The recent reform of the law applicable to the calculation and taxation of capital gains in France has brought in a profound change.
Taxation of Capital Gains on Real Estate
Previous System
Under the previous taxation regime, second homes in France were exempt from taxation of any capital gain after fifteen years of continuous ownership.
After the first five years ownership, a 10% deduction to the gain was previously allowed, each year. For example, a property owned for 9 years could benefit from a reduction of 40% (ie first 5 years ownership 0%, following 4 years 10% reduction a year). Thus, after fifteen years any gain was exempt.
System from 1st February 2012
This system of calculation of capital gains will change with effect from 1st February 2012.
In the first five years ownership, any capital gain will be taxed in full, as under the previous system. However, in the following years of ownership the deduction has been significantly reduced to 2%, 4% and 8% a year depending on the length of ownership. A complete exemption will only be achieved after 30 years continuous ownership; as summarised in the table below:
• 0 to 5 years ownership – 0%
• 6 to 17 years ownership – 2% a year (up to 24% cumulative)
• 18 to 24 years ownership – 4% a year (up to 52% cumulative)
• 25 to 30 years ownership – 8% a year (up to 100% cumulative)
In addition the small fixed allowance of €1,000 has been abolished.
The existing permitted deductions for the costs of purchase and sale and certain qualifying works to the property are unchanged and remain deductible when calculating any gain. This principal applies to all immovable assets in France. The individual principal private residence remains exempt from taxation of any capital gains in France.
Specific regime
As a measure to prevent tax evasion, this system has been applied since 25th August 2011 on the transfer of real estate to companies by way of contribution by shareholders.
The sale of building land will, under certain conditions, be subject to the same regime from 1st January 2013.
Place of residence
Individuals who are non-resident escape the French social charges and are liable to tax at 19%, 33.33% or 50% on the gain, depending on their State of tax residency.
Special tax for high income
An additional new tax of 3 to 4% has been created for income higher than €250,000 for a single person, and €500,000 for a couple, which will also be applied to income from capital gains, subject to tax treaty provisions.
Example
In our breifing note on this subject we consider the example of Mr Smith, a UK national and French non-resident, who bought a property in France for €1 million. During his ownership he completed works costing €200,000 and is selling for €2 million.
Tax rate changes
Since the new reform the total CGT rate for French tax residents is 32.50% ( 19% on the capital gain plus the increased social charges now at 12.50%).
By law, non-EU residents are taxed at 33.33%. However, certain case law states that some should be able to benefit from the lower 19% rate. For example, the Administrative Appeal Court of Versailles, on 21st July 2011, confirmed that Swiss tax residents should benefit from the 19% CGT rate instead of 33.33%.
Whilst Monaco tax residents should be taxed at 33.33%, however this will require careful consideration. A specific review of the tax treaty signed with their national country should be done to determine if they can benefit from the above case law and be subject to the lower rate.
Should you have any enquiries on this subject please contact us.