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Editorial

THE TAX AUTHORITIES COMMENT ON THE 3% TAX REFORMED IN 2008

The 3% tax payable annually on the market value of real estate located in France that is held, directly or indirectly, by entities holding the majority of their assets in real estate, whether or not they have a legal personality, represents a difficulty as regards the structuring of French and foreign real estate investments...

 
 
 
 
THE TAX AUTHORITIES COMMENT ON THE 3% TAX REFORMED IN 2008

The statement by the tax authorities commenting on the reform of the 3% tax has just been published!

The 3% tax payable annually on the market value of real estate located in France that is held, directly or indirectly, by entities holding the majority of their assets in real estate, whether or not they have a legal personality, represents a difficulty as regards the structuring of French and foreign real estate investments.

The tax authorities’ statement, published on 7 August 2008, sets out the new regime applicable since 1 January 2008 (see our Newsletter No.3), particularly the exemptions for listed entities, foreign equivalents of OPCI that are “open to the public”, investment funds and the (often numerous) bearers of securities.

The tax authorities have already announced an exceptional extension of the deadline for submitting 2008 declarations (No.2746 – until 15 September 2008 instead of 15 May: see our Newsletter No.5), but it is now vital to note that the tax authorities require the renewal, prior to 31 December 2009 at the latest, of all undertakings signed up until 31 December 2007. Acquisitions made in 2008 before the publishing of the guidelines may be subject to an undertaking to communicate certain information until the end of the year.

You will find further details of the main exemptions affecting the 3% tax below.

 

 
 
 

In order to remedy the difficulties encountered (the incompatibility of the tax with Community legislation and the burden of the formalities required to obtain exemption), the regime was significantly altered by the amending Finance Law for 2007.

It is in this context that the tax authorities, in their statement 7 Q-1-08 of 7 August 2008, have specified the various changes made to this tax, as well as most of the exemptions.

1. What is the purpose of the 3% tax?


It enables the French tax authorities to gather information on investors in real estate, thereby subjecting them to the French regimes of transfer taxes on disposals where these are not for valuable consideration (gifts and inheritances) and the wealth tax.

The 3% tax is justified by the desire to combat tax evasion. It increases the cost of anonymity (investments by the bearer or via offshore locations).

2. How does it function?

Article 990 F of the General Tax Code makes payment of the 3% tax the joint and several liability of the taxpayer, each interposed entity and the structure that owns the property in France. The tax representative designated in the case of a disposal of real estate assets by a non-resident is also jointly and severally liable for payment of the tax.

The 3% tax is determined in proportion to the rights to French real estate assets held by the taxpayer(s) on 1 January. It is payable on 15 May, at the same time as annual declaration No.2746 must be lodged.

Failure to do so will lead to application of late payment interest at an annual rate of 4.8%, and, where relevant, of a fixed penalty of 10%, 40% or 80% of the amount of tax. The authorities can register a legal mortgage on real estate assets located in France to ensure payment of the tax bill.

3. Who is affected?

Any entity, whether or not it has a legal personality, which directly or otherwise holds property located in France. Subject to any exemptions, the annual 3% tax is based on the market value of the French real estate assets held by entities holding the majority of their assets in real estate.

The concept of a majority of assets in real estate is determined by comparing the market value on 1 January of the French real estate assets held, directly or otherwise, compared to the market value of the total assets located in France. The value of indirectly held French assets is included in the numerator of the ratio of the entity concerned (rather than in the value of the shareholding). Assets held outside of France are not taken into account.

Property used by the entity for non-real estate business activities or by a group company is excluded when determining the ratio. On the other hand, stocks of property traders and developers are added to the numerator, although these amounts are exempt from the 3% tax.

4. Who is exempt?

• State and international organisations, and bodies over which these have more than 50% control;
• Pension fund management institutions (social security, professional and individual), entities with a recognised public utility and not-for-profit organisations;
• Stocks of property traders and developers.
• The following cases, to the extent of an establishment in an "Eligible Territory". The expression indicates Members States of the EU and countries that have concluded with France either an administrative assistance treaty or an equal treatment agreement.

