Real Estate 2019 Comparisons

Last Updated April 30, 2019

Contributed By DLA Piper France LLP

Law and Practice

Authors



DLA Piper France LLP has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.

The sources of real estate law are spread over various codes, as follows:

  • the Civil Code (Code civil) for property titles, transfers of ownership and civil leases;
  • the Commercial Code (Code de commerce) for commercial leases and administrative authorisations (eg, for retailers, hotels, or movie theatres);
  • the Construction Code (Code de la construction et de l’habitation) for the construction or repurposing of buildings;
  • the Planning Code (Code de l’urbanisme) for planning and local planning regulations; and
  • the Rural Code (Code rural) for agricultural/rural leases.

The real estate sector experienced a record year in 2018 thanks to the outstanding performance of the office segment, the growing attractiveness of major regional cities, the high number of significant transactions and the interest of international investors in the French market.

The attractiveness of offices in the French real estate market has been confirmed, representing nearly 70% of the investments. This was mainly due to the strength of the tertiary sector, industrial recovery, the growth of French technology and the needs induced by start-ups and modernisation.

The impact of metropolisation and the growth of transport infrastructure have encouraged the emergence of new business districts in main regional metropolises and led the office markets in these regions, particularly in Lille and Lyons, to reach unprecedented scales.

Retail particularly boosted the market in 2018 thanks to the High Street, which enacted multiple significant sales, such as the Apple Store on the Champs-Elysées, luxury stores on Rue Saint Honoré, and sales and leaseback portfolio such as Monoprix stores.

With an excellent year, the logistics market confirmed its strength. Portfolio sales have boosted the market, representing two thirds of the total volume in 2018.

Thanks to two emblematic transactions (the sale of the Westin Paris Vendôme and the Lancaster), the hotel investment market almost doubled between 2017 and 2018.

The most significant deals in the French real estate market over the last twelve months include the following:

  • the acquisition by BVK, Hines of 114 Champs-Elysées (the Apple Store) for EUR600 million;
  • the acquisition by Altarea Cogedim of Kosmos for EUR480 million;
  • the acquisition by Batipart and Primonial of two portfolios sold by Gecina for a total about of EUR800 million; and
  • the sale of Westin Paris Vendôme for EUR550 million.

A draft bill relating to the plan of action for growth and the transformation of enterprises (often referred to as the 'PACTE law') has been adopted by Parliament and will likely be enacted in early 2019. This project aims, among others, to improve the enterprise creation process, access to the financial markets and employment legislation to enhance enterprise operation, and will allow the French government to reform the laws of security, notably with regard to the assignment of receivables for security purposes, the receivables pledge or real estate securities to some extent.

In addition to exclusive ownership and timeshare arrangements, ownership can be divided between a right of usufruct (a right to receive the income and produce from real estate without outright ownership) and a bare ownership (ownership without the right to use and derive profit from the property).

A wide range of laws deal with a particular aspect of the sale and purchase of real estate. Different legal regimes apply to transfers of title to different kinds of real estate and there are a number of different tax regimes. There are no specific provisions linked to the industrial, office or retail sectors.

Ownership of real estate – as well as important matters affecting it, such as mortgages, lender's lien, easements and leases of over 12 years – must be recorded at the locally competent mortgage office registry to be enforceable against third parties and therefore must be notarised.

Notaries are responsible (amongst their mandatory duties) for ensuring that the buyer receives a valid and enforceable title to the property.

The risk of malpractice by a notary is covered by a system of indemnification provided by all notaries; therefore, title insurance is not generally used in France.

Lawyers and notaries share the responsibility for conducting these investigations, with the former being responsible for tax, social, leasing and insurance matters, and the latter for title, zoning, construction and commercial status.

Due diligence is normally much more limited on smaller residential and commercial transactions, and is generally conducted between the acceptance of an offer and the execution of a preliminary sale agreement.

French law imposes the following obligations and warranties on the seller:

  • an obligation to transfer the property in accordance with their specifications set out in the deed of sale (size, formal description and use of the building);
  • a guarantee of eviction – the seller must ensure that the buyer does not suffer any nuisance from himself or third parties in relation to rights such as easements or leases relating to the property;
  • a guarantee against hidden defects (vices cachés) that may affect the normal use of the property; and
  • an obligation to deliver technical information on the property in relation to asbestos, lead, legionella, termites and certain equipment containing dangerous or potentially dangerous substances, as well as a statement on natural, mining and technological risks that is less than six months old (état des servitudes 'risques' et d'information sur les sols), and an energy performance diagnosis (diagnostic de performance énérgetique), which remains valid for ten years.

The obligations are stricter when the buyer is not a real estate professional.

The buyer's remedies in relation to misrepresentations by the seller are limited to a claim for financial compensation or, in some cases, the annulment of the sale.

However, an annulment of the sale does not allow the buyer (or the seller) to obtain a refund of the transfer taxes, which are payable upon the execution of the notarial deed of transfer.

Ownership rights are notably subject to land use rules, protection of archaeological sites and mandatory expropriation for reasons of public interest (expropriation pour cause d'utilité publique). Ownership rights can also be restricted by easements for public use (servitude d'utilité publique).

