European Central Bank would follow the same route for the rates of the Euro as the Federal Reserve did for the dollar.

This rise of the interest rate implemented by the European Central Bank is very fundamental. It is a careful management of the current imbalances.
It will permit a fight against inflation. The European Central Bank takes into account an environment in the Eurozone which is more and more affected by price tensions. We can’t ignore the tensions over the oil markets, even if they’re not natural, but essentially due to the speculation. What’s happening in the foodstuffs market is even more scandalous. Harvests are good, but prices are increasing. The difference goes straight into the pockets of wheat, sugar, rice, cocoa, coffee traders … and many more.
It also adjusts the levels of rates by integrating which has becoming a dangerous business in the Eurozone. When it takes out a loan under its name, the Eurozone doesn’t have the mark AAA and it pays a half percent more than Germany. It also takes into account the fact it has at least four countries out of seventeen in difficulties, and a few others which could follow their bad example.
The European Central Bank needs to carefully manage the risk of its own affairs which have rocketed further with the purchasing of sovereign bonds from these countries. It does it with lower rates to those who prevail over the markets. So it has decided to go one step further and gradually transfer the responsibility of these bonds to private investors. By doing this, the Bank will recreate margins for manoeuvre essential for future interventions.
It also send a message to banks : the interest margins of their loans are very generous as they supply the bonus-paying machine to undeserving traders, but also benefit from the gap of exorbitant rates between their borrower rate and active rates that they have in their portfolio.
Finally it breaks certain illusions: the situation couldn’t go on forever. The recent booms of the Paris real estate market have created a bubble which is supplied by easy money. To avoid a brutal correction, the increase in price of borrowing money is an efficient way to slow down an enthusiasm which benefits principally to landowners who do not really need this largesse.

So if you are going to buy a French property and need a mortgage here is some advice: take out a long term mortgage with fixed rates before April 2011!

For more information and advices do not hesitate to contact Sextant French Mortgages on 020 7428 4918 or by email on info@sextantmortgages.com

The large majority of Sextant’s properties are resale properties, offering a large choice throughout France suiting the need of every customer. Ready to move in to or requiring a full renovation, Sextant Properties have all sorts of properties that are bound to meet everyone’s requirements.

> The Global Situation
The index has now been updated and shows the evolution over 18 months, from October 2009 to January 2011. The information can be put together in a chart, showing the average price trends in France.

In January 2011, the average price over 13 regions is €312,687 which is -0.25% lower than last month, but which represents a 9.94% increase over the last 18 months.

Visit the French Property Market: A regional outlook over the 13 most popular regions in France.

> 3 Top Area Evolutions
The regions of Normandy, Midi-Pyrenees and Brittany have all seen a rise in their prices of nearly 14% since October 2009.

In Normandy, they have risen by 16% since October 2009, with an average of €257,805. With this budget one could purchase a beautiful recent house set in 1.24 acres of garden with outbuildings and a swimming pool (ref 24419). In Midi-Pyrenees, prices have risen by 26%, to reach an average of €326,839.

The region of Languedoc, one of the sunniest areas in France (300 days of sunshine/year), has an average price of €325,572, which represents a 2.02% increase in comparison with October 2009.

These area prices will probably tend to increase and maintain their good investment potential over the next few years. Keeping an eye on the index can be very valuable indeed, as it is updated every month.

> Top Area for Negotiating
Only the Rhône-Alpes region’s average prices have significantly decreased over the last eighteen months. In this region it will be easier to negotiate the price, especially if the property has been on the market for a number of months.

The 13% decrease of the average price in this region since October 2009 seems to have stopped about three months ago. With this stability regained, prices will be back to the standard soon. This French Leaseback apartment in a 4-star residence with heated pool (ref 35772) in Megeve could be the perfect place for an Alpine property

> Still on Top
The Provence-Alpes-Côte d’Azur region has always been a fantastic area to find the most beautiful properties in France. The average property price around this region, €764.000, is enough to purchase this beautiful Mediterranean Villa (ref 13262). The stability of the average property price in this area confirms that this region is still one of the best places to invest in France.

If a customer’s dream property is over their initial budget, they could still take out a mortgage. French mortgages have dropped to 2.22% for a variable rate. For advice and help with all financial needs, Sextant have their own team of mortgage brokers, Sextant French Mortgages.

View the latest price variations per region here: French Rural Property index.

Nevertheless, French law is crammed with alternative vehicles, notably the société civile immobilière. This company structure is a useful vehicle for estate planning purposes and anticipating the transfer of assets to children.
If you look at the two legal institutions, you’ll find the trust and SCI have similarities. Both structures receive assets from individuals (the parents) to the benefit of beneficiaries (usually the children) and are managed by trustees or directors (the parents).

