French Property Capital Gains Tax FAQ

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French Property Capital Gains Tax FAQ

Please note: Taxation is a complex subject and full independent advice on the particular facts of a case should be sought. The content of this article is of a general nature and no liability is accepted in connection with it.

French Capital Gains Tax (CGT) - Rules for Property from 2004

Before 1 January 2004 the gain was computed by the French resident taxpayer and included in their annual Tax Return Form 2042. There was no deduction by the notary on completion and to a certain extent the French Revenue relied on the honesty of the taxpayer. There was a special regime for non-French resident taxpayers. The notary dealing with the sale deducted 33.1/3% of the net gain made by non-resident individuals and companies and paid it direct to the French Revenue. The system has been simplified and both French and non-French resident taxpayers are now broadly treated in the same way as non-residents: deduction by the notary on the sale.

The New Rates

The rate of Capital Gains Tax (CGT) for both French and non-French residents, who are residents of an EU country, is 16% of the net gain. If you are French resident you pay an extra 11% in French National Insurance making the effective rate 27%. In other words non-resident's tax rate has been reduced by 11%, which on the face of it should encourage more foreign purchasers in France and will probably drive up prices. Once the 16% has been paid the non-French resident individual taxpayer can have no further French tax liability.

From a tax perspective is French property attractive as an investment?

Yes. There is an incorrect perception of France as a high tax country; in many cases France is a lower taxing country than the UK (for example) and from a tax point of view an attractive place in which to invest in property (UK CGT rates are now much higher than French CGT rates, see the example below).

What are the rates if you are not a resident of a EU country?

The rate goes up from 16% to 33.1/3%. This is subject to any applicable Double Tax Treaty, which may improve the position. If you are not an EU resident and plan to buy a French property you need to think about a suitable EU, and probably French, vehicle to buy it in.

Does it matter if you are say an Australian national but a tax resident of the UK?

No, for these purposes the test is tax residency. There is however a surprising sting in the tail for non-EU nationals who live in an EU country and buy a second home in France. Under the new rules non-French residents are exempt from French CGT on any sale of a property provided they have lived in it and been French tax resident for at least two years at some time. You do not have to be a French tax resident when you sell the property. You are only allowed this exemption once and you can rent the property provided you have the free use of the property on 1 January prior to the sale.

How does this affect a non-EU citizen who is a UK taxpayer?

Quite simply this two-year exemption does not apply to them unless they are able to invoke a non-discrimination clause. However a UK citizen who is an Australian tax resident qualifies.

Are there other exemptions?

You are exempt from French CGT if you are in receipt of an old age pension or are an invalid. This applies even if you are a non-resident. This is subject to some fairly detailed conditions set out in the tax code. There are a number of other more detailed exemptions. The main residence exemption which is similar to the UK one and which can only apply if you are French resident appears below.

How is the gain calculated for individuals?

This is best illustrated by an example (which is one given by the French Revenue). On 20 January 2004 an individual sold a second home he bought 10 years earlier. No particular exemptions apply. He sold for €120,000 and bought it for €60,980. When he bought the property he had it rewired for €4,753 and changed the Central Heating the following year for €1,206.

Who works out the tax and pays it over?

The notary dealing with the sale. The notary is required to complete a tax return and work out the gain. They pay the money to the French Land Registry and if there is a problem the land may end up not being registered. It is up to you to give the notary invoices for works.

When should a tax representative be appointed?

Previously non-French residents had to appoint a French Inland Revenue approved tax representative to deal with their tax affairs when they sold property. The notary held back money until the tax affairs were settled. They also had to pay the tax representative's fees. Indeed if the sale price is over €150,000 the French government requires that you appoint a tax representative who will be in charge of calculating the tax due on capital gains tax on real property and of guaranteeing the payment of such tax.

If the price is less than €150,000 you don't have to appoint a tax representative. The same is true if you have owned the property more than 15 years regardless of price. Bear in mind that, even if you sell a property for more than €150,000 but you have no capital gains tax to pay (purchase costs are higher than your sale price), you cannot avoid designating a tax representative. 

What about a main residence?

This is exempt. If the property is entirely residential but you run a business from it, it is still exempt. However if parts of the property are used exclusively for business purposes then only the private part qualifies for the exemption.

If you have two properties in France the main residence is determined by where you are most of the time. If in doubt, it is where you claimed your reduction for taxe d’habitation (local rates) as a main residence.

Can outbuildings sold separately still be exempt?

If your house has various outbuildings which you want to sell separately they may be exempt if the outbuildings are “next to and necessary to” the main private residence. An important condition for exemptions that the house must be sold at the same time as the outbuildings though not necessarily to the same person. It is likely to be easier to have it exempt if it is seen as part of the garden rather than a building.