Public authorities also have pre-emption rights, allowing municipalities to purchase property to facilitate projects that are in the public interest.

A buyer should also verify that the property is not part of the public domain (domaine public). Public authorities hold both public domain assets and private domain assets. Authorisations to occupy a public domain property normally take the form of a temporary occupancy agreement. These authorisations are subject to the French Code of Public Property (Code du domaine de l'Etat).

In accordance with the 'polluter pays' principle, a landowner cannot be held responsible for historic contamination of the soil/groundwater. However, if it is established that the landowner has been negligent or has not been a 'stranger' in the polluting process then it is assumed that the landowner could incur liability, although the concept of a stranger has not been defined in legislation.

Where 'classified activities' are carried out on a site, the operator (the entity holding the permit issued by the environmental authorities to carry out the activities) will be held liable for pollution (historical or recent), unless it can prove that it is not responsible and the previous operator, which caused the pollution, can be traced.

When investing in a site that has these problems, it is assumed that an investor can take over the obligation to restore a site after it has been polluted and therefore become liable if the site is not properly restored, but the initial polluter will be liable again if that investor becomes insolvent.

The French Environmental Code provides that the seller of a site where a 'classified installation' has been operated must inform a prospective buyer of any related dangers or inconveniences and disclose a list of any chemical or radioactive substances that have been stored on the site.

The zoning and planning laws and regulations for each local region are available to the public, and copies of the regulations and local decisions can be obtained for a nominal cost.

Zoning and planning regulations must be checked before planning a construction project and applying for a building permit.

Expropriation processes are used to facilitate major public or semi-public development projects. Proceedings are generally considered to be fair, in terms of the assessment of what is in the public interest and the amount paid for expropriated properties.

The expropriation process is divided into an administrative phase followed by a judicial phase.

Following the French administration's decision to expropriate, a public inquiry (enquête publique) is carried out in order to consult the relevant persons and gather their concerns, and is followed eventually by a declaration of public utility (déclaration d'utilité publique). After this, a transfer order (arrêté de cessibilité) is notified to the owner of the expropriated land.

Within six months of the transfer order, an expropriation order (arrêté d'expropriation) shall be enacted, with the effect of transferring the property of the expropriated land to the administration. In exchange, the judge shall set an indemnity covering the direct, material and certain damage of the expropriation.

The sale of property is subject to transfer taxes and/or value added tax (VAT). Transfer taxes apply at the rate of 5.09-6.40%, depending on the type and location of the relevant property, and VAT applies at the rate of 20% (see 8 Tax for further details). Moreover, a specific 0.1% contribution applies to the sale of property (asset deal) (contribution de sécurité immobilière).

For sales relating to disposals of office premises, retail premises and storage premises in Île-de-France (ie, Paris and the surrounding areas), an additional tax of 0.6% of the sale price applies if the disposals are not subject to VAT.

Properties built less than five years ago are subject to VAT at 20%.

Special rules apply to renovation works completed during the last five years on properties built more than five years ago.

Asset dealers who buy and sell properties as their normal business benefit from a reduced rate of transfer taxes (0.715%), provided that the properties are resold within five years of the acquisition.

Transfer taxes are typically paid by the buyer, although the buyer and seller remain jointly liable for their payment vis-à-vis the French Treasury.

Indirect transfers of real estate, through the transfer of a company holding real estate assets, are subject to transfer tax at the rate of 5% of the price paid for the shares. Transfer tax applies to all companies, irrespective of their legal form, where the market value of the real estate accounts for more than 50% of the total value of the company's assets.

There are no restrictions on foreigners investing in property located in France, except for agricultural-use properties that must be authorised by the local Prefect and sensitive activities (relating to public authority, public order, research, production and commercialisation of weapons and explosive substances) that must be authorised by the Ministry of the Economy. However, since 12 May 2017, the sale or purchase of property located in France by non-residents, for an amount exceeding EUR15 million, must be reported to the Banque de France, for statistical purposes only.

Acquisitions of commercial real estate in France are commonly financed through a combination of equity and quasi equity and senior debt in the form of a loan or sometimes bonds, which may be completed with junior (subordinated) debt depending on the risk profile of the transaction, the size of the portfolio and the required loan-to-value ratio.

The debt portion of the financing may take the following forms:

  • a mortgage debt (for the financing of the acquisition of real estate assets);
  • an acquisition debt (for the financing of the acquisition of the shares of the entities holding real estate assets); or
  • a combination of both (for the financing of the acquisition of the shares of entities holding real estate assets and the refinancing of the existing indebtedness of such entities).

Financial leasing (crédit-bail) is another common type of debt financing for commercial real estate, where the creditor acquires the real estate asset from a third party or the debtor and leases it back to the debtor in return for the payment of rent. The debtor has the option to acquire ownership of the real estate asset upon the term of the financial lease agreement.

The financing of acquisition and development projects is generally secured by security created over the assets and shares of the borrower; lenders generally accept non-recourse financing for the acquisition of commercial real estate assets, whereas investor and/or bank guarantees will usually be required in addition to the standard security package for development projects.