 

 

 
 
 
Legal entities, and their subsidiaries where the holding is at least 99%, are exempt from the 3% tax if their securities are significantly and regularly traded on a regulated market (Article 990 E 2° b of the General Tax Code).

Determining the regulated nature of the market is straightforward as regards the European Union, as a list is published in the Official Journal of the EU. The statement specifies the criteria to be taken into account for listed entities outside the EU: the requirements for quotation, the portion of the capital to be distributed publicly, the degree and frequency of the trading required to ensure maintenance of listed status, the identification of the principal shareholders by the market authorities, the equal treatment of shareholders and the information obligations with respect to the public.

The tax authorities specify the concept of significant and regular trading of securities:
- the volume of transactions is considered satisfactory where the float is higher than 25% or, depending on the operating conditions of the market in question, where it lies between 5% and 25%;
- the regularity of transactions is considered satisfactory where an average of at least one transaction a month is carried out over 12 consecutive months during the calendar year preceding 1 January of the tax assessment year.
The degree of tolerance allowed for 99% held subsidiaries is reduced: in practice, companies where only part of the capital is held by a listed company will remain subject to the declaration formalities in order that they themselves are exempt from the 3% tax.
 
 
 
Open pooled real investment bodies (OPCIs deemed “open to the public” or “retail”) and their foreign equivalents established in an “eligible territory” are exempt from the 3% tax (Article 990 E 3° c of the General Tax Code).

French OPCIs include SPPICAVs (public limited companies with variable capital) and FPIs (co-ownership without legal personality). They can be open, i.e. “to the public”, or reserved to qualified investors (RFA – reduced operating rules), with only the former being automatically eligible for exemption from the 3% tax.

In addition to the condition of being equivalent in terms of their structural form, regulated foreign funds must satisfy the following criteria to be regarded as equivalent in nature:
- their object must be the pooled investment of capital received from the public and the direct or indirect investment in real estate assets with a view to their rental or resale,
- their operation must be subject to the principle of the spread of risk,
- they must be open, i.e. not reserved to “qualified investors” who are defined as persons or entities with the skills and means necessary to assume the risks inherent in operations involving financial instruments (Article L411-2, II-4° of the Monetary and Finance Code),
- the repurchase or reimbursement of the securities must be possible at the request of the bearers and drawn on the fund assets,
- they are subject to the approval and control of a supervisory authority (equivalent to the AMF, the French Financial Markets Authority),
- they must observe the following asset ratios:
>> at least 10% in liquidities and liquid financial instruments;
>> at least 60% in real estate and securities in companies holding the majority of their assets in real estate, of which at least 51% are not securities held in listed companies (SIIC/REIT).
Assets located in “non-eligible territories” are not taken into account in determining whether the majority of the fund’s assets are held in real estate for the purposes of the 3% tax (the 50% ratio).

Foreign pooled real estate investment bodies that meet all of these criteria are exempt from the 3% tax without further formality. The bearers themselves are thus exempt from the 3% tax with regard to their participation in the funds, but remain liable to the tax, as appropriate, on their other real estate investments in France.

If a foreign fund does not meet the above criteria, it may, where appropriate, be exempt from the 3% tax if it signs an annual declaration or a communication undertaking (see below); in this case, the risk of joint and several liability with the bearers will remain. In this respect, the statement authorises foreign entities that incorrectly regarded themselves as automatically exempt to regularise their situation by signing an undertaking or a declaration by 6 October 2008.

By specifically indicating the eligibility criteria for foreign regulated funds, the tax authorities hope to put an end to individual rulings in this regard. Nevertheless, the excessive precision of the statement may result in the ab initio exclusion of certain investment funds that are in fact eligible (e.g. the exclusion of investments held via an entity liable to corporation tax on behalf of a foreign equivalent to a FPI), which could produce new individual claims or criticism of the legality of the statement.
 
 
 
All investment funds that hold the majority of their assets in real estate (even if they are not legal persons, such as Luxembourg FCPs, British/US trusts, etc.) are from now subject to the 3% tax.

