NON-RESIDENT: DO YOU OWN PROPERTY? BEWARE OF THE 3% TAX
The Conseil d’État ruling of 3 May 2019
In a ruling of 3 May 2019, the Conseil d’État held that the BOFIP-Impôt commentaries on the application of the 3 % tax on real property to trusts do not add to the law (CE, 9 May 2019, no. 426431).
For the administrative court, those commentaries do not amount to an erroneous interpretation of tax law. Under article 990 D of the French General Tax Code (CGI), French or foreign legal entities which directly or indirectly hold rights in rem over one or more real estate assets located in France are liable for an annual tax of 3 % on the market value of those assets, unless they can be exempted pursuant to the provisions of article 990 E of the CGI.
The tax applies to developed and undeveloped properties located in France and to rights in rem over such properties (usufruct, right of use…). No distinction is drawn according to whether or not the property is let, or according to the nature of the letting or of the use made of the property. The taxable base excludes the value of properties allocated by the taxed entity, or by interposed entities, to their business activity other than real estate, or to that of a legal entity within the same group.
The scope of the 3 % tax
Created in 1983, the 3 % tax forms part of the anti-fraud arsenal of the French tax authorities, codified in articles 990 D and 990 E of the French General Tax Code (CGI), and targets French or foreign entities which acquire real property in France, either directly or via a chain of holdings. It is an annual tax equal to 3 % of the market value of the properties or of the rights in rem in real property.
In practice, it is aimed more particularly at legal persons established in States with privileged tax regimes, or at the very least in States which have not entered into an administrative assistance agreement with France for the purpose of combating tax fraud and tax evasion. The exemptions provided for in article 990 E of the CGI take French companies outside the scope of this mechanism. The Community case law Elisa (CJEU, 11 Oct. 2007, no. C-451/05, Européenne et luxembourgeoise d’investissements SA Elisa) condemned the unequal treatment between French companies and companies established in the European Union which were unable to rely on an administrative assistance agreement, as an obstacle to the free movement of capital guaranteed by article 56 of the EC Treaty.
While French companies were exempt as of right, an additional condition did indeed weigh on foreign companies. Their State of residence had to have entered into an administrative assistance agreement with France for the purpose of combating tax fraud and tax evasion. Through the amending finance act adopted on 25 December 2007, the legislature took note of that case law and reformed the wording of articles 990 D and 990e of the CGI.
All structures established in the European Union now enjoy the same exemption possibilities as French companies.
Fiducies (the French-law fiduciary arrangement) and trusts
In this case, Amicorp Limited, as successor to the rights of the trust « The Stigell Family Trust », brought an application for judicial review seeking the annulment of paragraph no. 90 of the administrative guidelines published on 12 September 2012 in the Bulletin officiel des finances publiques (BOFiP) – impôts under reference BOI-PAT-TPC-10-10 and of paragraph no. 50 of the administrative guidelines published on 5 October 2016 in the Bulletin officiel des finances publiques (BOFiP) – impôts under reference BOI-PAT-TPC-20-20. Those provisions concern the application of the 3 % tax to trusts and fiducies.
In accordance with the administrative guidelines (BOI-PAT-TPC-10-10-20120912), the 3 % tax applies to all legal entities: legal persons, bodies, fiducies or any other comparable institutions. No distinction is to be drawn according to the form of the entity concerned. The legal persons concerned are capital companies, sociétés de personnes or « partnerships », sociétés civiles, foundations and any entity endowed with legal personality in the State in which it is registered. The term bodies refers to entities such as the « Anstalten » and « Stiftungen » incorporated under the legislation of Liechtenstein, as well as to groupings. Groupings are legal structures, with or without legal personality, in which several legal and natural persons join together in order to pursue a common economic objective; these include, in particular, GIEs, EEIGs and similar groupings, joint ventures (associations en participation) or even simple association agreements covering arrangements of various kinds (syndicate, group, pool…). As regards fiducies and comparable institutions, those concerned include in particular the fiducies governed by the provisions of Law no. 2007-211 of 19 February 2007 and comparable institutions. That term covers institutions comparable to fiducies and to bodies, such as structures or arrangements like family foundations, trusts or investment funds without legal personality.
