Non-resident error
Taxation depends primarily on whether the buyer of the property is a resident of France. Foreigners, including Russians who are not residents, pay taxes only on assets and income they have in France. Tax residents, that is, people who have a residence permit and live in the country, are required to pay taxes on all income earned in France and abroad. It does not matter where exactly their assets are located. At the same time, the issue of tax residence in France is a rather delicate thing – you cannot become a resident once and for all, this status can arise and disappear.
"Firstly, there is a tax on the purchase and registration of real estate," says Alexander Shvarev, director of RFContact and Wedgewood Estates. – It is about 4% of the transaction value when buying a property built less than five years ago, and 5.09% when buying a building or apartment older than five years. This tax is paid to the notary on the day of the transaction."
When buying a property, VAT (TVA – Taxe a la Valeur Ajoutee) in the amount of 19.6% is also paid. As Tatiana Bulakh, a member of the International Tax Planning Association ITPA, warns, this tax is often not taken into account in the value of real estate, so the buyer may suddenly find that he needs to pay almost 20% more than expected. To calculate the total tax on the purchase of real estate, she advises finding automatic calculators on the Internet, for example on the website www.paris.notaires .fr. However, all such sites are written only in French.
In France, there is also an annual real estate tax (Taxe Fonciere), its amount is not fixed and depends on the cadastral value of housing. Roman Shendrikov, responsible for the development of Cosmopolite, notes that the real estate tax rate in France is up to 0.5% per year, whereas in Spain it is 0.3–0.5%, in Cyprus – 0-3.5%, in Turkey – 0.3–0.4%, and in Bulgaria – 0.15%.
The house should not be empty
We must not forget about several other taxes. Firstly, the residence tax (Taxe d'Habitation), which is levied on the owner of the home, regardless of who lives in his property. Owners of architectural monuments and commercial real estate are exempt from paying it. There is another additional tax for some cities and popular resorts, which is charged if the housing has been empty for more than two years. A special department in the tax inspectorate has been created to identify such buildings.
The amount of tax is calculated from the cadastral rental value and is 10% of the value of the property for the third year, 12.5% for the fourth year and 15% for each subsequent year. Since 1999, such a tax has been introduced in Paris, Lyon, Lille, Bordeaux, Toulouse, Montpellier, Nice and Cannes-Grass-Antibes. However, this tax is not charged if the building is to be rebuilt or demolished or if the owner cannot find tenants or buyers at the market price.
It is worth mentioning the so–called wealth tax (Impot de Colidarite Sur la Fortune), which is levied on persons whose assets – the sum of the value of real estate and accounts in a French bank - exceed 760,000 euros. Each year, this amount is subject to a progressive tax with rates ranging from 0.55–1.80%.
Finally, there is the capital gains tax (Impot Sur le Plus-Values), which taxes the difference between the cost of sale and purchase, that is, the income that the investor receives. If the resale is made in the first year after the purchase, the tax rate is 33.3%. It decreases every year, and after 15 years of owning real estate, the tax is no longer charged. The profit is exempt from tax in some other cases – if the seller uses the amount received to buy a new home, if he has lived permanently in his property for more than 5 years, if the seller is a pensioner, a disabled person, if the transaction value is less than 15,000 euros.
One of the tax changes that will come into force from the beginning of 2008 will be the abolition of inheritance tax paid by the remaining spouse. By the way, inheritance laws in France differ from Russian ones. In the event of the death of the owner, French law gives preference not to the surviving spouse, but to children, including illegitimate ones.
Reducing the burden
There are several ways to reduce the total amount of property tax. For example, for wealthy non-residents, it is possible to reduce the total tax rate "for everything", including taxes related to real estate ownership in France, to 5-10%. There are complex methods that are mastered by experts in international tax planning, united in the International Tax Planning Association (ITPA). In particular, Tatiana Bulakh clarifies, in France, it is possible to reduce the tax burden through the use of insurance schemes. There are only a few specialists on this issue in France, since very high qualifications are needed to protect the schemes. In this case, tax planning and the transfer of assets to non-taxable forms must begin before establishing residency, otherwise it will be impossible to obtain resident status.
A particularly profitable way to buy expensive real estate is to establish a French company. There are two options: SCI (Societe Civile Immobiliere) is a joint–stock company registered in France, or SCPI (Societe Civile de Placement Immobilier) is a company that has the right to deal only with real estate.
This option has a lot of advantages: the procedure for obtaining a loan and accounting is simplified, the resale of property and its inheritance is carried out quickly and without much loss.
All types of legal entities that directly or indirectly own real estate in France are subject to an annual tax of 3% of the market value of real estate, says Alexander Shvarev. The cost of organizing such a company is 1500-2000 euros, while the company's profit can be arbitrarily small.
The law that governs the activities of such legal entities obliges them to have a head office in France, which in itself is already considered real estate, adds Roman Shendrikov. At the same time, taxes on property and land will average about 2,500 euros per year.
Risk is an ignoble business
The flow of tourists in France is very large, there are constantly not enough places in hotels, so even the French themselves often prefer to rent accommodation on vacation. That is why the French government has developed the leaseback investment program since 1987. It can be used if the owner does not plan to live in the country permanently or assumes only a short-term use of his real estate.
When buying an apartment under such a program, the buyer signs a contract for a period of 7 to 11 years, according to which, immediately after the purchase, he is obliged to lease this object to a management company. In turn, the company undertakes to pay the buyer an amount equal to 5-6% of the value of the property every year, regardless of the economic situation in the country and any other indicators. This income is indexed and does not depend on inflation.
Depending on the terms of the contract, the buyer can live in the purchased housing for 2-4 weeks a year, but may also give up the right of residence in exchange for a higher income. Under the terms of the contract, the company assumes all costs and risks related to real estate. At the end of the validity period of the leaseback agreement, the property becomes available to the owner. By the way, by purchasing a home under the leaseback scheme, its owner is exempt from VAT, which is 19.6%, and can take out a bank loan at minimum interest.
Mortgage for everyone
Even if a buyer can afford to buy the most expensive housing in France with their own money, buying a mortgage may be more profitable. Firstly, rental income can fully or partially cover mortgage payments. Secondly, the interest on the loan can be offset by income tax.
A loan secured by purchased real estate is issued in the amount of up to 70% of the value of real estate for a period of 10-20 years, says Roman Shendrikov. The rate is on average from 3.5% to 5% per annum. To apply for a loan, you must present a loan application form, a passport and a marriage or divorce certificate, a purchase and sale agreement at the bank. You also need to provide documents confirming your solvency: a certificate of income (on letterhead with a stamp) three times the monthly loan repayment amount, and a bank statement on cash flows for the last three months. Copies of documents confirming the availability of movable and immovable property may become additional documents confirming solvency.
The procedure for approving a mortgage or loan for a non-resident of the European Union in France is not unified. It all depends on each specific case and the interest of the seller, the developer and the bank in the Russian client, says Tatiana Bulakh. In practice, EU banksThey prefer to issue loans to Russians secured by assets already available to the future buyer in the territory of the European Union.