UK-Specific Capital Gains Tax Facts

How does French CGT tie in with UK CGT?

It is likely that French CGT will be nil or far less than UK CGT. There are other French CGT exemptions for instance for landlords of furnished properties who have owned them for five years. You are taxable in the UK on any French gain if you are resident or ordinarily resident in the UK. There are exemptions from UK CGT for non-UK domiciled individuals who do not remit the sale proceeds to the UK. Similar planning incidentally applies to avoiding UK income tax on the rental income from the French property. Tax planning for UK investors who have seen sharp rises in French property over the last few years focuses on avoiding or mitigating the UK liability. 

How is the UK gain calculated?

In many parts of France a seller may pay no CGT in France but 40% in the UK. This is problematic and considered "unfair". UK CGT is worked out using UK rules. You cannot claim any French exemptions. Taking the example given above the UK CGT in pounds will be calculated as follows (£1 = €1.40 used throughout for simplicity):

CGT Tax and Business Property

What about buying and selling regularly, dividing land into plots and new build?

You are likely to be outside these rules. You are likely to be classified as a marchand des biens (a property dealer) which puts you under a different (and higher) tax regime. There is the temptation to try to come within the new rules here but it is high risk. You may get away with it if the development is small and the overall sale price is less than €150,000 so no tax representative is appointed and you have an understanding notary. You will probably be better off using a UK company and relying on the UK France Double Tax Treaty.

Can a person “turn” a contract? 

"Turning” (or selling) a contract on before completion, and new build contracts on a new development is a specialist area though the use of an offshore company in a country with a suitable Double Tax Treaty with France is likely to be the way forward.

When do the new rules apply?

The new rules only apply to sales of private property as opposed to property used for business purposes. In most cases sales of property used for business purposes are taxed under the business capital gains rules (regime des plus-values professionnelles).

What is the position for an owner who rents furnished property?

A person renting furnished property (which is trade in France) and being taxed under Micro-Bic falls under the new rules (not the professional regime) provided they are not a “professional landlord”; that is, have registered with the Commercial Registry and generate a certain income. The rules on taxing professional landlords have changed slightly but essentially the property is still exempt from French CGT after five years of letting. It is accordingly likely to be better to register as a “professional landlord” but advice in this area is essential.

What CGT regime applies if income tax is paid under a “Real” regime?

If you have elected to pay income tax under one of the “Real” regimes rather than Micro-Bic, the outcome depends on whether you have put the property on your balance sheet (bilan). If you have done this then you will pay CGT on a sale of the property under the professional CGT regime, if not you are likely to be taxed under the new regime.

Which companies fall within the new rules? 

Certain companies and trusts come within the new rules and the shareholders or partners are taxed as individuals (that is, the company is transparent for tax purposes). Essentially these are companies, which are not subject to French corporation tax. They are generally viewed as transparent for tax purposes similar to English partnerships. They are called sociétés de personnes. They include SCIs, SARLs which have elected for personal as opposed to corporate taxation and regardless of any election the sole shareholder of a SARL who is an individual. This will extend to non-French companies, which French law classifies as having the requisite characteristics. The new rules cover either a sale of a property by such a company or the sale of shares in such company, which broadly is a property company. There is a problem with SCIs if they, say, carry out furnished lettings, which is taxed as a trade in France because they cease to be tax transparent. 

How are company owners taxed? 

Broadly speaking, the French Revenue looks through the company and taxes the underlying owners of the company direct. If the société de personnes has its registered address (siege) in France it probably will be French resident under a relevant Double Tax Treaty. The shareholders or partners, whether or not French resident, will be taxed accordingly to their shares as a French resident. No tax agent is needed. This also applies if the partner is not an EU resident. The partner then is only taxed at 16% not 33.1/3%. This advantage should not be overlooked when structuring non-EU property investment into France.

What happens if the tax transparent company has its registered office outside France?

If the société de personnes has its siege outside France then this means tax at 33.1/3% is paid if the partner is not an EU resident individual. You pay the 33.1/3% if you are not EU resident even if you are a EU national. The tax position and different rates are summarised below. This also shows when you need to appoint a French Revenue approved tax representative to finalise affairs before the notary can release all the sale proceeds.

Further Information

• AngloINFO INFOrmation Page on: French Income Tax
• AngloINFO INFOrmation Page on: Capital Gains Tax
• AngloINFO INFOrmation Page on: French Taxes

Article by David Anderson of Sykes Anderson LLP Solicitors
Bury House 31 Bury Street, London EC3A 5JJ 
Tel: +44 2073 984 700 / e-mail / Website: www.sykesanderson.com
Copyright © 2004-2007 David Anderson All Rights Reserved

Updates and additions by Financière Accréditée SA (November 2007)
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