21 April 2015

From 1 January 2016, France will impose a 33 per cent capital gains tax charge on German- and Luxembourg-resident shareholders of property companies whose main investments are located in France.

Previously, capital gains made by such investments have been exempt from French capital gains tax (CGT). However, the relevant double-taxation tax treaties have now been renegotiated to abolish this exemption.

The amended Luxembourg treaty was agreed last September and the Franco-German treaty on 31 March 2015. The amendments are in the process of being ratified by the various legislatures and are expected to apply to transactions taking place after the end of this year.

In both cases, the effect is that any gains made on the shares of a property holding company will be taxable in the state where the property is located and not the state where the seller is resident.

The removal of the exemption is less significant for German investors – who are in any case taxed on these gains at home, albeit at only 5 per cent – than for Luxembourg investors, who were not. However, according to Franck Lagorce of law firm Pinsent Masons, it will mean a significant increase in the tax charge on the gain for German entities owning shares in companies owning French real estate. It could also be significant for French entities owning shares in companies investing in German real estate.

There is still an exemption for the sale of shares in companies whose properties are used in their own business activity, rather than held as investments.

‘Cross-border real estate owners carrying on a business will need to consider whether owning the business operations and the real estate in one single company, or separating operations from real estate makes sense, or not’, commented Lagorce. ‘Some of those investing in real estate as an asset class may want to think about reorganising or selling-off their interests in French real estate before the change takes effect.’

Under the new Franco-German treaty, France will also levy a 30 per cent tax on dividends paid by property holding companies to German shareholders who directly or indirectly hold at least 10 per cent of the capital. A similar provision appears in an agreement made between France and the UK in 2008, but it is not in the amended Luxembourg treaty.

It is expected that the French finance ministry will try to get similar amendments included in its other double-taxation treaties, to prevent taxpayers investing in French property free of CGT.

Source : STEP Industry News Digest