Arsene Taxand - Real Estate

French Finance Bill for 2008: 'Tax pack' for Real Estate

Today, Senator Marini lodged amendments to the Finance Bill for 2008 and proposed important changes for the French property market. Most of them were adopted by the government. In principle, these measures are not definitive at this stage as they should be voted by the National Assembly, but this should not cause any problem. To sum up, the main provisions concern the following:

New regime for taxation of capital gains on disposal of shares in real estate companies
The new regime is adopted by the Senate and should result in the taxation of these gains at the rate of 33.1/3%. However, an exception has been introduced for sale of shares in SIIC companies which should be taxable at the reduced rate of 16.5%. These new rates are applicable for sales carried out as from September 26, 2007. The retrospective effect of the law is thus confirmed which is bad news for deals in process.

Preferential regimes for SIIC and new funds (OPCI) structured as SPPICAV
The preferential regime known as SIIC 2 & 3 that consists in reducing the tax on capital gains on real property to 16.5% would be extended to sales of predominantly real estate companies, whatever their form or their tax treatment (whether they are subject to corporate income tax or tax transparent).

Furthermore, the SPPICAV (French investment company with variable capital investing primarily in real estate) regime is now possible with regard to a SIIC (listed real estate investment company): the parent/subsidiary tax regime would be applicable. A SPPICAV of a SIIC, SIIC of SIIC, SIIC of SPPICAV, a whole new set of opportunities available to market players which would further enhance the attractiveness of these vehicles, boosted by the favorable tax regime for property purchases until at least the end of 2008.

In-depth recasting of the tax treatment of capital gains on real property for non-residents (as from January 1, 2008):
Not only capital gains on the sale of unlisted companies, but also those on sales of listed predominantly real estate companies and French or foreign companies investing primarily in real estate (SPPICAV) would be taxable at 33 1/3% from now on where, in either situation, the seller owns a stake of 10% (either directly or indirectly).

Good news for small investors who are non-residents but much less good news for non-resident shareholders owning more than 10% of a French SIIC! It should be noted however:

First, that this regime applies subject to the provisions of the tax treaties, some of which remain extremely protective (Luxembourg, Germany, Ireland, only to mention nearby States);
Second, that there would be a reduction to 16.5% in the tax rate on capital gains made by legal entities resident in the EU, the European Economic Area or a State that has entered into a tax treaty with France containing an administrative assistance clause at the time of the sale of a listed real estate companies (such as SIICs) or shares in a SPPICAV (where the seller holds a stake of over 10%).

Tax regime for free revaluation extended until December 31, 2009
Furthermore, it should be noted that the regime for the free revaluation of real estate assets taxable at 16.5% is being extended until December 31, 2009. Naturally, we can only voice our disappointment that this measure does not apply to the SIIC 2&3 regime, but we can also bet on the fact that this measure will continue to remain possible next year under pressure of what promises to be a very favourable year for transactions of this kind.

2008 promises to be fascinating: everyone should start fine-tuning their strategy!

François Lugand