French real estate in companies and the “3% tax”

Those considering to purchase French real estate through a company must take into account a plethora of tax considerations. One of these considerations, the so-called ‘3% tax’ is often overlooked in practice which may lead to unfortunate consequences.

What?

In order to prevent shareholders of companies (or other beneficiaries of legal entities) from avoiding the French wealth tax (IFI) and other taxes (e.g. transfer taxes), France introduced the so-called ‘3% tax’ (or ‘taxe de 3%’ in French). This tax is payable by French or foreign companies of which more than 50% of the French assets consists, directly or indirectly, of French real estate.

Thus, by lack of other French assets, a foreign company holding French real estate is in most cases covered by the tax. Even if the company holds other real estate outside of France, and regardless of its relative value, the ‘3% tax’-rules are applicable.

The consequence would be that an annual tax equal to 3% of the value of the French real estate would be due (hence the name). Not an enticing prospect. However, the tax can easily be (legally) avoided!

How to avoid?

As mentioned before, ‘3% tax’ was introduced to prevent people from hiding behind a corporate veil to avoid (personal) taxation. If on the other hand the corporate veil is already lifted, this objective is reached and there is no more need to effectively levy the tax. Hence, the ‘3% tax’ is not due if the company is established in France, in the EU or in a country with which France has concluded a treaty on administrative assistance to prevent tax fraud and which contains an information exchange clause. Moreover, certain information such as the identity and address of shareholders holding a participation over 1%, an overview of the overall shareholders of the company, as well as the location and value of the real estate must be declared (or atleast a commitment must be made that this information will be made available upon request of the tax administration). This must be done in declaration n ° 2746, which must be submitted annually no later than May 15th.

Tax still due?

If no declaration is made, the French tax administration may levy the ‘3% tax’ nonetheless. It is noted that they can go back in time several years, which in combination with a late payment interest of 0.4% per month may lead to most unpleasant situations.

Take for example a French real estate with a value of 1 mio. EUR, which is held by a company that did not file the declaration. If the tax administration goes back five years, the shareholders are faced with an amount due of five times 30,000 EUR, or 150,000 EUR. Increased with late payment interests, the total bill nears 200,000 EUR or 20% of the value!

Moreover, as the tax is calculated on the fair market value of the French real estate, additional discussions may arise on the valuation. Indeed, how should this value be determined?

Is there no hope if the company was not aware of the ‘3% tax’? Luckily, in some instances the tax administration accepts a spontaneous rectification which could lead to only a one-off payment, or no tax at all...