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France: Taxation of real estate capital gains and the questionable outcome of the French assimilation process

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Foreign owners of real property located in France should take note

Nicolas Duboille and Hugo Levit of Sumerson examine the taxation of real estate capital gains in France by non-residents and consider a case when the seller is a Delaware corporation.

As a general principle, real estate capital gains are taxable in the state where the assets are located. For this purpose, Article 244 bis A of the French Tax Code (FTC) instigates a specific tax on occasional capital gains realised by non-residents upon the sale of French situated real properties. Save for the provisions of specific tax exemptions, this regime is generally applied to any legal entity (including real estate funds) or individual realising occasional capital gains on real estate assets situated in France.

1) In the case of disposal of French situated real property by individuals, the taxable gain is equal to the selling price reduced by the purchase price with certain adjustments and notably rebates calculated upon the length of ownership, which may result in a full exemption of income tax with a 22-year ownership and a full exemption of social contributions with a 30-year ownership.

The taxable gain is subject to a 19% tax rate, increased by an additional tax whose rate varies from 2% (as from €50,000) to 6% (on the portion of gain exceeding €260,000). In addition, social contributions are applied at the rate of 17.2%, reduced to 7.5% if the seller is a tax resident in a EU/EEE country or in Switzerland and if he/she is covered by the social security system there.

2) Legal entities that fall within the scope of the CIT must pay French CIT at a rate of 26.5% (rate for 2021, to be reduced to 25% in 2022) on the capital gains recognised upon the disposal of real properties located in France (if the seller is a tax resident in the EU or Iceland, Liechtenstein, Norway, the taxable basis is equal to the difference between the selling price and the net value of the asset. If not, the taxable basis generally corresponds to the difference between the selling price and the acquisition price upon which a rebate amounting to 2% per year of ownership is applied). 

It the seller is a legal entity that does not fall within the scope of the French CIT (transparent or pass-through for tax purposes), the applicable tax treatment will be determined in accordance to the status of the shareholder(s), whether they are individuals (if so, tax treatment mentioned in paragraph 1 above applies), entities subject to CIT (if so, tax treatment mentioned in paragraph 2 above applies) or transparent (in the latter case, one has to look further in the chain of investment).

Therefore, for determining the applicable French tax treatment to capital gains recognized by foreign entities, it is necessary to determine whether the seller should be regarded as a company subject to CIT. 

Consistently with the fact that the French CIT was created in replacement in 1948 of the tax on commercial profits, Article 206, 1 of the FTC, defining the scope of CIT, targets:

(i) The profits that are made by the société anonyme, the société par actions simplifiée, the société à responsabilité limitée and the société en commandite par actions: these entities have a commercial status by law (sociétés commerciales par la forme, they are treated by law as a commercial entity, irrespective of the activities actually carried out): because of their commercial status by law, there is a irrebuttable presumption that their profits derive from commercial activities and should be treated as such from a tax standpoint;

(ii) And the profits deriving from commercial activities realised by any other legal entities.

There are admittedly some French legal entities that are commercial as per their legal form and are pass-through for tax purposes (such as the société en nom collectif or the société en commandite simple, for the portion of profit attributable to the GPs), but these are limited exceptions to the main rules of determination of the scope of French CIT, into which fall traditionally only the entities that either are commercial as per the law or are carrying out commercial activities. This was our understanding of the rationale of the French CIT scope before the French supreme court decision ‘Word investment Corporation’ of April 2 2021 discussed below.

Application to a Delaware LLC not pursuing any commercial activity

The French Administrative Supreme Court (Conseil d’Etat or CE) considered the situation of a limited liability company registered in 1986 in Delaware (LLC) (CE 2-4-2021 No. 427880).

This entity acquired real estate in France in 1986 and sold it in 2008 realising then a significant capital gain. Its only activity was to hold the real estate and make it available free of charge for its interest holders while the legal purpose described in its articles of incorporation was to perform any activity permitted by Delaware Law. 

The LLC considered itself not to be assimilable to any French entity subject to CIT and wished to be treated as such: this would allow the seller to benefit from a full tax exemption pursuant to the above-mentioned rebate for length of ownership. 

As the French tax authorities denied the application of such regime, the controversy went finally in front of the Conseil d’Etat who ruled that the LLC should be assimilated to a French corporation subject to CIT, irrespective of the fact that this entity was not carrying out any commercial or for-profit activity, and as such, that the LLC was liable to CIT on the capital gain recognised upon the disposal of the French situated property.

The outcome of the controversy depended on the extent to which the LLC can be assimilated to one of the forms listed in Article 206,1 of the FTC.

The CE, in a notable decision Artemis (CE plénière 24-11-2014 No. 363556), laid down the analysis that should be followed in a context involving foreign entities. It consists in (i) analysing the intrinsic characteristics of the foreign entity in order to find an appropriate French comparable; and (ii) apply the appropriate tax regime in light of this analysis.

In line with this case law, taking notably into account that the shareholders of the LLC could not be held personally liable for the debts of the LLC, the LLC was assimilated by the CE as a French corporation such as the société par actions simplifiée (SAS), a legal entity that is subject to CIT, irrespective of the activity carried out (because this type of entity is a ‘commercial entity’ by law). 

Alternatively, instead of focusing only on the general legal features of the foreign entity, the judge could also have checked whether the Law of Delaware attributes the status of ‘commercial entity’ to LLCs, and if not, whether the LLC carries out commercial activities. Should the answer to these two questions be negative, the judge would have logically concluded that the LLC should not be subject to CIT in France.

By taking into consideration only the legal features of foreign entities, this case law entails the application of CIT and then the rules of taxation of business and commercial profits (Bénéfices Industriels et Commerciaux) to entities that have nothing that relates them to commerce, as is the case for many foreign entities set up under a limited liability company form or corporate form whose only purpose is to hold real estate in France.  

This decision should be carefully taken into consideration by foreign owners of real property located in France who structured their property acquisition with a foreign company, carrying out a purely non-commercial activity, but having some legal features similar to those of the French société par actions simplifiée or société anonyme, especially if the liability of the shareholders is limited. 


Nicolas Duboille

Partner, Sumerson



Hugo Levit

Associate, Sumerson




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