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This page is intended to keep our nonresident contacts informed of pertinent legislative developments or new legal precedents concerning international affairs which may impact their operations and require preemptive action.

Published on Tuesday 18/06/2013

The purchase of a real estate property in France by a non resident is an international operation, intrinsically complex. Ideally, the non resident should start with contacting a notaire in order to check the feasibility of his project and its consequences, because he does not always realize the difficulties his project might lead to.

Before the purchase, the following matters must be checked with the potential buyer: personal/family situation, finance and aim: how long will he keep the estate, aim (investment for rent or leasure home), whether the estate be passed on to his relatives or not. A form is available in English and in French.

A written study must then be drafted, to explain the potential buyer the taxation of the purchase, ownership and sale. The study must also explain the legal consequences of the purchase (in the event of a divorce of death of the owner). This study will dictate the most adequate structure according to the potential buyer's aim. A company can be set up (investment for rent), a marriage contract or a modification to the marriage contract can be signed (leasure home) and an option for the inheritance law of the country of citizenship of the buyer (if the buyer a citizen of a member state of the EU).

After the study, the preliminary agreement can be signed. The aim of the preliminary agreement is not only to bind the parties, but also to set the terms and conditions of the sale. This agreement has to be exhaustive and allow perfect knowledge of the real estate property to avoid the potential buyer unpleasant surprises after the signature of the agreement. It guarantees the signature of the deed of purchase under good conditions.

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Tags : Trust Sale Société civile immobilière/SCI International law Apartment International tax law


Published on Tuesday 18/06/2013

The sale of a real estate property has become more and more complicated because of the evolution of the law, tax law and case-law involved. The time when the buyer had to be curious is over. Indeed, the courts assign the vendor a real obligation of information regarding the real estate property's characteristic features and its eventual defaults.

 

In other words, it is highly recommended before putting the real estate property up for sale, that the vendor contacts his notaire in order to update the technical and legal documentation regarding the estate and prepare the preliminary sales and purchase agreement which has to be an exhaustive document, allowing perfect knowledge of the estate. This will avoid the buyer unpleasant surprises after the signature of the preliminary agreement. It will also allow the vendor to check the eventual real estate capital gains tax. Should there be any problems or doubt, a short note explaining them as well as the subsequent risks for the buyer and their consequences will have to be given to the potential buyers by the realtor.

 

If the real estate property is held by an entity which has its registered offices in a non cooperative state or territory or in a state which has not signed with France, a treaty with a clause of administrative assistance, a written study must be done before the preliminary agreement is signed, in order to analyse the legal and tax situation of the vendor and identify the economic beneficiary of the operation, after collection the pertinent documentation.

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Tags : Trust Sale Société civile immobilière/SCI International law International tax law Real estate investment


Published on Thursday 13/06/2013

The French administrative supreme court (Conseil d’Etat) has rendered a ruling which has enshrined the principle of subsidiarity of international tax conventions, first in a ruling of 19 December 1975 (n° 84774 et 91895) then, in explicit and solemn terms, in the Schneider Electric case of 28 June 2002 (n° 232276).

This principle, crossing priority of French law and supremacy of international law, consist in a specific way to apply taxation rules in an international context:
 
- In the first place, it must be checked if, applying French taxation, the taxpayer must pay taxes in France and, if so, on the grounds of what qualification. Article 4A of the French tax code (Code général des impôts), a person who has their domicile for tax purposes in France is liable to the income tax in France. In a ruling dated 11 April 2008 (n° 285583), the Conseil d’Etat ruled that the notion of domicile for tax purposes must be appreciated according to French rules, even though the international tax convention contained its own rules regarding the matter. According to Article 4B of the Code général des impôts, a person has their tax domicile in France if they have in France: their home or their principal place of residence, a principal professional activity or even the center of their economical interests,
 
- Once the taxpayer is deemed liable to taxation in France, it must be checked if the international tax convention involved does not oppose the application of French taxation rules, in order to reduce or avoid taxation in France.
 
