The French 3% tax on market value: how foreign entities may be exempt

Important note: Citizen Avocats has produced this article as part of our collaboration. The contents do not constitute legal advice by SO Legal and are not intended as a substitute for legal advice.

Introduction

Designed and adopted as a tool against tax evasion, the TVVI seeks to dissuade taxpayers, subject to the French impôt sur la fortune immobilère (ISFI), from escaping it by acquiring properties or real estate rights in France through legal entities established in tax havens.

This article will help you know if you are affected by this tax, which exemptions are available, and the steps you must take to benefit from them.

1. Are you affected by the 3% tax?

The rule is rather simple: in principle, the TVVI applies to all French and foreign entities (legal persons, bodies, trusts or comparable institutions), whether or not they have legal personality, which owns real estate or real property rights in France on the 1st of January of each year, directly or through an intermediary (article 990 D of the Code Général des Impôts).

The tax amounts to 3% of the market value of the property. For example, an English private limited company owning a French property worth €300,000 could be liable for €9.000 of TVVI yearly. You should also be careful when several entities are interposed between the property and yourself. 

Indeed, the 3% tax applies to entities (e.g. holding companies or trust arrangements) with ownership interest within the entity or entities which effectively own the property (no matter how many links in the chain).  

Given its broad scope of application and substantial rate, one can wonder how the TVVI ever goes unnoticed. 

The main reason is that there are so many broad exemptions that it rarely applies in practice. In some cases, however, the benefit of these exemptions requires the proactive provision of certain information to the French tax authorities.

A failure to make such declarations can prove very costly, which is precisely what this article aims at avoiding.

2. What are the TVVI exemptions available under French law?

Let’s see some of the main TVVI exemptions, provided for in article 990 E of the Code Général des Impôts.

2.1. The exemption by virtue of minority ownership

First, the TVVI does not apply to legal entities whose French real estate properties amount to less than 50 % of their total French assets. This is quite logical, given the rationale for the TVVI.

To get back to our first example, if the English private limited company owns the €300.000 property besides owning €400.000 of French stock, it will not be liable to TVVI.

2.2. The exemption applicable to publicly listed companies

Second, companies whose shares and or securities are significantly and regularly traded on a regulated market are not concerned by the TVVI. 

The 3% tax is primarily aimed at combating tax evasion by individuals subject to the French wealth tax. That is why it only applies to private companies.

2.3. The exemptions due to the location and characteristics of the legal entity

Finally, legal entities can be exempt from the TVVI if they cumulatively meet specific criteria relating to their location and characteristics.

a) The location criterion

When it comes to the location, article 990 E of the CGI provides that:

"Legal entities: […] which have their registered office in France, in a Member State of the European Union or in a country or territory which has concluded an administrative assistance agreement with France to combat tax evasion and avoidance, or in a State which has concluded a treaty with France allowing them to benefit from the same treatment as entities which have their registered office in France [can benefit from a TVVI exemption]" - Art. 990 E 3° of the French Code Général des Impôts

In the aftermath of Brexit, the question arose as to whether the United Kingdom could be considered a country, territory, or state having concluded such agreements or treaties with France.

The answer to this question (recently confirmed to Citizen Avocats by the Direction départementale des finances publiques de Lot-et-Garonne) is positive. 

Indeed, articles 25 and 27 of the 2008 double taxation avoidance convention between the UK and France (as amended by the 2017 multilateral convention) provide for a mutual assistance between both countries and the reciprocal non-discriminatory treatment of their nationals and entities.

It thus makes no doubt that UK entities meet the location criterion of article 990 E. The answer would be the same for entities with headquarters in a Member State of the European Union. 

On the other hand, for entities whose headquarters are located in a third country, it will be necessary to verify, on a case-by-case basis, the existence of such cooperation agreements or treaties with France.

b) The five alternative grounds for a 3% tax exemption

Entities who meet the location criterion can invoke one of the five grounds for exemption listed in the Code Général des Impôts:

1. their share of the property situated in France, or the real rights they hold directly or indirectly in respect of such property, is less than €100,000, or 5% of the market value of such property;
    
2. they have been set up to manage pension schemes, recognised as being of public utility, or their management is disinterested, and their activity or financing justifies the ownership of buildings or property rights
    
3. they are a specific type of French real estate investment companies or investment funds (this category is very specific and the readers of this article are quite unlikely to be concerned by it);
    
4. they communicate each year or undertake and respect the commitment to communicate to the tax authorities, on request, key information relating to the real estate owned on the 1st of January of each year and the identity and address of the beneficiaries; or, finally
    
5. they declare to the tax authorities each year, and by the 15th of May at the latest, key information relating to the real estate owned on the 1st of January of that year and the identity and address of the beneficiaries.

In most cases, it will be one of the last two of these five grounds that will benefit foreign entities threatened by the French TVVI.

3. What must you do, in practice, to benefit from a 3% tax exemption?

The first thing to do is to ascertain whether your entity is liable for the 3% tax and, if so, whether it already benefits from one of the "automatic" TVVI exemptions (2.1., 2.2. and grounds 1, 2 and 3 of 2.3. above).

Should it not benefit from any of these, you should seriously consider the last two grounds for "voluntary" exemption.

From the acquisition stage, the TVVI issue could be appropriately discussed with your notary. 

Indeed, the commitment to communicate relevant information to the tax authorities on their request (ground 4° above) must be made on the date of acquisition. In many cases, this rather simple formality would be sufficient to benefit from the exemption and enjoy some peace of mind.

Otherwise, you could still file the annual declaration of information before the 15th of May of each year.

This "last recourse" option is a little bit more of a constraint. The declaration has to be made online. It will thus require the prior opening of a professional account on the impots.gouv website. This takes some time, as the first step is obtaining an INSEE company number. Consequently, if you are in this situation, we advise you not to wait.

Expert advice on French law

If you have any questions regarding the TVVI, please get in touch. Citizen Avocats regularly acts as tax agents for foreign companies and individuals. The assistance of qualified legal professionals can save you both time and costly mistakes.

SO Legal has an exclusive collaboration with Citizen Avocats - affording our clients greater access to legal expertise in France and the EU while giving Citizen's clients enhanced access to our specialist legal services in the UK.

Find out more here.