Arsene Txand - Real Estate

OPCI 1: SIIC 3

For the last three years, we have become used to reforms being made in quite major areas of taxation of the real estate sector under the impetus of Senator Philippe Marini, general rapporteur of the French Finance Commission. The 2006 vintage is probably the best and a model of legislative techniques and tactics.

First because it lays the foundation stones for the OPCI (property collective investment fund) or specific OPCVMs (undertakings for collective investments) dedicated to real estate even if it remains for an implementing decree to specify certain technical aspects. Furthermore, because it reinforces the tax treatment of SIICs (listed real estate investment companies). As this measure will allow for the creation of "listed real estate investment companies of listed real estate investment companies" like funds of funds, a SIIC will now be able to acquire a stake in the capital of another SIIC and extend the tax exemption from which it benefits to the dividends received from its shareholding.

Finally, criticism has become more and more insistent over recent weeks regarding the relatively incomplete and even ineffective nature of the preferential tax treatment for contributions of real property to listed real estate investment companies. The scope of the amendment is crystal clear: the regime has been enlarged from now on to include all sales of real property. Thus, a company subject to corporate income tax that is the owner of a building will be able to benefit from preferential treatment with regard to disposals of its asset until the end of 2007. The corporate income tax rate will thereby decrease from 33.33% to 16.5% plus the tax surcharge on condition that the real property is sold to a public listed company or a company approved by the financial markets and provided such company retains the property among its assets for a period of five years.


OPCI 1

A logical follow-on to the ordinance of October 13, 2005, the tax provisions relating to the OPCI (property collective investment fund) were adopted using the same technique of senatorial amendment within the scope of the amended Finance Act for 2005.
This instrument, which is midway between an FCP immobilier (investment fund with regard to real estate) and a SICAV (open-ended investment company), is a new type of collective investment fund with a strongly marked real estate character. This new category of undertaking for collective investment is not in fact any such thing, in the light of the fact that the underlying assets are of a real estate nature. Its real estate nature is, in particular, affected by the liquidity of the units of the OPCI (reference being made to values assessed by property appraisers rather than to market value). Furthermore, the OPCI can contract debt (at a loan to value ratio of 50%) and apportion a significant percentage of its allocation of assets, 40%, to investments other than real estate (of which at least 10% must be allocated to deposits, liquid financial instruments and liquidities).
In order to serve the objective of redynamizing the regime applicable to SCPIs (non-trading real estate investment companies) with its constraints that no longer fit into a real estate market where the new buzzword is liquidity, the French government has provided for a two-pronged approach to the system of OPCIs with "fonds de placement immobilier" or FPIs (real estate investment funds), and "sociétés de placement à prépondérance immobilière et à capital variable" or SPPICAVs (investment companies with variable capital investing primarily in real estate).

For SPPICAVs, the tax treatment would be the same as that applicable to SIICs (involving tax exemption and taxation at the level of the shareholder). In return, the SPPICAV, like the SIIC, would be obliged to distribute at least 85% of its rental income and 50% of th e capital gains generated. For individual shareholders, the distributed income would be taxed in the category of securities income and the capital gains generated by the shareholders would be taxed in the category of capital gains on sales of securities. For legal entity shareholders subject to corporate income tax, distributed income would be included in taxable income subject to the normal rate of corporate income tax but could not benefit from the special parent-subsidiary treatment and the capital gains on sales of shares of the SPPICAVs would be taxed at the normal rate (the special long-term capital gains treatment would not apply).
For FPIs, a new kind of tax-transparent treatment would be applied. Due to the lack of legal personality of such an entity, the unit holders would in fact be taxed as if they had personally received the income collected by the fund. However, they would only be taxed in respect of the income distributed or capital gains generated by the fund. The fund would be required to distribute 85% of the distributable amount of income received and capital gains generated. Thus, the types of income collected by the FPI would continue to be classified in the same manner – rental income, interest, dividends – and would be taxed in the category of real estate income or securities income for individual unit holders depending on the case. The capital gains generated by the fund on real estate assets would be subject to the tax treatment applicable to capital gains made by individuals on real estate and the capital gains generated on securities assets would be taxed at the level of the individual unit holders at a rate of 16% (excluding social levies). With regard to legal entity unit holders, the distributed income and the capital gains on sale of units in FPIs would be included in income taxable at the normal corporate income tax rate.
In addition, inasmuch as the assets held by the SPPICAVs will have to be assessed at their actual value, it appears that no depreciation could be applied. However, the system should provide, in order to the determine the distribution obligation related to income on real estate, a kind of notional standard tax deduction equal to 1.5% of the cost price of the property. This standard tax deduction would be optional and adjustable (ranging from 0% to 1.5%) and applied every year, building by building. A similar standard tax deduction should also be applied in the case of FPIs.
Finally, as an incentive for the conversion of SCPIs into OPCIs within a period of five years following official approval by the general regulation of the French financial markets authority (the AMF), the measure provides for an exemption from registration duties and real estate registration tax as well as mortgage registry fees. Furthermore, any capital gains that will have to be recognized at the time of such conversion will benefit from tax deferral: this is a notable advantage from which SIICs were unable to benefit, but in fact turns out to be a relatively cost-free gesture for the public purse in light of the capital losses generated on the portfolios of a large number of SCPIs.
SIIC : 3
The introduction of the OPCI was an opportunity for the French government to extend the preferential tax treatment in respect of asset contributions to include public listed companies at two different levels:
- firstly by enabling the new OPCIs to benefit from this tax treatment, and
- then by applying the tax treatment on a much broader scale to sales rather than merely to contributions.

The change in this rule amounts in effect to introducing a specific tax rate of 16.5% plus the tax surcharge for sales of property by public listed companies and companies approved by the AMF. We have the following comments to make on this measure:
The tax environment of outsourcing transactions should finally become more favorable for companies who have assets that can be hived off to listed real estate in vestment companies. The technique of contributions should therefore only be used in future in relatively isolated cases as everyone is aware of the large number of obstacles they present from the standpoint of both the financial aspects (overvaluation of the adjusted net assets of listed real estate investment companies and risk of dilution, liquidity of the securities against a background of low floats) and legal issues: the technique of contribution does not appear to be really compatible with the fact that the beneficiary is a listed company. It can however be noted that such a technique remains attractive from a tax standpoint as it makes it possible to avoid registration duties being applied to the purchaser.

This new measure continues to provide for an obligation to retain the real property for 5 years for the SIICs or OPCIs who are the purchasers. Although this obligation to retain the property was logical within the scope of a contribution, it is not as easy to understand its objective in the scope of a technique involving a sale. This does not however appear to be an obstacle in the light of the relatively long period of asset rotation within SIICs.
The time window of action for sales of real estate assets is limited: these sales must be made by the end of 2007. However, it should make it possible for a large number of transactions that had previously been blocked due to the complexity of the contribution to now take place under much more favorable conditions. Moreover, the FSIF (the French federation of property and real estate companies) has stated that it will try to obtain the extension of this measure beyond this limit.

Francois Lugand