This principle of subsidiarity shows the international tax conventions do not create a taxation system above the French one, but only to correct its provisions in order to avoid double taxation.

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Tags : International tax law


Published on Thursday 13/06/2013

Castles
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Buying a castle or an hôtel particulier is the dream of many, who often do not think about the obligations (maintenance fees, cost and complexity of the reparation works). It is a fact, that those real estate properties are often sold by foreign buyers only a few years after the purchase and that no long term renovation works are carried on. It is noteworthy that those properties were always built by wealthy people (and, contrary to what people think, not by military aristocracy but by the "nobility of the robe" and the tax collectors that existed before the French Revolution of 1789) who were aware that they needed to dedicate an important part of their land or financial estate to the expenses related to this real estate property. For instance, it was common place until the French Revolution of 1789, that tens of thousand of acres of farming land be dedicated to the castle and the rest of the property, in order to provide stable income. Those who did not respect this rule have always ended up selling their castle. By setting up a rule of equal share of the inheritance, the French Revolution of 1789 contributed to the division of the estates and the separation of the castle from the income producing farming land. For instance, it is common knowledge that the mansion of wine producing properties is always well maintained.


In order to avoid disappointments, it is necessary before buying this kind of property, to make sure with the buyer his aim, the financial means he is willing and able to dedicate to the maintenance and restoration of the property to buy, his knowledge of the specifications of the restoration works on such properties which are the object of specific protection rules (i.e. listed buildings, historical landmarks...) supervised by the ministry for Culture and, more importantly, his intent to keep this building with the obligations and costs involved.


Necessary firsthand precautions for the purchase of a historic home by a non resident

Many people often dream of buying a château or a historic hôtel particulier, without realizing the constraints involved in owning such a property (maintenance fees, cost and complexity of its repair and restoration). Experience shows that many buyers are disappointed in their purchase and end up selling the property shortly thereafter. More specifically, historic houses owned by non residents are often frequently sold over and over and the long term maintenance work is lost along the way (restoration of the roof and the façade, bracing of the structures...).
It is noteworthy that most of these properties were built before 1789 under a political, social, religious, legal and tax system  that allowed the gathering of the wealth in the hands of a lucky few. Contrary to what is commonly thought, they were not so often from the nobility of the sword (noblesse d'épée) who kept their castles from the middle ages. Those happy few were the Church, the nobility of the robe (noblesse de robe), bankers and tax collectors in the 17th and 18th centuries.
The neighborhood of the Faubourg Saint-Germain in Paris was built in the 18th century by the members of the Parisian Parliament and the Court of Auditors. Hôtels particuliers built downtown in the 17th and 18th centuries and castles in the suburbs of the cities which had their own parliament before the French Revolution of 1789 (Ancien Régime) (Dijon, Montpellier, Nantes, Rennes, Lyon, Toulouse etc.). Every capital city of each region has religious buildings built before the French Revolution of 1789, which show the magnificence of the Church.


In order to avoid disappointments, we will guide you through the process of carefully choosing a property, helping you step by step to check matters before the purchasing this type of property by a non resident, then explain why it is necessary to set up a special-purpose reserve in order to finance the maintenance and reparation costs and set up the property as a long-term investment project.

I) Matters to clear firsthand


Buying a historic home requires substantial preparation on the part of the buyer. This is even more true for a non resident, who is often not familiar with (1) the legal and tax aspects of the purchase of a real estate property in France and (2) the nature and scope of the restoration and the specific administrative constraints if the property is a historical landmark (monument historique) subject to the control of local branches of the Ministry for culture.