Declaration No.2746 and payment, where appropriate, of the 3% tax may be made by the management company or any other designated member of the fund. The tax authorities hold that, if no such step is taken, the management company may in all cases be held liable for payment of the tax in its capacity as representative of the fund.

This situation means that the cost of the 3% tax, payable for example if one or more bearers is established in a country not covered by agreement, will be mutualised at fund level, in particular in cases where the fund’s regulations do not authorise it to charge the economic burden of the 3% tax to the “defaulting” investor.

Investment funds established in “eligible territories” are fully or partially exempt from the 3% tax provided that:
- they are SPPICAVs or FPIs and foreign entities subject to equivalent regulation in their country of establishment (see above);
- they sign and observe an undertaking to communicate certain information to the French tax authorities (see below),
- they lodge annual declaration No.2746, revealing the identity of the bearers of securities representing more than 1% of the rights in the funds (see below).

 
 
 
Legal entities established in an “eligible territory” are exempt from the 3% tax: such exemption may be either full by means of the signing, within two months of the acquisition (whether direct or indirect) of real estate assets located in France, and observance of an undertaking to communicate certain information at the first request of the tax authorities, or partial or full by means of the signing of an annual declaration prior to 15 May (Article 990 E 3° d and e of the General Tax Code). The information concerns:
1) the identity of the bearer and his residence, if he holds more than 1%,
2) the number of securities held,
3) any interposed companies,
4) the market value and composition of the real estate assets as at 1 January.
In all cases, the entity concerned is not obliged to reveal the identity of “small” bearers, defined as those holding no more than 1% of the rights. The statement specifies that these small bearers are themselves exempt from the 3% tax, as their participation is less than 1%, but remain liable to the tax, as appropriate, on their other real estate investments in France.

The tax authorities will now permit entities subject to the tax since 1 January 2008 and already holding real estate assets in France, as well as those that acquired real estate assets between 1 January and 7 August 2008, to sign an undertaking prior to 31 December 2008. The statement also requires previous undertakings to be renewed prior to 31 December 2009.
 
 
 
Provided that they are established in “eligible territories”, entities whose shareholding in a property located in France is less than €100,000 or 5% of the market value of the property are exempt from the 3% tax without further formality (Article 990 E 3° a of the General Tax Code).

Under the statement, each of these two alternative criteria must be determined per property, it being specified that in the event of an indirect holding, it is advisable to take account of the percentage held by each interposed company.

In other words, holdings of less than 5% in the capital of a company that holds several real estate assets located in France, and shareholdings whose value is lesser than € 100.000 in a company holding more than 5% of several properties, are exempt from the 3% tax, provided they are not established in a “non-eligible territory”. This simplification, while somewhat cautious as regards its thresholds, is nevertheless welcome.
 
 
 
Ultimately, it is difficult to see any short-term relaxation of the formalities relating to the 3% tax: although the tax authorities have consolidated and simplified the exemptions for the smallest shareholdings, they still require the renewal of communication undertakings signed prior to 2008. It is difficult to imagine, in the absence of legal provisions, what sort of sanctions would be applicable in the event of a failure to renew such undertakings.

Moreover, the tax authorities have redefined the calculation of the ratio used in determining the extent of real estate holdings and thus widened the scope of application of the 3% tax: taking into account the market value of real estate assets held via interposed companies in fact penalises investors more heavily than a revaluation of shareholdings.

Lastly, the comments concerning the new exemption of regulated funds appear prudent, even over-sensitive, to the extent that the definition of foreign equivalents is based on the rules applicable to OPCIs, thus leaving no room for foreign – and in particular European – regulations. On this point, the statement appears to add considerably to the law, which could encourage taxpayers to dispute its legality.

The 3% tax is likely to provoke debate for some time to come!
 
 
 

Pierre Appremont
Partner


Email :
pappremont@lpalaw.com
Tél. : +33 (0)1 53 93 33 77


 

Eglantine Lioret
Associate


Email :
elioret@lpalaw.com
Tél. : +33 (0)1 53 93 39 43


 

Paméla Le Jeune
Associate


Email :
plejeune@lpalaw.com
Tél. : +33 (0)1 53 93 39 26

www.lpalaw.com.fr 

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