Typically, the lenders will require security that allows them to recover the financed asset directly or indirectly. Such security may take the form of a contractual mortgage (hypothèque) or a lender's lien (privilège de prêteur de derniers) over the real estate asset and/or a pledge over the shares of the entity holding such asset, which also ensures that no change to the shareholding of the borrower will occur during the period of financing without the consent of the creditors.

Both the contractual mortgage and the lender's lien must be made effective by a notarial deed executed in front of a French public notary, and must be registered with the land registry to be enforceable against third parties.

The security package will also include security interest over cash flow related to the real estate asset (receivables from rent, insurance, sums credited to the bank accounts of the real estate asset owner, etc), as well as cash flow resulting from the financing transaction (intragroup loans, hedging, etc), usually in the form of an assignment of receivables by way of security (Dailly assignment), a delegation or a pledge over receivables.

Depending on the type of the transaction, the creditors may also require security over the borrower's other movable assets (business, shares of subsidiaries, etc).

In principle, French banking monopoly rules prohibit institutions other than licensed credit institutions or licensed financial institutions from carrying out banking operations in France on a customary basis and for valuable consideration. However, there are certain exceptions to this general rule, particularly for European long-term investment funds and certain alternative investment funds. Therefore, unless qualifying for such exception, a foreign lender participating in a financing transaction considered to be located in France must be licensed in France or hold an EU passport so as not to violate the French banking monopoly rules.

Generally, there are no restrictions on granting security to foreign lenders. Dailly assignment constitutes an exception, as it may only secure the obligations under a loan agreement and may only be granted to a lender that is a credit institution or financial institution duly licensed in France or holding an EU passport, it being specified that, in the event of assignment or transfer of a loan secured by a Dailly assignment, the existing Dailly assignment granted to a qualifying assignor/transferor will continue to secure the assigned or transferred portion of the loan independent of the quality of the assignee/transferee.

There are no restrictions on payments made to foreign lenders under a security document or loan agreement.

Fees paid on the granting of security over real estate assets are proportional to the amount of the secured debt at the time of creation and depend on the type of the security granted, as follows:

  • publicity tax – mortgage (hypothèque), 0.715% of the secured amount; lender's lien (privilège de prêteur de deniers), between EUR0 and EUR125;
  • notary’s emoluments – mortgage, 0.45% of the loan amount plus VAT; lender's lien, 0.45% of the loan amount plus VAT; and
  • real estate security contribution – mortgage, 0.05% of the secured amount; lender's lien, 0.05% of the secured amount.

Transfer tax at a rate of 5.09-6.40% applies upon the enforcement of a security over a real estate asset, depending on the type and location of the relevant property (see 8 Tax for further details).

Under French law, a French entity granting any type of security must ensure that it complies, where relevant, with the following rules.

  • Financial assistance rules – a French entity is prohibited from providing assistance (whether by way of a loan, a guarantee or a security) to finance the acquisition of its own shares by a third party.
  • Corporate benefit requirement – managers of a French entity must ensure that acts and decisions taken on the entity's behalf fall within the entity's corporate benefit (intérêt social), which is distinct from that of its shareholders and other entities. In practice, this requirement limits the ability of French entities to grant upstream or lateral guarantees.
  • Corporate purpose requirement – as a principle, any act or decision made on behalf of a French entity must be included in its corporate purpose, as stated in its by-laws.
  • Corporate authorisations – depending on the form of the French entity and the provisions of its by-laws, certain acts and transactions may require prior corporate approval from a relevant corporate body.
  • Consultation of the works council – French labour law obliges French entities for which the existence of a works council is mandatory (ie, entities with more than 50 employees) to inform and, in some cases, consult the works council in respect of decisions that may have significant consequences for the company’s future (decisions relating to contracting indebtedness or the granting of security over the entity's shares, business and other assets).

The principal risk for a creditor if a debtor defaults is if that debtor opens insolvency proceedings, as creditors may not enforce their security interest for the duration of any such proceedings.

In the absence of insolvency proceedings of the French debtor, and provided that all the formalities regarding the mortgage or the lender's lien have been correctly accomplished, the creditors will effectively have priority over the real estate asset. The secured creditors can enforce the mortgage or the lender's lien in the following ways:

  • by way of application to the court for an order to seize the property (commandement aux fins de saisie), to be served on the debtor by a bailiff (huissier de justice); following the proceedings, the property will be sold by way of a public auction at a hearing before a civil court (Tribunal de Grande Instance), where bidders must be represented by an attorney-at-law and where the attorney of the creditor may not bid;
  • by way of application to the court for the attribution by court order of the property to the beneficiary of the mortgage or the lender's lien, in accordance with the judicial attribution procedure; or
  • if so provided in the security deed, by way of appropriation (pacte commissoire), in which case the creditor becomes the owner of the real estate asset; in such cases, the value of the real estate asset shall be determined on the day of the transfer by an expert designated by the parties, or judicially if no agreement can be reached.

