Buying or holding a secondary residence in France: what are the wealth impacts for Luxembourg tax residents?
In this article, Societe Generale Private Banking, a major player in the French and Luxembourg banking landscape, gives an overview of the key considerations for Luxembourg tax residents who have a secondary residence in France.
Acquisition fees and taxes
In France, real estate transactions must be established by notarised deed and registered with the French public land registry (service de la publicité foncière). This mandatory registration involves a tax payment at the buyer’s expense, the amount of which will depend on where the asset is located (around 7% in most cases(1)), and is in addition to notary emoluments (around 1% of the sales price). If acquiring shares in a company holding property in France, there may be a 5% duty payable in France and based on the market value of the shares(2).
How can you best structure the holding of your secondary residence in France?
Property can be acquired directly or through a company, such as a real estate investment company, registered in either France(3) or Luxembourg(4).Holding property through a company is often in anticipation of a free transfer of assets (shares in the real estate investment company rather than the property itself), especially in the case of multiple heirs. This is a way of avoiding the inherently problematic issues of co-ownership, and of arranging the management of the property independently of its holding by adapting the governance by-laws. It is possible to associate the next generation to the company’s capital from its creation, or to donate shares at a later stage either in the form of full ownership or through the division of property. Worth noting is that the division of property, which only transfers bare ownership, reduces the gift tax amount based on the usufructuary’s age. The younger the usufructuary, the greater the reduction on the bare ownership value(5).
The impacts of free transfers
Whether the property is held directly or through a company, including foreign companies, such gifts must be registered in France and, as such, may be subject to French duties on the free transfer of assets (DMTG — droits de mutation à titre gratuit)(6). Luxembourg does not require gifts of property located outside the country to be registered. Gifting company shares by notarised deed may, however, be subject to a registration duty of a maximum of 2.4% for direct heirs(7). Duties on the transfer of real-estate company shares (DMTG) with little capital are generally minimal as they are calculated based on the market value of the shares (assets — liabilities). The liabilities side of the company’s balance sheet could include amounts due to banks and/or to partners (partner’s current account). Indeed, if there is not enough revenue to cover its overheads, the partners will need to inject liquidity into the company — a common occurrence in the case of property held for personal use. This involves booking a partner’s current account as a liability (receivables from partners). While such accounts may seem innocuous, they could become a problem when a partner wishes to execute the transfer strategy they set up during their lifetime. Again, this is because France and Luxembourg do not have a treaty in place to avoid double taxation on inheritance tax. DMTG could therefore apply to the value of the partners’ current account:
If the company holding the property is French,
Or if the partner’s heir has been living in France for more than six of the 10 last years.
It is important therefore to factor in and mitigate the difficulties that come with transferring a partner’s current account, particularly when the heirs are tax residents in Luxembourg.
Occasionally letting out your property: important points
While infrequent, the owner of a property held for personal use may decide to let it out from time to time when they are not there(8). In French legislation, a distinction is made between “bare” letting (unfurnished, minimum lease of three years), and “furnished” letting which, from a tax perspective, qualifies as a commercial activity and its income as industrial and commercial profit (BIC), rather than income from property. Furnished lettings fall under one of two French tax schemes: the régime micro-BIC scheme(9) or the régime réel(10). Irrespective of the chosen tax scheme, the net rental income will be taxed at the progressive income tax rate applicable in France. However, the calculated tax amount may not be below a certain tax rate(11). The income will also be subject to social contributions (17.2%, or 7.5% if the taxpayer is not affiliated to a mandatory French social security regime(12)), as well as to social charges in some cases. While a furnished rental can be attractive from a tax perspective, some caution is required for properties held through a real estate investment company, or SCI: they are fiscally translucent (with respect to income tax) and as such may not have a furnished letting business, otherwise it would automatically have to pay corporate tax. This would give rise to a number of important consequences:
Tax impacts when the partners decide to estimate the revenues of the SCI;
Having to pay the SCI rental income at market value when partners wish to make use of their property;
A less attractive tax regime on real-estate capital gains versus an SCI subject to income tax.