Thus, the prospective buyer has to be advised before his purchase by a French notaire (i.e. attorney whose intervention is required by law for real estate sales):

  • His patrimonial aim (leisure purchase or running the property as a business),

  • His financial means to pay the price and the maintenance and repairs. In particular, his income and his estate must be checked in order to evaluate what part of it he is willing to dedicate to his project,

  • How much time he can spend on this project and draw his attention on the fact that he needs assistance, especially from a specialized architect in order to make, when appropriate and before the preliminary sales and purchase agreement, a inspection of the property and a study of necessary work and their cost,

  • His knowledge of the restoration work and the administrative constraints of protected buildings (historical landmarks – monuments historiques ), but also the tax advantages and the eventual subsidies,

  • Lastly, his will and his passion to carry on this, necessarily, long-term project.


    As in all real estate purchases, the non resident buyer has to be informed before the signature of the preliminary sales and purchase agreement, of the legal and tax consequences of the purchase, ownership and sale of a real estate property in France. Those will be checked with regards to the French law and the applicable international conventions, in collaboration with the buyer's tax and legal advisor in his country of residence. Then, a sound investment structure can be chosen, in order to anticipate the inheritance matters and the consequences of an eventual divorce, if the buyer intends to keep the asset on a mid or long-term basis.


    After this first phase, we will now explain why it is necessary for the buyer to set a designated reserve in order to finance the maintenance and repairs on a long-term basis, and to allow the creation of financial resources dedicated to the château.

    II) Necessity to set up a designated income producing reserve


    The construction or the maintenance of historic homes has always been expensive (and sometimes too expensive) even before the French Revolution of 1789. How many castles have been demolished or destroyed, how many construction sites have been stopped after the owner's misfortune? Let's remember the Marquis du Tillet de la Bussière who was financially ruined by the construction of his château de Villarceaux near Paris or Machault d'Arnouville who had to stop the construction of his Château d'Arnouville lès Gonesse in the Val d’Oise and demolish the service quarters after he was dismissed as finance general controller after he wanted to impose an income tax on all the classes before the French Revolution of 1789, or, closer to our times, the banker Jacques Laffitte who had to, after 1830, sell the park of his château in Maisons-Laffitte in the Yvelines and demolish the service quarters in order to find construction material. Lastly, we should remember that the last châteaux were built in France were prior to 1930.

    The French Revolution of 1789 was very damaging for many châteaux, were demolished to sell construction material or neglected since the owners did not have the money required for their upkeep. The rule or equal share of inheritance and the creation of the four taxes (tax on doors and windows, property tax on real estate, property tax on moveable property, patente) contributed to splitting the estates and thus, lessen the income that provided for the maintenance of such properties. The tax increases during the 20th Century have only made this situation worse.

    Let's not forget that special-purpose land was dedicated to these properties. This land was often thousands of acres and produced regular income which paid for the maintenance, for the owners' own expenses and paid for the salary of their employees. This special-purpose reserve disappeared because of the new succession rules and taxation set up after the French Revolution of 1789, forcing the owners to divide their properties with every new generation, departing the dedicated reserve from the property it supported.
    For example, it is easy to see that the châteaux which have vineyards are always in better condition than the ones without, even if it has not always been the case in the past. The French region of the Gers shows a remarkable contrast between the châteaux in the Armagnac producing region and the other ones.

    Therefore, the prospective buyer has to think seriously about his project before his purchase and check that his income is sufficient to finance the necessary expenses.
    Depending on his income and his estate, he will be advised to buy a property which already has a vineyard so that the property produces its own income or, if not, think about turning the château into a business depending on its features and its history. Furthermore, if the buyer's estate allows it, the buyer will need to use part of it so that the income can provide exclusively for the maintenance of the château. The amount of this dedicated reserve will depend on the importance of the expenses to cover, keeping in mind that they have to be assessed on a long-term basis and that the income of the capital is always less than the income of the work. The composition of this special-purpose reserve will depend on the buyer's knowledge of the investment market and on the risk he is willing and able to take. The example of the important endowment contribution granted to the Historical Landmarks Fund (Caisse des monuments historiques) after the death of the marquise de Maillé at the same time as her château de La Motte Tilly is a reference, even if the way the endowment has been used since then can be criticized. It is also recommended that the investment portfolio be managed directly by the investor.