For those unfamiliar with the SCI, the French company is a quasi-French partnership that has shares. Its articles of association set out the company’s objectives, management etc. An SCI that has the sole objective to purchase and manage a French property for the benefit of its members is fiscally transparent and therefore not usually liable for French corporation tax. Instead, the members of the SCI are treated for tax purposes (income, inheritance and wealth tax) as individual taxpayers, personally owning a share of the property. If a French property was purchased by an SCI in which shareholders were individuals then, from a tax point of view, they will be in the same position as if they own the property in their sole name.

The SCI is well known by notaires for inheritance purposes and the transfer of personal or professional real estate to the children. It is an effective tool for asset management. It protects children and may provide them with an income if the SCI uses its assets for rental purposes. The articles of the SCI may stipulate that the children can receive dividends that pay a larger percentage of the income than the percentage share of the capital share.

Management consists of one or several directors who run the company in accordance with its objectives. Parents who act as directors benefit from particular advantages to retain control if they are named as directors for an unlimited period, assuring them with voting rights to keep the majority in any decision. The SCI only deals with civil activities such as real estate matters and cannot execute corporate matters, otherwise the company would be considered as subject to corporate tax.

The main characteristic of the SCI is its capacity to transfer real estate to children or any beneficiary and minimise French inheritance tax, if it is used and set up upon each individual circumstance. It is easier to give shares of a company rather than a fraction of an immoveable asset i.e. property. Under French law it is possible to gift shares every six years and benefit from the relevant inheritance tax-free allowance. Other scenarios may also attract the use of an SCI for estate-planning purposes. Take the example of a non-married couple. The transfer of a property to each other can trigger 60% inheritance tax. There is a possibility to mitigate the tax with the setting up of a PACS agreement, but under several conditions. The use of a SCI can resolve this problem notably if the statutes include a clause tontine to transfer the majority of the shares to the survivor. There are many uses for an SCI for commercial or civil purposes but each SCI must be adapted to the need of each family hence professional advice should be sought. The setting up of the SCI, like any other companies, can have disadvantages regarding the management of it and the administrative formalities. For instance The SCI must summon a general assembly with all the shareholders each year to approve the accounts.

Further to this general assembly, a report must be established and signed by the director. This document indicates what decisions has been taken.
Moreover, a shareholder can request the director, by recorded letter, to summon a special general assembly or consult with the shareholders in writing concerning a particular question.
The rules of summoning and functioning of the assembly are stipulated in the statutes of the Company.

However, certain decisions need to obtain the unanimity of the shareholders, eg.:
- the modification of the statutes (except when there is a clause indicating that the majority is sufficient),
- the increase of the shareholders’ obligations,
- the transfer of the registered office of the Company in another country.

They are indefinitely responsible for the Company’s debts on their personal state in proportion to their share in the capital.

The creditors can turn against the shareholders for the payment after having requested the Company to reimburse the debts.

- Directors
His responsibility can be a civil or criminal responsibility.
Moreover, the director can be responsible in the case of bankruptcy of the Company.

The director is responsible towards third parties and the shareholders.
His personal responsibility may become relevant if he acts outside of his legal powers

Written by Christophe Dutertre, Lawyer at Blake Lapthorn
Tel: +44 (0)23 9253 0379
Christophe.Dutertre@bllaw.co.uk

Jacques Chirac, prime minister of France at the time, promised to get rid of the tax in 1986 but then went on to lose the presidential elections two years later. Since then no other French politician has dared to touch the tax. However, current president Nicolas Sarkozy is thinking of abolishing the tax by next year.

Because of rising property prices, it now touches more than the super-rich with an estimated 560,000 taxpayers affected- 42% more than in 2005. And it has prompted many of the truly rich, like the French singer, Mr Hallyday, to flee. But the French, many of whom see riches as vulgar, have little sympathy for such types. One survey by BVA, a pollster, suggests that 64% are against getting rid of the wealth tax.

It may sound odd that Mr Sarkozy chooses 2011, a pre-election year, as the right time to strike. The reason behind this is that he is trapped by an unpopular fiscal rule known as the tax shield. Mr Sarkozy introduced a cap at 50 % of the overall tax rate on all personal income, partly to tempt tax exiles home. But, thanks to uncharacteristically deft lobbying by the left, it has become a symbol of fiscal injustice, as the wealthy collect refunds. For example, Liliane Bettencourt, the billionaire heiress to the L’Oréal cosmetics empire, received a cheque from the treasury worth €30m this year.

The matter now is to use the abolition of the tax shield to bring about the end of the wealth tax. The BVA poll suggests that a majority would back scrapping both, if this were combined with a rise in the top marginal income-tax rate. Mr Sarkozy has ruled this out, but wants a new tax levied on revenue from assets, rather than on the assets themselves. A new scheme should be unveiled by next June.