Lastly, according to the tax treaty between France and Luxembourg on income tax, income derived from property in France is not taxed in Luxembourg(13). This income must nevertheless be declared in Luxembourg in order to determine the actual tax rate to be applied to the taxpayer’s other taxable revenue.
What are the advantages of taking out a bank loan?
By definition, property that is held for personal use is not meant to generate income. So does is make sense to take out a bank loan for the acquisition? The decision to do so is strictly economic, as the cost of the bank loan and the expected returns of financial investments are weighed up. This trade-off approach is all the more relevant in a low interest rate environment, where the returns on a portfolio invested on the market can be higher than the cost of the loan. Taking out a loan from the bank can also have tax impacts:
The interest paid on the loan can count as an expense that can systematically be charged against any income derived from the property.
In some cases, the outstanding loan principal(14) can lower the market value of the property liable to French real estate wealth tax (IFI - impôt sur la fortune immobilière)(15).
If the acquisitions take place through a company that takes on debt, the loan can reduce the tax base if a gift of company shares up to the market value of such shares.
In conclusion, acquiring property for your own personal use in France does have implications for your wealth. It is a decision that should involve careful reflection on how to best structure and plan for the possible transfer your asset.
1/ Excluding the French metropolitan departments of Indre, Isère and Morbihan where an overall rate of around 6% applies.
2/ This concerns all unlisted companies, irrespective of nationality, whose real estate operations are predominantly in France on the day of sale and in the year preceding the sale. The acquisition deed must be registered in France in the month following the transaction.
3/ Fiscally translucent by default (subject to income tax), except in special cases. See below.
4/ The Luxembourg real-estate investment company is fiscally transparent, meaning that its partners are subject to income tax in France. This kind of structure, however, requires following specific tax procedures.
5/ For example, if the usufructuary is aged between 51 and 60 years, the fiscal value of the bare ownership in France is set at 50% of the full ownership value. Note that in Luxembourg the same logic applies to the division of property (with a one-year difference in the tax scale).
6/ In the case of direct heirs, the market value of the transferred assets is taxed at a progressive rate with a marginal tax bracket of 45% (>EUR 1.8 million). The children benefit from an allowance of EUR 100k that is renewable every 15 years.
7/ No tax treaty having been concluding between France and Luxembourg in this regard, situations of double-taxation may arise.
8/ Contingent on permission obtained from the local council, and provided that the furnished letting is registered as a business with the registrar of the commercial court in order to obtain a business registration number (Siret).
9/ The micro-BIC scheme applies a 50% allowance for expenses to total rental income, and the paperwork for filing the tax returns is very straightforward.
10/ Under this scheme, actual expenses can be deducted from rental income, and the depreciation of the value of the property (excluding the land value), furniture and equipment can also be deducted under certain conditions. However, it does involve a lot of filing formalities. There is no limit on the amount of profit to be eligible for this tax scheme.
11/ Minimum rate of 20% for revenue below the second tax band for income tax (i.e. EUR 25,710) and 30% thereafter. In some cases, these minimum tax rates can be scrapped.
12/The taxpayer must, however, be affiliated to a social security regime in the EEA or in Switzerland. Note that it is possible to be registered with Luxembourg’s national health insurance (CNS) and be affiliated to the French social security regime. This may be the case for people who are employed in France, or who receive their pension in France.
13/ Treaty of 20 March 2018 to avoid double taxation and prevent income tax and wealth tax evasion and fraud.
14/ With respect to this wealth tax, the theoretical amortisation of bullet loans must be calculated on a straight-line basis.
15/ The IFI trigger threshold is set at EUR 1.3 million net taxable wealth. The net value of real estate assets held directly or indirectly by the taxpayer is subject to a progressive tax rate with a marginal tax bracket set at 1.5% (>EUR 10 million). The French tax authorities recently commented on the treaty of 20 March 2018 between France and Luxembourg, but gave no particular interpretation with respect to the IFI. However, according to many experts’ reading of the text, only real estate assets held directly or through fiscally transparent companies may be concerned by the French IFI.
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