Under article 990 D of the French General Tax Code, legal entities without legal personality may be liable to the 3 % tax if they hold, directly or indirectly, real property or rights in real property in France. Correspondingly, they may be exempt from it if they meet the conditions required to qualify for one of the exemptions provided for in article 990 E of the French General Tax Code. In either case, the exemption or the total or partial payment of the 3 % tax will be conditional on the filing of an undertaking or of a return no. 2746. It should be recalled that all legal entities interposed between the person or persons liable to the tax and the properties or rights in real property are jointly and severally liable for payment of that tax.
The concept of the fiducie
Fiducies were introduced into French law by Law no. 2007-211 of 19 February 2007. Under the terms of article 2011 of the French Civil Code: « the fiducie is the transaction by which one or more Settlors transfer assets, rights or security interests, or a body of assets, rights or security interests, whether present or future, to one or more Fiduciaires who, keeping them separate from their own patrimony, act for a specified purpose for the benefit of one or more Beneficiaries ».
Close to the trust of Anglo-Saxon law, the fiducie is a triangular relationship, made up of a Settlor who transfers part or all of his wealth to a Fiduciaire, in the interest of a Beneficiary. Effecting a temporary transfer of ownership from private wealth to a ring-fenced patrimony, the fiducie traditionally meets several needs: creating security, managing assets on behalf of another, and transferring them. But, in accordance with the intention of the legislature, the French fiducie may be used for all of these purposes. Fearing that it might be used for the purposes of tax evasion, the government did indeed prohibit its use as a tool for gratuitous transfers. In accordance with the regime of tax neutrality and tax transparency of the fiducie, the Settlor is, for tax purposes, the holder of rights over the assets placed in fiducie. Consequently, a Settlor which is a legal person is liable to the 3 % tax by reason of the rights it holds over the real-property assets placed in fiducie. It is therefore for the Settlor to comply with the obligations laid down in articles 990 D et seq. of the CGI, in particular where it wishes to rely on an available exemption. In practical terms, the reporting obligations referred to in d and e of 3° of article 990 E of the CGI may be discharged by the Fiduciaire authorised by the Settlor.
The tax authorities reserve the right to ask the Settlor to produce the fiducie agreement. It should be noted that these rules apply to entities governed by foreign law which, having regard to their legal characteristics, are comparable to a fiducie under French law.
The concept of the trust
The trust is a legal relationship created by a person, the Settlor, in order to place assets under the control of a trustee, in the interest of a Beneficiary or for a specified purpose. A trust is defined by reference to the rights and obligations exercised over the assets by the trustee, rights and obligations which are set out in the instrument creating the trust.
Deemed to be members of the trust are its Settlors, trustees and Beneficiaries, including those entitled to capital. Article 792-0 bis of the CGI, created by the amending finance act for 2011 of 29 July 2011, sets out the concept of the trust for the purposes of national tax law. It covers « all the legal relationships created under the law of a State other than France by a person having the capacity of Settlor, by an instrument inter vivos or upon death, with a view to placing therein assets or rights under the control of an administrator, in the interest of one or more Beneficiaries or for the accomplishment of a specified objective ». Under article 990 D of the CGI, the trust is liable to the 3 % tax by reason of the real property or rights in real property which it holds. It may therefore claim, provided that the required conditions are met, the benefit of the exemptions provided for in article 990 E of the French General Tax Code.
Exemptions from the 3 % tax
The exemptions
The Cour de cassation holds that an entity which has no shareholders cannot claim the benefit of the exemption from the 3 % tax subject to a reporting condition provided for in article 990, E, 3° of the French General Tax Code (CGI).
As a reminder, all French or foreign legal entities which own (directly or through an interposed entity) one or more properties (or rights in rem over such assets) in France are liable to a tax equal to 3 % of the market value of the properties concerned (CGI, art. 990 D et seq.).
In particular, legal entities having their registered office in France, in another EU State, in a State which has concluded with France an administrative assistance convention with a view to combating tax fraud and tax evasion, or in a State which has concluded with France a treaty allowing them to benefit from the same treatment as entities having their registered office in France, have the option to:
- Be entirely exempt from the 3 % tax if they disclose, or if they give and comply with an undertaking to disclose at the request of the tax authorities, a certain number of items of information on their properties and on their shareholders (whose holding exceeds 1 %), or if they file return no. 2746-SD (CGI, art. 990 E, 3°-d); or
- Benefit from a partial exemption in proportion to the shareholders whose identity and address they have disclosed on return no. 2746-SD (CGI, art. 990 E, 3°-e).