    In order to optimize the funding of long-term restoration work, it is advisable to place the property in a company that owns the investment portfolio, liable to corporate tax so that the costs of the maintenance, work and amortization can be deducted from the income of the investment portfolio. This allows the avoidance of the limitation of the deductibility of the works on historical landmarks. The example of the château d'Ancy le Franc (Yonne) is a reference since the company owning the château also owns several properties which are rented, and also runs the château as a business. The gross annual yield of the investment portfolio is 14%, that is 4.3% after deduction of the expenses and amortization (balance of the year 2011).


    In summary:


    Buying a historic house for a non-resident requires a deep motivation and a passion, which must be carried on as a business project on a long-term basis.
    Important financial means will need to be dedicated either to the purchase of a property that produces its own income, or to the purchase of a property which will need this money to be reserved and/or find a way to make money from the property.
    A team of qualified professionals, including an experienced notary or notaire, will need to assist the buyer to succeed in his endeavor.
    Without a careful and thorough preparation, the buyer may face disappointments that inevitably lead to selling the property shortly after the purchase.

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    Tags : Trust Sale Société civile immobilière/SCI International law International tax law Real estate investment Historical landmark/Listed building


    Published on Thursday 13/06/2013

    This study is aimed at providing an outline of all the consequences resulting from the ownership of a leisure property located in France (whether a listed building or a high standing leisure property in the mountains or by the seaside) from a legal, tax and economic viewpoint. The leisure property can either be held by the purchaser directly or indirectly by means of a body corporate (whether a French or overseas company, a French fiducie or a British trust). Each of these solutions triggers peculiar consequences.

    One shall distinguish between cases where the real property is allocated to a business activity and cases where it is not. Every project shall be examined on a case-by-case basis in collaboration with legal and tax advisers from the client's country of residence. This analysis shall be done taking into account the purpose of the client's prospective purchase.