If the loan agreement has not been contracted in the form of a notarial deed, or if the obligation to pay under such loan agreement has not been reiterated in the mortgage deed, such mortgage will not constitute an enforceable title (ie, a title that confirms the existence of a receivable that is certain, of a fixed amount and payable). This implies that, prior to the enforcement of such mortgage, the secured creditors will have to obtain a court judgment stating that their receivable is certain, of a fixed amount and payable. This could be done before the French court or before a foreign court with an exequatur of the foreign court's decision obtained in France.

A creditor may agree to subordinate the existing secured debt contractually to newly created debt by entering into a subordination or intercreditor agreement, which will implement the rules of subordination among creditors as well as rules governing the decision-making process, enforcement rights, etc.

In addition, in the event of insolvency proceedings of the debtor, the existing secured debt will be legally subordinated to (i) super-privileged debts (insolvency proceeding-related legal fees, salaries and various indemnities to employees and debts (new money) secured by the privilege of conciliation) and (ii) privileged debts; ie, new debts qualified as 'useful' (contracted for the purpose of the running of the insolvency proceedings or the observation period, or as consideration for services provided to the debtor in relation to its business activity) and contracted regularly after the opening of the insolvency proceeding.

A lender holding security over a real estate asset will not be liable for environmental damage, provided it does not itself cause or knowingly permit damage to the environment.

In the event of enforcement of the security over a real estate asset by way of appropriation, the lenders may incur a risk of liability under environmental laws, since in some circumstances owners of a real estate asset can be liable for environmental damage on such asset or emanating from it, even if they did not cause the damage.

In principle, a validly granted and perfected security interest may not be made void in the event of the insolvency of the borrower.

However, if insolvency proceedings are opened against a debtor, most of the security interests will be inefficient (ie, the creditors will not be authorised to proceed with the enforcement of such security interest) for the duration of such insolvency proceedings, creditors whose receivables are not privileged by way of law being prohibited from commencing or continuing any individual legal actions against such debtor.

Moreover, any new security granted by a debtor during the 'hardening period' (maximum 18 months from the date determined by the court as being the date of suspension of payments (date de cessation des paiements) and ending on the date of the opening of the insolvency proceedings) to secure pre-existing debts is deemed null and void.

In addition, creditors may be held liable for damages suffered by debtors that result from the facilities made available to such debtors, but only if such damage is a consequence of fraud, interference with the management of the debtor, or disproportionality of the security or guarantees granted. If a creditor is found liable on any of these grounds, the security or guarantee may be declared null and void, or reduced by the judge.

Real estate finance transactions in France are typically denominated in euro and therefore refer to the Euro Interbank Offer Rate (Euribor). The EU Benchmarks Regulation (BMR), agreed and published in the EU Official Journal in 2016 as Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, wants the Euribor to be replaced by the start of 2020 but this deadline could be extended and the reform is ongoing. Euribor’s administrator, the European Money Markets Institute (EMMI), has tested the use of actual trades rather than the current banker estimate-based system. The prioritised choice for a BMR-compliant term rate is now a hybrid option where mathematical calculations are used to bolster the sample. At this stage, real estate finance documentation has not evolved and still relies on standard clauses for interest rate index replacement.

Zoning and planning are governed by a combination of national and local regulations in France. Whereas most national regulations are contained in the French Planning Code, local regulations are usually prescribed by the relevant municipality and are covered in local development plans (Plans Locaux d’Urbanisme). Typical restrictions include those on height, location, parking spaces, exterior aspects and green areas.

Public law controls whether a landowner may construct a new building or refurbish an existing building by means of prior planning authorisation, usually a building permit.

Other types of authorisation may be required, depending on factors such as the location of the building, its future intended use and the extent of any contemplated works. These can include a declaration of works, an authorisation to create commercial space, an authorisation for high-rise buildings, authorisations in relation to premises open to the public, a declaration for a change from a residential use to another use (mandatory in certain cities) and an authorisation to create resorts in the mountains.

Overall, responsibility for regulating the development and designated use of the land lies largely with local authorities, as the mayor of the municipality is almost always responsible for issuing building permits (except in certain areas or projects where the person responsible for issuing building permits can be the Prefect).

The process for obtaining an authorisation involves filing a building permit or declaration of works application with the municipality where the building is located.

The time period for the instruction of the application file will depend on the characteristics of the project and its location. The usual time period is one month for the declaration of work and three months for the building permit (such time period can be up to twelve months).

The municipality will request several opinions on the project, depending on the nature of the project. For major projects, a public consultation may have to be carried out to obtain the opinion of the public.

Building permits are valid for a period of three years, during which time the works must have started (although extensions of time may be granted by the authorities). Furthermore, once started, the works must not cease for any period longer than a year.

Once granted, the building permit or the declaration of works can, for a limited period of time, be withdrawn by the municipality, or be challenged by the Prefect or third parties (such as neighbours), provided they can evidence an interest to act.

Such challenge can take place in front of the administrative authority that issued the decision (recours gracieux) or the administrative courts (tribunaux administratifs).

Several agreements may be necessary, depending on the nature and location of the project. For instance, for construction projects located in a Zone d’Aménagement Concertée area, it is often necessary to purchase construction rights in addition to the land.

The owner (maître d'ouvrage) may have to make a financial contribution to the infrastructure to support new development.

