Arsene Taxand - Real Estate

The new French government decides to strengthen the French capital gains tax on real estate predominant companies

In an unexpected provision of the Draft Finance Act for 2008, presented this morning, the new Government Fillon has decided to align the capital gains tax due by companies subject to corporate income tax on the disposal of shares in real estate predominant companies on the regime applicable to real estate assets. This is double bad news for real estate structures as this means (i) that the French long term capital gain regime applicable to the sale of real estate predominant companies would no longer apply and (ii) that mechanically these sales would now be liable to the standard corporate income tax rate of 33.33% (plus surcharge) and no longer to the 15% rate.

The purpose of the new legislation is difficult to understand as it ignores totally the structural impact of the tax discounts applicable to share deals which is connected to inherited capital gains tax transferred with the company sold. As a consequence, it strengthens the double taxation suffered on share deals if the latter are subject to French capital gains tax.

This is principally the case if the seller is a French company or if the seller is a foreign tax resident subject to French capital gain tax as a result of a tax treaty provision (i.e., Spain, Italy or Switzerland as an example). For sure, it will give a dramatic impact to the qualification of the French company as a real estate predominant company. Undoubtedly, this new legislation, if it passes in its proposed form, will improve – should it be necessary! – the competitiveness of real estate holding structures based in Luxembourg or other legislation which may benefit from a favourable tax treaty protection and a performing participation exemption regime.