Tax on the market value of real estate properties in France owned by legal entities (the so-called three per cent tax)

Arnaud Tailfer

Arkwood, Paris

arnaud.tailfer@arkwood.fr

The three per cent tax was introduced in France in 1983 to identify the ultimate owners of real estate properties located in France despite the interposition of French or foreign legal entities. To summarise, French and foreign entities owning real estate properties (or real estate property rights relating to such properties) must annually declare their shareholding and disclose the identity of their ultimate owner. If they fail to file a proper tax return and disclose the required information, entities can be sanctioned to pay, for each failing year, a tax equal to three per cent of the market value of the real estate property or the rights of the real estate property they own.

Based on recent case law, foreign legal entities that own French real estate properties should be particularly vigilant in their structuring: despite filing the three per cent tax returns, they could be regarded as having failed to provide to the tax authorities with the relevant information.

French and foreign legal entities (legal persons, organisations, trusts and comparable institutions), which directly or indirectly own one or more real estate properties situated in France or hold real estate property rights relating to such properties, are liable to pay a three per cent tax on the market value of such properties or property rights[1].

The tax is payable on the market value of the real estate properties (or the equivalent rights) owned on 1 January of the relevant tax year.

However, some legal entities may be exempted from the tax, such as[2] :

• international organisations, sovereign states and their political and territorial subdivisions;

• legal entities that are not considered as companies predominantly invested in real estate properties; and

• legal entities located in the European Union or in a country or territory bound to France by an administrative assistance agreement with a view to combatting tax fraud and evasion. These entities are exempted, notably, if they declare annually to the tax authorities the situation, composition and value of the real estate properties owned on 1 January of each year, as well as the identity and address of each shareholder or member who owns more than one per cent of the company.

Thus, for foreign entities owning French real estate properties, the common way to avoid the payment of the three per cent tax consists of the filing of an annual tax return, which allows the French tax authorities to have some visibility over their holding chain back to the ultimate owner. The French tax authorities can then keep track of the correct application of French taxes related to these real estate properties (eg, the French wealth tax or stamp taxes in the case of real estate sales).

In the case of an audit by the French tax authorities of the information disclosed in the three per cent tax return and assuming the authorities are not convinced by the veracity of the information provided, the three per cent tax would then be due from the person filing the return.

Recently, the French Cour de Cassation (judicial Supreme Court or the ‘Court’) ruled on three similar cases in which foreign entities had filed three per cent tax returns that the tax authorities considered had been wrongly filled. The rationale of the Court is quite worrying and illustrates the delicate situation in which some foreign entities are placed to demonstrate the truth of the information provided in their three per cent tax returns.

The common point of these three decisions[3] is that the French real estate properties were owned through Luxembourg companies, which had filed their annual three per cent tax returns in which they claimed the benefit of an exemption.

In these three cases, the shares of the Luxembourg companies were sold, which led to a change of shareholders. In Luxembourg, according to the registrar rules, only the original shareholders who registered the company are mentioned in the public register ‘Legilux’. The French tax authorities thus requested additional proof from these Luxembourg companies about the details of the change in their shareholder structure.

In the first case[4], the company produced a sales agreement, as well as the register (certified by a notary) of the company stating the transfer of shares.

In the second case[5], the company produced some notarised documents relating to the sale of shares (the shares were sold for a symbolic price because of the company’s debt). The company also produced the register of shareholders, along with the minutes of the extraordinary general meetings certified by a notary and an attestation certifying the shareholder’s identities.

In the third case[6], the company produced a notarised deed of guarantee signed by the ultimate shareholder of the Luxembourg company for the credit line opened to finance the acquisition of the property, the contract of the loan granted for the acquisition stating the identity of the ultimate shareholder, as well as a certificate from a notary confirming the identity of the ultimate owner and a letter from the company’s lawyer confirming the transfer of shares to the current ultimate owner.  

In all three cases, the French tax authorities considered that the evidence on the actual shareholders provided by the Luxembourg companies was insufficient and, therefore, refused them the benefit of the exemption from the three per cent tax. The French Tax Administration is able to go back up to six years to notify a tax adjustment, according to the applicable statute of limitations, as such the Luxembourg companies were requested to pay a tax amounting 18 per cent (three per cent x six years) of the market value of the real estate properties they owned.

In all these cases, the French Court confirmed the position of the French tax authorities and found that the production of ‘private’ documents can’t be considered as adequate proof of the ownership of a company.

The Court ruled that, even if the identity of the shareholders can be proved by any means including proof of cashflows relating to the acquisition price, in view of the proof produced and in the absence of any justification relating to the corporate acts filed with the local registrar (such as a declaration filed with the tax authorities, a document certified by a member of a regulated profession, or any justification relating to the cashflows with respect to the movement of shares), the companies failed to produce convincing evidence on the truth of their ownership.

However, it is worth mentioning that some of the documents provided were notarised, even though it was not mandatory under the local regulations. For the Court, the fact that the documents were notarised only proved that the said documents were presented to a notary but did not prove the truth or accuracy of the transactions, which were not realised by the same notary at the time.

It’s important to note the extreme severity of the solution adopted by the French Court: its position leads to the export of the French standards of proof to transactions realised in foreign states that may not have the same degree of formalities requirements.

In other words, a foreign taxpayer can be liable for the three per cent tax, even though they duly disclosed the requested information to benefit from the exemption, if they are not able to demonstrate, according to French standards, the truth of the current shareholder structure.

The latest evolution at the EU level regarding beneficial ownership registers does not totally clarify the issue. Based on recent case law, France appears to be the first in line regarding transparency, which can cost a lot!

These three cases are very instructive about how to think or rethink real estate properties structuring in France, especially through opaque structures, and encourage particular attention to be paid to the supporting documentation for the information declared in the three per cent tax return. The Court’s decisions have the merit of highlighting the level of proof required to avoid the payment of such tax. Taxpayers must now identify the solutions to reach it!