Acquisition of Commercial Real Estate- Part V – FRANCE
Aliant Guide on Acquisiton of Commercial Real Estate was created by Aliant’s Real Estate Practice Group, where our experienced and well established lawyers from France, Italy, Finland, Cyprus, and Lithuania have answered some fundamental and up-to-date questions on how to acquire commercial real estate in their jurisdictions. If you are interested in Commercial Real Estate in any of the beforementioned countries please follow this five part series.
1) Please describe in a few steps the prosses of transfer of commercial real estate in your country with particular focus to the transfer of the ownership or the title to the buyer.
In French law, under the civil law, as soon as there is a sale’s agreement on the thing and the price, the sale is made.
Whereas in commercial real estate, it is recommended to follow different steps below:
Step 1: the meeting of consent
the salesman formulates an offer which can be accepted by the purchaser or to make a counterproposal. This exchange can be framed by a letter of intent to organize the negotiations.
Step 2: the promise to purchase.
There are two types of the promise:
- across promise: the two parties promise, one to sell and the other to buy such as the compromise of sale ;
- a unilateral promise of sale: the purchaser has the right to opt for the acquisition and at any time the purchaser can withdraw.
That it is in one or the other of the configuration, there will be:
- Conditions precedent depending on the obtention of administrative authorisations or a bank loan.
- A clause of transfer of property which has vocation to intervene with the notarial act of sale confirming the payment of the price and the handing-over of the title of property.
Step 3: regularization of the future sale.
Some formalities must be regularized for the sale to be perfect, such as the lifting of the condition’s precedent, the purging of the rights of pre-emption, and the obtaining of information and compulsory legal documents (certificate of urbanism, regulation of co-ownership, diagnoses the state loan to date of the co-ownership).
Step 4: the signature
Signature at the notary’s office of the deed of sale, the seller proceeds to the handing over of the keys and the seller to the payment of the price. The deed of sale is worth title of ownership.
Step 5: The land publicity
the notary office will oversee the registering at the land publicity register to protect the rights of property.
2) What is country’s tax system that governs commercial real estate ownership and the transfer thereof?
In France, there are several different taxes:
1) taxes during the property holding
1.1. the tax generated by the simple fact of owning the property
1.2. the taxation of incomes from real estate
2) taxes linked to the transfer of real estates
2.1. the taxation of the transfer of ownership: registration fees
2.2. the taxation of profits made during the transfer (capital gain): the tax on real estate capital gains
1) taxes during the property holding
1.1. The tax generated by the simple fact of owning the property: tax on real estate property
In France, if you are an owner, you will automatically have to pay taxes. However, the tax due is different depending on the quality of the owner. the owner will have to pay the property tax and the tax on real estate wealth if he is eligible and if he is a company, he will have to pay the business property tax.
The property tax (for individual): it is due by the owners or usufructuaries of built properties. An exemption is possible if your reference tax income is below certain ceilings.
For wealthy individuals: There is a tax on real estate wealth (IFI), if the net value of your real estate assets exceeds 1.3 million €. These assets include all property and real estate rights held directly or indirectly (including through a company).
The business property tax (for companies): it must be paid by companies that usually carry out a professional activity. This applies regardless of their legal status, the nature of their activity and their tax regime.
All these taxes are independent of the nationality of natural or legal persons and are linked to the location of the property.
1.2. The taxation of incomes from real estate
The income generated by real estate property is also taxed under the tax on real estate income. However, the tax and its calculation will be different depending on the status of the taxpayer.
1.2.1 Tax on income generated by real estate of an individual.
The taxation of land income concerns income from the rental of unfurnished housing and land. There are two tax regimes for land income: the micro-foncier regime and the real tax regime.
The micro-foncier regime is a simplified taxation regime for land income. It is reserved for taxpayers with gross property income that does not exceed the threshold of 15,000 euros per year. The property income is made by automatic application of a deduction of 30% on the gross property income.
In the real taxation system, the taxpayer determines his net property income himself. This property income is included to the income of the individual to determine the income tax. It will be equal to the gross property income by deducting the expenses actually incurred and justified. This system is the automatic system when the gross property income of the whole tax household is higher than the threshold of 15 000 euros per year.
1.2.2 Tax on income generated by real estate of a legal person.
For companies subject to income revenue tax (IR)
In France, some companies may subject to the regime of tax transparency and is not liable for corporation tax.
The profits of these companies are taxed at the level of the partners: they are included in the income of the partners to determine their income tax (or their corporation tax if the partners are companies).
The partners of the companies subjected to the IR are considered, on the tax plan, as personally owners of the real estates to the enjoyment of which their shares or social shares give them vocation. Consequently, these partners are personally subject to income tax or corporation tax for the portion of the property income corresponding to their rights in the company.
It is the case of civil companies (SCI, SCPI) and limited liability company with partners who are members of the same family.