Germany got rid of its wealth tax in 1997 and is more competitive than France. To what Mr Sarkozy argues, the French should follow. “I cannot accept a deficit in competitiveness with our main economic partner, Germany,” he said recently. “I want to lay the ground for a relatively homogenous fiscal zone.” This looks like a heroic attempt to impose reform on the French by dressing it up as European “tax harmonisation”. An official commission is now looking into how to align France’s tax structure with Germany’s. France is trying to legitimise its reforms “by copying the German model”, says one top French official. As long as nobody expects Germany to return the favour.

France’s notaries predict that the recovery of prices and the high number of properties being sold in the resale housing market in France (confirmed by data from the second trimester) has every reason to continue into the beginning of next year, thanks to interest rates that should remain low. In the second trimester of 2010, the Insee index of the price of old apartments, which was published this Tuesday, increased by 2.2% in three months and by 6.3% in a year, while those of old houses increased by 2.3% in three months and by 5.7% in a year.

According to the notaries “there is no reason, considering the present state of affairs, to believe that at the start of 2011, this tendancy will be reversed: in fact the interest rates should remain low, continuing to boost buyer solvency.”
The watchdog Credit Logement/CSA announced on Tuesday that the interest rates of the competitive sector, already at their lowest since after the Second World War, once again dropped in October to average out at 3.26%, compared to 3.30% in September.

The notaries added that the amount of resale property sold in the whole year should “largely surpass” the predictions bandied about in July of 700,000, reaching a figure of between 720,000 and 750,000, and perhaps even more. “The figure of 750,000 could even be surpassed if a significant number of sellers decide to sell quickly in order to avoid heavier taxes regarding capital gains property, as the present tax rate of 28.10% is due to be increased (there is no capital gains tax after 15 years).” The amount of activity in the market diminished to less than 600,000 in 2009, while in the years before the crisis it was in the bracket of between 800,000 and 840,000.

Cutbacks of tax benefits

Concerning French new build property, in a market that is always monopolised by the housing association investors, the notaries are banking on a triumphal end to the year, particularly in the sale of apartments. The amount of new apartments sold in the second trimester has increased by 5.7% in a year and the notaries believe that that number should reach a minimum of 110,000 by the end of 2010.

“The prospect of a reduction in certain tax benefits from the 1st of January 2011 is without a doubt the cause of the marked increase in the number of sales of property for future completion from now until the end of 2010,” state the notaries, referring to tax incentives within the context of the “Scellier” law for investors.

They state that, according to the Federation des Promoteurs Constructeurs (FPC), on average the price of new apartments in the second trimester increased from 5.7% in a year to 3.556 euros/m2. On the other hand, still according to the FPC facts, the price of individual houses has dropped 4.2% in the same period to an average price of 237,300 Euros, as this section of the market is more competitive and less affected by the regulations of accessibility for handicapped people.

Whatever happens, whether in the new build market or the resale property market, the notaries remind us that the movements of prices and the number of houses sold remains extremely varied according to each region.

The total net income is subjected to several band rates (like for the PAYE in the UK). It applies only on the income realised in France if you aren’t a French resident.

1. The total net income is divided by the number of family tax quota (1 for a single person, 2 for a married couple).
2.  A different rate is applied for each tax band.
3. The total amount obtained is multiplied by the number of tax quotas.

Example 1: a married couple without children (=2 shares) has a total net income of 100,000 euros. They have a shared income of 50,000 euros each.

Each of their shared income is imposed by band according to the scale below (valid for 2010 tax year):
Up to 5,875 euros: 0%
From 5,875 to 11,720: 5.50%
From 11,720 to 26,030: 14.00%
From 26,030 to 69,783: 30.00%
Beyond 69,783 euros: 40.00%

They will pay less taxes than a single income person earning 100,000 euros per year because he will have to pay 40% taxes while their individual incomes are lower than 69,783 euros each so they will pay only 30% saving 10% taxes.

Example 2: the total taxable income of a single person is 35,926 euros. He will pay:
0% on the band lower than 5,875 euros
5.50% on the income bracket ranging between 5,875 and 11,720. That is to say 5.50% X (11,720 – 5,875) = 5.50% X 5,845 = 321 euros
14% on the income bracket ranging between 11,720 and 26,030. That is to say 14% X (26,030 – 11,720) = 14% X 14,310 = 2,003 euros..
30% on the income bracket higher than 26,030. That is to say 30% X (35,926 – 26,030) = 30% X 9,896 = 2969

So the total tax income to be paid by this single person will be: 321 + 2,003 + 2,969 = 5,293 euros.