    Summary


    Introduction...3
    Part I – The Different Steps of Buying Real Estate in France...3
    I.1) Introduction of the French Notaire...3
    I.2) The Offer to Purchase (offre d’acquisition)...4
    I.3) Signature of a Preliminary Agreement (avant-contrat)...6
    I.3.1) Nature of the Different Preliminary Agreements...6
    I.3.2) Object of the Purchase : Real Estate or Shares of a Company ?...6
    I.3.3) Escrow or Bank Guaranty?...7
    I.3.4) Seven Day Cooling-Off Period...7
    I.3.5) Condition precedents...8
    I.3.6) Pre-emption Rights...9
    I.3.7) Costs...11
    I.4) Specific Rules Regarding the Acquisition of a Building to be Erected...11
    I.5) Setting Up a Structure in order to Hold the Real Property...12
    I.6) Setting Up the Bank Loan...14
    1.7) Signing of the Final Deed of Purchase...15
    I.8) Follow-Through After the Purchase...15
    Summary...17
    Part II - Tax-Related Consequences under French Law...18
    II.1) The Residence for Tax Purposes...18
    II.2) Taxes Related to the Property of the Real Estate...19
    II.2.1) Wealth Tax (impôt sur la fortune or ISF)...19
    II.2.2) Special Tax and mandatory declarations when the Real Estate Property is held by means of a Trust...21
    II.2.2) Land Tax (taxe foncière)...22
    II.2.3) 3 % Tax (taxe de 3 %)...23
    II.2.4) Economic Contribution for Local Territories (Contribution économique territoriale)...24
    II.3) Taxes Related to the Use of the Real Estate...25
    II.3.1) Notional Income Tax (impôt sur le revenu forfaitaire)...25
    II.3.2) Residence tax (taxe d’habitation)...27
    II.4) Taxes Related to the Transfers of the Real Estate...27
    II.4.1) Taxes Related to Transfers of the Real Estate With Consideration...27
    II.4.2) Taxes Related to Transfers of Real Estate Without Consideration: Gift and Inheritance Tax (droits de donation et de succession)...33
    II.5) Rules Concerning Taxation of Real Income in France...35
    II.5.1) The Real Property is Held by an Individual...35
    II.5.2) The Real Property is Held by Means of a Corporate Body...37
    II.6) Special Treatment Concerning Listed Properties...38
    II.6.1) Income Tax Deductions...39
    II.6.2) Exemptions from Gift and Inheritance Tax...41
    II.6.3) Wealth Tax Relief...41
    Part III - Authorizations concerning town-planning...41
    III.1) Demolition License (permis de démolir)...42
    III.2) Building License (permis de construire)...42
    III.3) Preliminary Declaration (déclaration préalable)...42
    III.4) Sanctions for Building Work Performed Without Authorization or Authorization Infringement...43
    III.5) Specific Rules...43
    III.6) Authorizations on Listed Properties...43
    III.6.1) Real Property Listed MH (immeuble classé au titre des monuments historiques)...44
    III.6.2) Real Property Listed ISMH (immeuble inscrit au titre des monuments historiques)...45
    III.6.3) Building Leaning Against Building Listed MH and Real Property Located within a Property Listed MH or ISMH's Field of Visibility...45
    III.7) Specific Constraints Insofar As Properties Located by the Seaside are Concerned...46
    Part IV - Investment Optimisation...47
    I.V.1) The Real Property is not Meant to be Used for Business Purposes...47
    IV.2) The Real Property is Meant to be Used for Business Purposes...52
    Appendix: Summary...55
     

    Conclusion

     
    To conclude, the choice of a non resident upon the way how to acquire a leisure property in France, depends on economic goals (whether strictly non-professional ownership for housing purposes or professional ownership for business purposes). The client needs to be as specific as possible about these goals in order for his advisors to be able to draft a preliminary report in writing, which would contemplate the different possibilities. Once the mechanism has been put in place, statute and tax and legal documentation (company's clerk work, tax returns) needs to be followed up by the client's advisors. This can all be done at our office.
    Holding the land by means of a company, should rather be considered if the prospective buyer plans to keep it on a long-term basis (more than 30 years) or if one plans to transfer it to a family member in the future. If the prospective buyer means the real property to be sold within a short time, one shall advise the individual to acquire the land directly.
    The form of the company, which shall purchase and hold the real property will depend upon the purpose of detention of the property: estate keeping not trading company not subject to corporate tax or trading company, i.e. subject to corporate tax).


    As a general rule, a company set up for the specific purpose of holding land usually needs to have its registered office in the same country as the real property in order to avoid legal and tax-related difficulties.


    Complex tax planning performed only for tax avoidance purposes does indeed often bring about some difficulties and needs an active following through, which is not always done properly. Furthermore, getting out of the tax planning structures is even more difficult and it brings about uncertainties. Sometimes it may also bring about capital losses at the moment of the sale of the acquired property since the vendor may remain "trapped" in the initial tax plan.


    Besides, the rules enabling French tax avoidance, have recently been more and more challenged (Article 164 B of the French Tax Code regarding the definition of income from French sources, and the tax convention between Luxembourg and France and between France and the United Kingdom have already been modified).

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    Tags : Trust Taxation Real estate investment Family office Personal wealth Sale Gift/Transfer International law International tax law Société civile immobilière/SCI


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    The interdisciplinary expertise of the Selarl Bruno Bedaride, notaire in Paris covers the following areas: corporate law, international contracts law, legal and tax advice, advice for international transmission, real estate law, family office, real estate and company finance law. We offer more particularly our services to non residents or foreign company who wish to invest, move or create a business in France.