The Cour de cassation upholds the position of the tax authorities and holds that only the actual economic beneficiaries as at 1st January of the tax year of the legal entities concerned may be treated as the shareholders, partners or other members holding more than 1 % of the shares, units or other rights, thereby excluding contingent beneficiaries.
To put it more simply, an entity without shareholders or persons treated as such cannot benefit from the exemption subject to a reporting condition provided for in article 990, E, 3° of the CGI.
The Cour de cassation then dismisses the argument based on a potential incompatibility of the 3 % tax with the free movement of capital (Cass. com., 10 mai 2024, n°21-11.230)
Reporting obligations
As a practical rule, the reporting obligations may be discharged by the trustee in its capacity as legal representative of the trust or, where appropriate, by any other member authorised by the trustee to perform those obligations. In the event of a failure to file or to pay, the tax authorities may in all cases consider that the trustee, in its capacity as legal representative of the trust, must satisfy the reporting and payment obligations incumbent on the trust. Where the trust, through the trustee or another authorised member, elects for the exemptions referred to in D and E of 3° of article 990 E of the French General Tax Code, it must state a certain number of items of information in return no. 2746. It must specify which member or members of the trust are the actual holders of rights over the French real property or real property rights held in trust, on an assessment made on a case-by-case basis for each trust by the trustee or the authorised member. As a general rule, and subject to the trust deed, this will be the Settlor where the trust is revocable, and the Beneficiaries where the trust is irrevocable. It must also mention, for information purposes, the other members of the trust. The particulars relating to the allocation of rights within the trust must likewise appear in that return.
The information set out in the preceding paragraph must also be provided in connection with a request by the tax authorities for performance of the undertaking given pursuant to d of 3° of article 990 E of the CGI. The members of the trust must assess their own tax position with regard to the 3% tax. The tax authorities reserve the right to require the trustee or the authorised member to produce the trust deed. They may, where appropriate, challenge the status of those members of the trust as holders of rights over the French real property or real property rights held in trust.
The administrative guidelines do not add to the law
In the view of the Conseil d’État, it follows from the combined provisions of articles 990 D, 990 E and 792-0 bis of the CGI that a trust, defined as a body of legal relationships created under the law of a State other than France, must be presumed, for the purposes of the rules relating to the 3% tax, to have its seat in the State or territory under the law of which the legal relationships establishing it were created. Accordingly, by relying on the State or territory of the law to which trusts are subject in order to determine the place where they are established, the challenged administrative commentaries did not give article 990 E of the CGI an erroneous interpretation of the tax law, nor did they add to it.
In the view of the Conseil d’État, the challenged guidelines merely set out a presumption of establishment in the State or territory of the law to which these legal entities are subject. And that presumption cannot, as a matter of principle, prevent an entity which claims the benefit of the exemption provided for by 3° of article 990 E of the CGI in respect of the buildings situated in France or the rights in rem over such buildings which it holds, considering that, in its dealings with the French tax authorities, it falls under the law of a State or territory covered by those provisions, from adducing evidence thereof and thereby rebutting the presumption of attachment to the State or territory corresponding to the law to which it is subject, the administrative court concludes.
John D. Rockefeller had already understood this more than a century ago with his now famous phrase « Own nothing, control everything ».
Such is the purpose of the fiducie (the French-law fiduciary arrangement).
Frequently asked questions on the 3 % tax on non-residents
What is the 3 % tax on real estate?
The annual 3 % tax (articles 990 D et seq. of the French Tax Code) applies to the market value of real estate located in France held by legal entities (companies, fiducies (the French-law fiduciary arrangement), trusts), whether French or foreign. Its purpose is to identify the real owners of real estate.
Who is concerned by the 3 % tax?
The tax concerns legal persons and similar structures which own, directly or indirectly, real estate in France. Individuals holding directly are not targeted: it is holding through a company or a trust which triggers the tax.
How can exemption from the 3 % tax be obtained?
Exemption is possible, in particular by filing each year the no. 2746 return disclosing the identity of the members, or depending on the location of the registered office and on the existence of an administrative assistance treaty. Compliance with the filing obligations is essential.
What are the filing obligations?
The entity must file an annual return before 15 May, stating the composition and the value of the real estate as well as the identity of its members. Failing this, the 3 % tax becomes payable together with penalties.
What should I do if I have failed to file?
Regularisation is often possible: the published administrative guidance accepts, subject to conditions, the late filing of returns in order to benefit from the exemption. Legal advice makes it possible to secure that regularisation and to avoid a reassessment of the tax.
The House of Harlington since
2006