Example 3 for property investor: Mr. Smith (UK resident) owns a French property investment with an annual rental income of 8,000 euros and has an interest only mortgage which cost 3,000 euros/year. He can deduct the interests from his French income: 8,000 – 3,000 = 5,000 euros per year. It is below 5,875 euros which is the lower tax band at 0%. Thus he does not pay income tax on his investment.

References:
http://droit-finances.commentcamarche.net
http://fr.wikipedia.org

Economic gloom in France has prompted the passing of a statute in 2008 permitting the setting up of a small business in an extremely simplified way and with an attractive tax regime.

In a nutshell, the main features of the “auto-entrepreneur” status, as it is called, are as follows:

- There is no minimum capital required and no need to set up a company. The legal status applicable is that of “individual enterprise” (“entreprise individuelle”). There is no limitation on liabilities, but it is possible to render unattachable one’s main residence and any other real estate assets by way of declaration before a notaire, provided that they are not affected to a professional usage.

- The tax and social regimes are that of “micro-enterprises” (see below).

- The creation and de-registration are extremely simplified and can be done over the internet.

- This status is only available if the annual turnover does not exceed 80,000 € before tax for activities of sale of goods, of food to take away or to consume on the premises, or of supply of accommodation. The maximum turnover is 32,000 € for services taxed in the categories of “industrial and commercial profits” (“BIC”) or “non commercial profits” (“BNC”). This would apply, for example, to activities of services to the person.

Social charges and tax: one great feature of the status is that if there is no turnover or profits, there are no tax and social charges.

Social charges are that under the “micro-social” regime and consist in a fixed rate, payable monthly or quarterly (at your choice), as follows for 2009:

- 12% for a commercial activity;

- 21.3% for a services activity;

- 18.3% for a liberal activity (eg: consultant).

No deductions are possible for the purpose of application of these rates.

Tax is that under the “micro-fiscal” regime (subject to conditions of maximum income) and consists in a fixed rate, payable monthly or quarterly (at your choice), as follows for 2009:

- 1% if the main activity is the sale of goods, of food to take away or to consume on the premises, or the supply of accommodation;

- 1.7% if the main activity is other than those falling under the 80,000 € ceiling, such as services;

- 2.2% for certain services, taxable in the “industrial and commercial profits” services.

No deductions are possible for the purpose of application of these rates.

If the maximum income condition is not met, the applicable tax regime will be that of “micro-entreprise”, which is a progressive tax, applied after a fixed deduction.

TVA: the auto-entrepreneur is not liable for TVA.

Professional tax (“taxe professionnelle”) : not applicable for the year of creation of the business and two years thereafter.

Declaration of start of activity :

All that is needed is to fill in a one page form and to send it back with a photocopy (or scanned copy) of your passport certified by you (with the words ”J’atteste sur l’honneur que cette pièce est conforme à l’original”) which must be dated and signed. For commercial or craft activities, you must declare the activity at the Centre de Formalités ses enterprises (“CFE”) (http://annuaire-cfe.insee.fr/AnnuaireCFE/jsp/Controleur.jsp ) or at the URSAFF for liberal activities (https://www.cfe.urssaf.fr/autoentrepreneur/CFE_Bienvenue ).

The CFE will then forward all necessary information to the various administrations, including the tax administration. You will then receive a SIREN number (identifying your enterprise) from the INSEE. As soon as this is received, you can start your activity. You will also receive a SIRET number (of which the SIREN number is part).

Management:

Accounts: you must of course keep accounts, but there is no need for the accounts to be certified by a chartered accountant. It is important to note that as the fixed tax and social charges rates are a percentage of the turnover and not of profits, no costs can be deducted (such as amortization, salaries paid to employees, etc.).

Bank account: it is not compulsory but highly recommended to open a bank account specifically for the business and distinct from your personal account, in order to identify operations easily. It does not have to be a professional paying account, an ordinary free individual account will do.

Insurance: although it is not compulsory for every activity, it is of course highly recommended to subscribe an insurance policy covering damage to third parties, damage to property, IT risk (loss of data…), legal costs protection (in case of law suit). The simplest is to subscribe a “multi-risk’ policy covering most of the risks pertaining to the activity.

Premises: you can buy or rent premises specifically dedicated to your activity, or use the services of a business center, which can supply a registered address, meeting rooms and support services (secretarial, etc.).

The auto-entrepreneur status is a very convenient tool to start an activity for foreigners who are not in France all year round but yet still want to generate some income, eg by running a gite or chambre d’hôte. If it later becomes successful, it is always possible to easily deregister it and to set up a company.

Hervé Blatry

Avocat

TEE FRANCE

STANLEY TEE LLP

High Street

Bishops Stortford

Herts CM23 2LU

Tel 01279 710621 and 01279 710654

heb@stanleytee.co.uk

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