Several sanctions may apply if the owner fails to obtain and comply with the required planning authorisations, including injunctions requiring cessation or demolition of the works, criminal law sanctions (fines and, in some cases, imprisonment), a prohibition on reconstructing the building in the event of destruction, or a prohibition on obtaining new planning permissions on the site.

Types of corporate vehicle are as follows:

  • SCI (société civile immobilière) – real estate civil company;
  • SNC (société en nom collectif) – partnership;
  • SARL (société à responsabilité limitée) – limited liability company;
  • SA (société anonyme) – stock corporation;
  • SAS (société par action simplifiée) – simplified stock corporation;
  • SCPI (société civile de placement immobilier) – real estate civil investment company; and
  • SIIC (société d’investissement immobilier cotée) – listed real estate investment company.

An SCI is a real estate civil company in which the shareholders are liable indefinitely for the debts of the company in proportion to the shares they hold in the share capital.

An SNC is a commercial partnership in which the partners are deemed to be businessmen (commerçant) and are jointly and severally liable for the debts of the partnership.

An SARL is a limited liability company in which the shareholders' liability is limited to the amount of their investment in the company.

An SA is a stock corporation where the capital is divided into stocks and the shareholders' liability is limited to the amount of their investment in the company.

An SAS is a simplified stock corporation and may be formed by a private individual or a corporation as a sole shareholder. As with an SA, the liability of the shareholders is limited to the amount of their investment.

An SCPI is a real estate civil investment company, whose purpose is to acquire and hold rental property. These companies are entitled to sell their shares to the public as soon as the total value of the shares held by the founding shareholders is at least equal to the amount of the minimum share capital and if they provide evidence that a bank guarantee is in place as approved by the French stock market regulator (Autorité des Marchés Financiers). At least 15% of the share capital must have been issued to the public within one year of the first public offering.

An SIIC is a listed real estate investment company allowing for special tax exemption arrangements whose main purpose is the acquisition or construction of property for rental purposes, or that has direct or indirect ownership of stakes in legal entities with identical corporate purposes legally classified as partnerships or subject to corporate income tax.

The minimum capital required to set up each type of entity is as follows:

  • SCI – EUR1;
  • SNC – EUR1;
  • SARL – EUR1;
  • SA – EUR37,000;
  • SAS – EUR1;
  • SCPI – EUR760,000 (each share must have a minimum face value of EUR150); and
  • SIIC – EUR15 million.

SCI

The company is managed by at least one general manager, who may be an individual or a legal entity appointed in the by-laws (a statutory manager) or by the shareholders.

The general manager can be a shareholder or a third party.

SNC

The partnership is managed by at least one general manager, who may be an individual or a legal entity appointed in the by-laws (a statutory manager) or by the shareholders.

The general manager can be a shareholder or a third party.

SARL

The company is managed by at least one individual general manager, who can be named in the by-laws (a statutory manager) or properly appointed subsequently. Additional general managers can also be named in the by-laws (statutory managers) or appointed by a decision of the shareholders. Only individuals are likely to be appointed as manager.

The general manager can be a shareholder or a third party.

SA

There are two possible structures for an SA.

Société anonyme with a board of directors

The board of directors must be composed of between three and 18 members appointed through the by-laws when the company is set up, and subsequently by the shareholders. The chairman of the board of directors is appointed by the board, amongst its members. The board must also appoint a chief executive to lead the management of the company.

A single individual can be both chairman (président du conseil d'administration) and chief executive (directeur general).

At the request of the chief executive, the board of directors can appoint up to five deputy executives to assist the chief executive in the management of the company.

The chairman of the board, as well as the chief executive and deputy executives, must be individuals.

Société anonyme with an executive board and a supervisory board

The executive board typically has between two and five members, all individuals. If the company is listed on a French stock market, this number may be increased to seven.

If the share capital of the company is less than EUR150,000, the executive board can be replaced by a single chief executive. Members of the executive board are not required to be shareholders of the company. The members and the president of the executive board are appointed by the supervisory board. The executive board manages the company.

The supervisory board must contain at least three but no more than 18 members. These members are not required to be shareholders of the company and can be employed by the company. Members of the supervisory board cannot be members of the executive board and are appointed through the by-laws when the company is set up, and thereafter by the shareholders. The supervisory board appoints a chairman and a deputy chairman (which must be individuals) from amongst its members.

The supervisory board supervises the executive board.

SAS

By-laws can grant considerable flexibility on corporate governance. The company is typically managed by a president, who can be an individual or a legal entity. The by-laws can provide for the president to be assisted by one or more executives, or by one or more deputy executives, and can also provide for the appointment of a joint management body.

SCPI

An SCPI is managed by a management company, which must be a stock corporation with a minimum share capital of at least EUR125,000 or a partnership, of which at least one partner is a stock corporation with at least this amount of share capital.

The management company must:

  • be approved by the French Securities and Exchange Commission (Autorité des Marchés Financiers);
  • present sufficient guarantees regarding its organisation, its technical and financial strength, and the suitability and experience of its managers;
  • take steps to secure the transactions it enters into; and
  • have sufficient financial means to conduct its business and meet its liabilities.

The management company is assisted by a supervisory board comprising at least seven shareholders, who are appointed at a shareholders' meeting.

