Real Estate Tax Review of 2009
2009 ended with very few legislative reforms, indicative of a torpid real estate market. Although signs at the end of the year pointed to a possible upturn in the investment market, especially in the field of commercial real estate, it remains obvious that in general, 2009 was marked by a large slowdown which was reflected in the pace of regulations adopted after five years of strong momentum.
During 2009 there were few major reforms of the SIIC or OPCI regimes, except for some adjustments and efforts made to ensure better fluidity of both these statuses, particularly in relation with partnerships based on joint ventures between SIICs and OPCIs. We had hoped for this measure to be applied in 2008, but the joint agreement of SIIC and OPCI representatives was needed to introduce it.
- Taxand’s Take This is seen as an extremely welcome innovation, in a market which will doubtless encourage partnerships, especially for the ownership of assets with a significant value (amounting to over a hundred million Euros) which the market wishes to pool among several investors.
Indirect Taxation on Real Estate
Concerning indirect taxation, there has been a change in the rules applicable to disposals of shares of foreign predominantly real estate companies. Indeed, as a result of unfavorable case law, the French Ministry of Finance has amended the tax rule in order to include disposals of foreign predominantly real estate companies in its scope of application . It is now impossible to escape the 5% transfer tax in case of a sale of a Luxemburg or Dutch company. This measure will be applicable to any disposal made from 1 January 2010 onwards.
- Taxand’s Take Although this measure is unfavourable, it was anticipated and we can only be glad that, with all things considered, transfer taxes still remain relatively favourable to disposals of securities in France. Indeed, unlike our German or Spanish neighbours, the basis for assessment of the duties in case of disposal remains the value of the shares sold and not the fair market value of the real estate asset. A sale of the shares therefore remains advantageous in many cases. Only the disposal of shares of foreign companies is penalised, meaning that there will be fewer cases where disposals of this kind are appropriate.
VAT on Real Estate
VAT on real estate will be the main tax issue during 2010. Reform in this area raises questions with regard to the system of margin VAT. Indeed, according to the EU VAT directive, the application of margin VAT is only optional. However, the French tax regime of margin VAT (which was in place before the directive was adopted) applies automatically to property dealers without any possibility of them electing for another treatment. This discrepancy in French tax law was highlighted in a bill proposed by Mr. Jean-Luc Warsmann (bill No. 1890 for simplification and improvement of the quality of law), submitted to the French Parliament on November 24, 2009.
- Taxand’s Take As such no litigation has yet taken place. However, it should be considered that, in order to protect their interests, it would be advisable for property dealers to carry out a review of their past transactions in order to determine those that could challenge the tax treatment applied. This would be the case more especially where:
a) VAT was not charged to the buyer because it had no possibility of recovering such tax (sale to an individual or to a financial institution)
b) The amount of VAT recovered on renovation, partitioning and servicing works does not exceed the margin VAT. It should be noted that VAT may be contested for 2 years. Therefore, in 2010, only the VAT treatment for 2008 and 2009 can be questioned.
International Real Estate
Finally, in the international sector, the entry into force of the new treaty between France and the UK is an interesting development. This treaty contains innovative measures on the tax treatment of SIICs. Payments of dividends made by SIICs or REITs will be subject to domestic withholding tax (25% in France), when the beneficiaries hold a stake of more than 10% or to a withholding tax of 15% in any other case. A measure of the same kind also exists in the double tax treaty entered into with the US. It is to be expected that France will adopt this new position in future renegotiations regarding double tax treaties.
- Taxand's Take 2010 will without doubt be an extremely fascinating year, after the “wait-and-see” attitude that tended to prevail in 2009. The tax environment has stabilised and, in general, France has not changed its favourable real estate policy. Thin capitalisation rules can be handled. Indirect taxation is not neutral but choices can be made, such as for capital gains for example. For operators, the fluidity and neutrality of the tax treatment of SIICs and real estate funds like OPCIs are unrivalled anywhere in Europe. All signs therefore point to a quick recovery in investment. Opportunities are now available, while pressure on public finances could bring about increased taxation for investment activities in the coming years.
Your Taxand contact for further queries is:
T. +33 (0)1 70 38 88 21