For the companies subject to corporate income tax (IS)
In this case, the company is directly liable for tax on the income generated by the company’s activities. Income from real estate owned by a company subject to corporate income tax are included in the income of the company
The applicable corporate income tax rate is:
- 15% for SMEs up to €38,120 of profits
- 28% for profits not exceeding 500,000 euros.
- 33% for the part of the income above this ceiling
The partners will be taxed personally only if they receive income from the company (remuneration or dividends).
2) taxes linked to the transfer of real estates
2.1. The taxation of the transfer of ownership: registration fees
In France, registration fees are due for each transfer of goods. For real estate, these registration fees are around 5/6% of the sale price (to which are added the notary fees, determined according to the legal scale. The total is around 8%).
2.2. The taxation of profits made during the transfer (capital gain): the tax on real estate capital gains
2.2.1 The real estate transfer taxes for an individual
These taxes are due if an individual makes a capital gain directly or indirectly from the sale of real estate located in France or from the sale of shares in a company whose assets consist mainly of real estate located in France.
This income tax is due even if the seller is foreign resident. The fiscal regime of this tax is linked to the location of the real estate.
The capital gain will be subject to a 19% withholding tax, regardless of your country of residence of the seller. The capital gain will also be subject to social security deductions at a global rate of 17.2%.
2.2.2 The real estate transfers taxes for company subject to income revenue tax
With the regime of tax transparency, the capital gain from the transfer of real estate will be taxed at the level of the partners, under the real estate transfer for an individual above.
2.2.3 The real estate transfers taxes for a company subject to corporate revenue tax
All real estate’s value gains, whether classified as short-term or long-term value, are subject to corporate income tax. There are three tax rates for net capital gains.
– 28% up to €500,000 of profits
– 31% above €500,000 for companies with a turnover of at least €250 million
– 15% for SMEs up to €38,120 of profits.
At the same time, if the real estate sale generates a capital loss, this is deductible from the company’s operating income under the conditions of ordinary law.
3) Which parties (aside from seller and buyer) are usually involved in commercial real estate acquisition? Please briefly describe their duties and roles.
The lawyer will be able to analyze the situation and propose the most appropriate strategy.
The lawyer will be a real support to propose solutions that you would not necessarily have considered and a safeguard to avoid inconveniences that are difficult to anticipate without being an experienced practitioner.
The lawyer’s role is above all to advise and draft documents, particularly for the drafting of commercial leases and company articles of association, to ensure that no clause in the contract is to your disadvantage. His objective is to preserve your interests and he will be able to prevent you from possible conflicts and limit the risks.
The notary is responsible for collecting the deeds, authenticating them, and keeping them. thanks to this, the buyer can register his deed through the land registry.
The estate agent
The estate agent is a sales agent. This implies that he receives a delegation of powers to act in the name and on behalf of his client. His role is to put the buyer and the seller in contact with each other, but he is also a real estate negotiator.
In France, the estate agent’s activity is a regulated profession as lawyer or notary.
The credit brokers
The broker’s mission is to accompany his client at all stages of his loan, from the preparation of the file to the release of funds at the notary’s office, including the negotiation of the most advantageous conditions.
4) Please describe how and on what basis in your country parties mentioned in the previous question are to be remunerated and how to be informed in advance about the range of theirs fees? *
The remuneration of a lawyer is free, every lawyer can have a different price based on the work to do, the difficulty of a case, and his notoriety. You must take contact with the lawyer to know the price of the prestation.
The remuneration of notaries is called emolument. The emolument corresponds to the sum received by the notary in return for a service whose rate is regulated (sale, donation, marriage contract, successions). Its amount is identical whatever the notary you choose. Depending on the type of service, the emolument can be fixed (for a deed of notoriety) or proportional (in particular for an inheritance declaration).
The estate agent
The estate agent will receive a commission on the sale. The remuneration generally varies from 4 to 8% of the sale price. It can be charged to the seller or the buyer. This provision taken at the time of the signature of the mandate of sale must be specified in the real advertisement.
The credit broker.
All brokers are remunerated by the bank as business contributors. This remuneration generally corresponds to a percentage of the amount of the loan (between 0.5 % and 0.8 % of the financing).
5) Please describe what liabilities exist for a buyer (in addition to paying the purchase price) in commercial real estate acquisition under your country’s legal system.
Apart from paying the price, the buyer has another important obligation to respect for the continuity of the activity.
Indeed, the buyer must take over the contracts and obligations in progress, such as commercial leases, residential leases, respect the easements and the co-ownership regulations, take over the taxes and duties from the sale.
These obligations are of high importance in order not to risk that the activity is stopped because of the sale of the commercial real-estate property.
It as well all the responsibility’s incumbent to an owner: the maintenance of the property, not to create nuisance and to guarantee a peaceful enjoyment.