SIIC

An SIIC is managed by a management company, which must be a stock corporation with a minimum share capital of at least EUR125,000 or a partnership, of which at least one member is a stock corporation with at least this amount of share capital.

The management company must:

  • be approved by the French Securities and Exchange Commission;
  • present sufficient guarantees regarding its organisation, its technical and financial strength, and the suitability and experience of its managers;
  • take steps to secure the transactions it enters into; and
  • have sufficient financial means to conduct its business and meet its liabilities.

The management company is assisted by a supervisory board comprising at least seven shareholders, who are appointed at a shareholders' meeting.

SCI

EUR12,000.

SNC

EUR12,000 plus the cost of statutory auditors (EUR10,000/20,000), although the latter are only required when two of the following three thresholds relating to capital, turnover and the number of employees are exceeded:

  • the total value of the assets on the balance sheet is EUR1.5 million or more;
  • the turnover (exclusive of tax) is EUR3.1 million or more; or
  • the average number of employees is 50 or more.

SARL

EUR12,000 plus the cost of statutory auditors (EUR10,000/20,000), although the latter are only required when two of the following three thresholds relating to capital, turnover and the number of employees are exceeded:

  • the total value of the assets on the balance sheet is EUR1.5 million or more;
  • the turnover (exclusive of tax) is EUR3.1 million or more; or
  • the average number of employees is 50 or more.

SA

EUR20,000 plus the cost of statutory auditors (EUR20,000/25,000).

SAS

EUR20,000 plus the cost of statutory auditors (EUR20,000/25,000), if applicable.

SCPI

EUR12,000 plus the cost of internal auditors (EUR10,000/20,000).

SIIC

EUR20,000 plus the cost of statutory auditors (EUR20,000/25,000).

Commercial Leases

Commercial leases are granted for a minimum term of nine years and are subject to the mandatory legal regime laid down in the French Commercial Code. Subject to specific conditions, a tenant has the right to terminate the lease at the end of each three-year period and the right to renew the lease.

Overriding Leases

Overriding leases (or short-term leases) have a duration of up to three years. The tenant gives up the protection of the mandatory regime applicable to commercial leases. Any renewal of the lease must be on the terms of a normal commercial lease.

Professional Leases

Professional leases have a minimum duration of six years and are for professional activities only (to the exclusion of commercial, craft, industrial and agricultural activities). The lease can be terminated by the tenant at any time, by giving six months' notice.

Commercial leases are basically governed by a strong statute provided by the French Commercial Code, which covers regular commercial leases and short-term leases.

Regular commercial leases are historically tailored for the purpose of merchant activity, but are also regularly used for office or warehouse premises, for instance.

In any event, the applicable rules of the French Commercial Code are mainly designed to protect the tenant vis-à-vis the landlord.

Short-term leases should be seen as a first step on the path to the granting of a commercial lease. Under such an agreement, the tenant is able to start its business operation for a limited period of time (less than three years), while the landlord is not bound for more than such duration.

At the term of the short-term lease, they will probably enter into a regular commercial lease. Otherwise, when the short-term lease expires, the tenant may change its plan and the landlord may retake full possession of the premises.

The statute governing commercial leases is mostly designed to protect the tenant’s interests.

Even though many items are freely negotiable, important terms and conditions are subject to regulation, and any derogation from said regulation is forbidden, or at least limited.

The most common relevant items are as follows:

  • the duration of a regular commercial lease shall be at least nine years and the tenant shall be entitled to terminate the lease upon expiry of each three-year period (subject to a six-month prior notice); thus, a firm duration of more than three years may not be agreed unless certain specific conditions are complied with;
  • allocation of charges – the landlord shall provide the tenant with a limitative list of charges, taxes and fees that the tenant will have to pay pursuant to the lease;
  • allocation of works – certain types of work, such as structural work, may no longer be put at the tenant’s cost;
  • the assignment of the lease by the tenant may be prohibited unless the lease is assigned to the purchaser of the tenant's business;
  • subletting is prohibited, unless otherwise provided;
  • the tenant is entitled to renew its lease, which the landlord cannot deny unless he pays an eviction indemnity (most of the time assessed by an expert before the court); and
  • termination clause – its triggering is subject to a specific process (detailed in 6.17 Right to Terminate Lease). The effect of the termination clause will still have to be confirmed by a judge.

The minimum obligatory term for a commercial lease is nine years. The tenant has the right to terminate the lease at the end of each three-year period by giving notice (by bailiff or by registered letter with acknowledgement of receipt) of at least six months.

In certain cases, the tenant may waive its right to terminate the lease at the end of the relevant three-year periods subject to whatever termination options/mechanisms have been agreed by the parties (eg, financial penalty for exercising a right to terminate the lease at the end of a three-year period). Cases in which the tenant may waive its termination right are as follows:

  • leases relating to premises for office use;
  • leases relating to premises suited only to the carrying on of a specific business activity due to their particular layout;
  • leases relating to storage premises; and
  • commercial leases with an initial duration of more than nine years.

