Currently, France can point to low interest rates and a rental sector that show’s continual growth, especially in the main cities such as Paris, Lyon and Bordeaux. While this has attracted institutional investors interested in retail and tourism, personal investors looking for investment opportunities or second homes are also prominent.
There is no legal restriction on foreign ownership of French real estate. French law always applies except in succession matters where the law of the non-resident owner’s country applies. The legal documents that transfer direct ownership of French property must be drawn up by a notary and lodged with the Land Registry. For indirect sales (shares), a legal adviser is sufficient. In cases where construction or renovation are taking place, a building or demolition permit is necessary.
Where leasing, contracts must be drafted by a legal professional. There are restrictions on rent increases and some legal provisions are mandatory and will depend on the type of lease; for example, commercial or residential leases. As well as paying rent, tenants must pay service charges to keep the rented premises in good condition, they must also insure the property and its contents.
In the case of overseas investors, a property may be acquired either directly by non-resident individuals or via a company created specifically for this purpose. The company will be a non-commercial entity (SCI) under French law. However, for rental income, shareholders can choose between paying personal income tax or switching to corporate tax.
Property owners pay taxes on acquiring, renting and selling a property.
Taxes on acquisition
Property sales are subject to VAT at 20% and/or a transfer tax of 5.8% depending on the age and type of property. The VAT on acquisition can be deducted from rental revenues in some cases.
Taxes on rental income
For non-resident individuals, there is a basic rate of 30% tax on net rental income. An additional 7.5% in social charges is also payable, or 17.2% if the tax-payer is not resident in the European Union or European Economic Area.
Although rental income from unfurnished property is exempt from VAT, owners may choose to pay VAT France is one of the largest investment markets in continental Europe. Its stable economy and legal system, added to its history and culture, makes France attractive to property investors. Investing in French real estate ISSUE 18 — Business World 05 on rental income. This can be a useful option where the owner can deduct VAT expenses attaching to the property such as those arising from construction or renovation.
Where a property is owned by a non-resident company, corporate income tax is payable on income at a rate of 15% under €38,120, 28% between €38,121 and €500,000, and increasing to 33.33% once rental income exceeds €500,000.
Taxes on disposal
Non-resident individuals pay a withholding tax of 19% calculated on the difference between the sale price and the original real estate cost. If you sell more than one property in a year, corporate tax applies. There may be exemptions available based on length of ownership.
In addition, social charges of 7.5%, or 17.2% if the tax-payer is not resident in the European Union or European Economic Area, shall apply.
Where property is owned by a non-resident company, or a French company with an option for corporate tax, tax is calculated on the difference between the sale proceeds and the deemed net book value. Tax is charged at 15% up to €38,120, 28% between €38,120 and €500,000, and 33% above €500,000.
Other annual taxes to be aware of include local property taxes based on the property value.. A wealth tax on property worth more than €1.3 million also applies at a rate of:
- 0.7% between €1.3 million and €2.57 million
- 1% between €2.57 and €5 million
- 1.25% between €5 and €10 million
- 1.5% above €10 million
- 3% where the identity of the physical owners is withheld.
As well as taxes, there are other costs to consider when investing in French property. These include:
- real-estate agency fees of up to 10% of the sale price
- legal costs for drafting a provisional agreement or sale-and-purchase contract, under certain circumstances
- bank and accountant’s fees for certain financial documents
- fees to incorporate a company, if using as the purchasing vehicle, of around €2,000
- notary’s fees for the final sale-and-purchase agreement of 8% of the sale price
- accountant’s fees for certain tax declarations that may be required.
Real estate investments are usually financed by a combination of equity contribution and bank financing. A bank will usually require a minimum 20% personal deposit and security over the property for any mortgage it advances. A notary will conduct money laundering checks to verify the origin of personal funds.
The French legal and tax system is complex; this means it is essential that you seek the help of legal, property and accountancy professionals. On the positive side, this complexity makes French property ownership secure, making any investment a wise one in the long term.
Guest blog by Laëtitia Villain a director at Pyramide Conseils.
(First published Russell Bedford: Business World May 2019)