French legal entities holding real estate face a 3% annual tax: a lesser-known levy that should not be ignored

French legal entities holding real estate face a 3% annual tax: a lesser-known levy that should not be ignored.

The 3% annual tax on French real estate owned by companies and other legal entities is a frequently overlooked yet significant tax. While potential financial consequences can be substantial, exemptions are often available through proper structuring and compliance.

Introduced by articles 990 D and 990 E of the General Tax Code, this tax on the market value of French real estate held by legal entities is subject to rigorous audits and tax disputes. Tax authorities frequently prevail due to taxpayers' mistakes, often stemming from insufficient or incorrect advice.

In France, owning real estate, directly or indirectly, involves tax obligations. Many real estate acquisitions are made through entities such as civil companies, which may be held by French or foreign holding companies or even trusts or foundations.

Originally, the 3% tax aimed to deter those seeking to avoid the Wealth Solidarity Tax (now the Real Estate Wealth Tax) by using shell companies in tax havens to purchase French properties.

While this regulation primarily targets those concealing French real estate assets behind offshore structures, the broad wording of the legislation extends its scope to a wide range of entities.

What is the annual 3% tax on real estate?

The 3% tax aims to encourage legal entities, both French and foreign, to disclose the true owners of French real estate properties, especially when these assets are held through a chain of companies.

The goal is twofold: to impose a sufficiently high tax to discourage opaque schemes and to offer complete exemptions to entities demonstrating transparency. This facilitates French tax authorities' monitoring and control of partners or shareholders with indirect interests in French real estate.

How is the 3% tax calculated?

When applicable, the 3% tax is levied annually on the fair market value of French real estate properties, whether held directly or through other structures. Fractional ownership rights are also included.

This tax is significantly more expensive than the IFI, which is capped at 1.5%. The potential high cost underscores the importance of seeking advice from a French tax lawyer to avoid unnecessary tax burdens.

What are the entities subject to this annual tax?

The scope of the 3% annual tax is broad.

The law targets entities with a predominant real estate nature in France, whether based in France or abroad.

Affected entities include companies, unions, trusts, investment funds without legal personality, and family foundations.

The essential criterion for being liable to this tax is the possession, directly or indirectly, of real estate rights in France, whether in full ownership or split ownership, temporary or for life.

However, numerous exemptions are available, provided certain conditions are met.

What are the 3% annual real estate tax exemptions?

Several exemptions from this 3% tax may apply, categorized into two types:

1. Exemptions available to entities because of their inherent nature.
2. Exemptions available to entities due to their disclosure to French tax authorities of some information.

1. Entities exempted because of their inherent nature

This includes:

• Sovereign states and other public law entities;
• Structures that aren't predominantly real estate-based in France;
• Structures whose securities are listed on a stock exchange or are wholly owned, directly or indirectly, by such entities;
• Entities managing retirement schemes;
• Certain real estate investment funds;
• Entities holding real estate properties (or equivalent rights) in France, either directly or indirectly, with an actual value less than 100,000€ or representing less than 5% of the total value of these properties or rights.

2. Entities exempted due to compliance with reporting obligations

Exemptions may be granted to structures:

• Whose registered office is located: Within the European Union; In a country that has signed an agreement with France to combat tax fraud and evasion; In a country having a treaty with France that ensures treatment equivalent to that of entities based in France.
• Which comply with at least one of the following conditions: Fulfill one of the following reporting obligations:

(i) Voluntary annual submission of an income declaration n°2072 (for entities not taxable under corporate tax, as is often the case for French SCIs or Monegasque civil companies, for example), or exempted from producing such a declaration.

(ii) Submission of a specific declaration n° 2746-SD before May 15th, notably indicating the names and addresses of the associates, their share of ownership in the structure, as well as the estimated market value of the real estate lease and its main physical characteristics (area, number of rooms, etc.)

Since 2021, this annual declaration regarding the 3% property tax must be mandatorily filed online, and it is assumed that the entity is registered in France with the tax administration.

It is also possible to commit to providing this information upon request from the tax authorities, which allows for exemption from the annual declaration n°2746. This commitment must be undertaken within two months of purchasing the property or a stake in a real estate company.

By tolerance, the tax authorities allow companies that have not met their reporting obligations within the legal deadlines in order to benefit from the 3% tax exemption to regularize their situation, either voluntarily or within 30 days of a formal notice issued by the administration; they are then exempted from paying the tax. However, this tolerance only applies to the first regularization request and for all non-barred years (BOI-PAT-TPC-30 n°20 - October 4, 2017).

This leniency can therefore only be applied once, so it is essential to be very attentive to compliance with reporting obligations for entities likely to benefit from a 3% annual tax exemption on the market value of properties.

Furthermore, it should be noted that the French tax authorities can go back and assess the 3% tax over the last 6 years, except in the case of filing a declaration that allows the administration to assess the situation without having to carry out further research.

In conclusion:

The annual 3% tax on the market value of properties calls for caution as the courts, in case of dispute, tend to interpret the texts very strictly and, most often, to reject taxpayers' appeals when, in particular, there is doubt about the actual beneficiary of the property located in France.

Moreover, Article 990 F of the CGI stipulates that any legal entity interposed between the debtor(s) of the tax and the properties or real estate rights is jointly and severally liable for the payment of the tax due, if any, for said properties or real estate rights. The payment of the tax can therefore be sought from an intermediary company, and not only from the entity liable for the tax.

Due to the potentially very heavy financial consequences associated with poor management of the annual 3% tax on the market value of properties, whether at the time of acquiring the property in France (choice of the scheme structuring the acquisition) or during its ownership (compliance with reporting obligations), it is essential to anticipate this issue and to be assisted by a tax law professional.

The French tax law firm CM-TAX, founded in 2007, and its team of English-speaking tax lawyers based in Lyon and Marseille but operating throughout France, provides its experience and expertise in tax law to support you, advise you, and defend your interests.