There is no maximum obligatory term for a commercial lease and the parties may agree to a lease of more than nine years. However, any lease of more than 12 years must be entered into before a notary and shall be recorded with the Mortgage Office (Service de la Publicité Foncière) where the premises are located.

Short-term leases can be granted for a maximum term of three years (several short-term leases can be granted consecutively, provided that in aggregate their duration does not exceed 36 months), in order not to be subject to the legislation relating to commercial leases. On the termination of a 36-month lease, the parties have one month to enter into a commercial lease or to accept the termination of the short-term lease and vacate the rented premises.

Under the French Civil Code, expenses relating to the maintenance of the premises and major repairs are payable by the landlord if they relate to structural works listed under Article 606 of the French Civil Code (ie, those pertaining to load-bearing walls, vaults, entire roofs and beams).

An extensive and precise list of works completed during the last three years and those to be completed during the three coming years must be drawn up and communicated to the tenant by the landlord upon signing the lease and thereafter updated every three years.

The frequency of rent payments is freely negotiable by the parties.

Quarterly rent payments in advance is market practice, although rents are sometimes paid in arrears, on a monthly or bi-annual basis.

Rent can be revised every three years at the request of either party, even if a formal rent review is not provided for in the lease.

Parties may also agree on an automatic yearly rent revision. The rent may be determined by reference to an index, with the Tertiary Activities Rent Index (ILAT index), the Construction Costs Index (ICC index) and the Commercial Rental Index (ILC index) being the most common; each is published by the National Institute of Statistics and Economic Studies (INSEE). The index chosen by the parties must have some connection with the activity carried out by one of the parties or with the purpose of the lease (the ILC index cannot be used for office premises).

If the rent review pursuant to an indexation clause results in a change of 25% or more compared with the rent originally fixed or the rent as determined at the last rent review, either party can request the rent to be reviewed and fixed by reference to the 'valeur locative', or cadastral rental value.

Variable rents, although permitted by law, are not common in leases for offices, but are a common feature of hotel and retail leases. Variable rent is expressed as a percentage of the yearly gross revenues of the tenant's business, subject to a specified minimum fixed rent (the minimum rent is itself linked to indexation).

The landlord can elect to subject the rent to VAT (at 20%) under certain conditions. VAT can be recovered (totally or partially) by the tenant if it uses the building for the purposes of a VAT-able business.

If VAT does not apply to the rent then CRL (Contribution sur les Revenus Locatifs, or Contribution from Rental Revenues) does, at the rate of 2.5%. CRL is not recoverable but is a tax-deductible expense.

All commercial leases of more than 12 years must be entered into before a notary and recorded with the Mortgage Office (Service de la Publicité Foncière) where the premises are located. This involves the payment of a fee comprising a small percentage of the total rent payable over the term of the lease (capped at 20 years).

If there is more than one tenant, the expenses are shared according to the terms of the relevant leases.

Typically, the expenses are allocated on a pro rata basis, determined with regard to the aggregate surface of the building and the surface rented by each tenant.

Under the French Civil Code, the cost of utilities and telecommunications is payable by the landlord, but tenants will normally be given responsibility for electricity, heating and gas supplies.

The landlord must take out an insurance policy to cover risks associated with premises occupied under a commercial lease, while the tenant must insure risks associated with its own activities on the premises.

The insurance policy usually covers the risk of fire, explosion and theft. However, it is possible to include an express clause in the lease agreement that provides for the tenant to reimburse the owner for the cost of insuring the premises.

Leases usually specify the permitted use, which is narrowly defined, and any changes require the landlord's consent and/or administrative permissions.

Any works must have prior consent from the landlord if they will have an impact on the structure of the property (walls, floors and roof) or if they will alter the premises' character or legally permitted use.

It is market practice for leases to provide that, on the expiry of the lease, any improvements automatically become the property of the landlord without indemnity, unless the landlord requests their removal and/or the reinstatement of the premises to their original state.

There is a specific law that governs residential leases, which are normally granted for terms of three years and require a cash deposit corresponding to one month's rent.

Offices are usually let under commercial leases, with the level of rent determined by reference to the market value of similar premises.

Professional premises (let to lawyers, doctors, etc) are usually let under professional leases with a duration of six years. The lease can be terminated by the tenant at any time by giving six months' notice.

Lettings of retail space and hotels are governed by the commercial lease regime referred to above.

Under an insolvency proceeding, the administrator appointed by the court can decide whether to terminate or continue the lease. This option given to the administrator is a public policy rule and the lease cannot provide for an automatic termination when the tenant is subject to an insolvency proceeding.

In the continuation of the lease, rents due for the period after the opening of the insolvency proceeding are to be paid on time, failing which the landlord can ask for the lease termination as usual.

The opening of an insolvency proceeding shall freeze the triggering of the termination clause based on unpaid rent and charges, as long as a court did not acknowledge the effect of the termination clause. On the contrary, it shall have no adverse effect on the triggering of the termination clause based on non-performance by the tenant (apart from payment duties).

A security deposit usually equal to one rent instalment excluding VAT, but sometimes more, can be provided to a landlord to protect against a failure by the tenant to meet its obligations.

Cash security deposits are increasingly being replaced by bank guarantees.

Payment of rent and service charges is also often secured by guarantees given by a parent company, another affiliate or a third party.

Subject to certain exceptions, the tenant has a right to renew the lease for a similar term to that initially agreed. This does not apply to short-term leases that are granted for a term of up to three years.

The tenant may apply for the lease to be renewed if he has not already received a notice from the landlord refusing a renewal. This application must be made within the six-month period preceding the expiry of the lease, or at any time during the lease extension. The landlord must respond to this application within three months, or the lease will be renewed automatically.

The landlord must pay compensation (indemnité d'éviction) to the tenant for a refusal to renew, unless the refusal is due to serious and legitimate reasons (eg, unpaid rent, subletting without consent), or in certain other circumstances provided for by law (eg, to perform works, to sell the business, etc).

The landlord may terminate the lease at the end of each three-year period based on certain limited grounds, such as:

  • to build or rebuild the existing building;
  • to reassign the ancillary dwelling to this use; or
  • to carry out works imposed or authorised for a property restoration operation.

In principle, the landlord should pay an eviction indemnity to the tenant.

In addition, commercial leases usually provide for an automatic termination clause in favour of the landlord in the event of the tenant breaching its obligations under the lease. The implementation of the automatic termination clause requires a formal notice to address the breach to be served to the tenant by a bailiff. Should the tenant fail to address the breach within one month, the landlord is entitled to initiate proceedings to obtain the acknowledgment by the court of the termination of the lease.

The tenant is entitled to break options at the end of each three-year period and the parties may agree on additional break options in favour of the tenant.

In commercial leases, the tenant may only waive its break options for those leases relating to single-use premises, premises solely for office use or storage and warehouse premises, and/or for those initially granted for a term of more than nine years.

In addition, the tenant may terminate the lease at any time under certain limited circumstances, such as retirement or disability.

In some cases, the landlord may force a tenant to leave at the end of the three-year period, but will have to pay compensation (indemnité d’éviction).

If the tenant defaults on the rent, the landlord can force the tenant to vacate the building. Associated legal proceedings can take around six months or more.

In addition, if the lease contains a termination clause, the landlord may terminate the lease prior to the date agreed if the tenant fails to comply with the terms and conditions of the lease.

Where a compulsory purchase order takes effect, the lease is automatically terminated and the tenant is paid compensation by the purchaser.

There are two main types of construction contract under French law:

  • fixed price construction contracts (marché à prix forfaitaire), where the contractor carries out construction works (as detailed in documents attached to the agreement) for a fixed price agreed prior to the execution of the works and the contractor is not entitled to request additional payment, unless the owner instructs variations in the works; and
  • quantity construction contracts (marché au métré), where the contractor carries out construction works for a price that depends on the quantities used for the works.

A 'costs of works plus fees' structure may be provided, but is rarely used.

The owner can enter into:

  • separate contracts with the design team and the contractor(s) – in such cases, responsibility for the design studies will mostly be placed on the design team, while the contractor(s) will be liable for the works;
  • a single 'design and build' contract (contrat de contractant général) with a contractor that will also take responsibility for the design; and
  • a real estate development agreement (contrat de promotion immobilière), whereby a developer – as agent – will appoint the design team and the contractors on behalf of the owner, and be liable for the design and the works.

Contractual devices that are commonly used for managing construction risks are as follows.

  • Retention provisions – the owner is entitled to retain an amount not exceeding 5% of the entire price of the contractor agreement to guarantee the remediation of any defects arising on the date of acceptance of the works. The contractor has the right to replace this retainer by a bank suretyship (cautionnement bancaire).
  • Indemnity provisions – although such provisions are enforceable in principle, a court may revise the amount of the indemnity if it is deemed to be obviously excessive or insufficient.
  • Contract provisions regarding penalties for delay – delay penalties are calculated by multiplying the contract price by the rate of delay damages and are payable unless the delay was due to force majeure/an unforeseen event, or was the fault of the owner. Delay penalties are often capped at a percentage of the price of the contractor agreement but may be revised by the court.
  • Mandatory set of warranties covering damages to the construction – 
      1. a one-year warranty from the date of acceptance of the works (garantie de parfait achèvement), whereby the owner can claim for the repair of all defects that were not apparent at the date of the acceptance of the works;
      2. for two years after the acceptance of the works, the owner can claim for the repair of damages to equipment of the buildings (garantie biennale); and
      3. for ten years after the acceptance of the works, the owner can claim for the repair of structural damages caused to the building or where the ability to use the building is jeopardised (garantie décennale).

These warranties are mandatory and cannot be excluded by contract.

Construction risks are also covered through insurance. The insurance coverage for construction projects, decennial civil liability policies (responsabilité civile décennale) and damage to property policy (dommage-ouvrage) are mandatory.

Construction contracts provide for damages for delay.

As mentioned in 7.3 Management of Construction Risk, an owner is entitled to monetary compensation for delays in achieving milestones and completion dates, through delay penalties. Parties may even provide for termination of the contract by the owner for material delay.

Additional forms of security are often requested by owners in major projects, such as performance bonds issued by banks or a contractor's parent company.

For retention provisions, see 7.3 Management of Construction Risk.

If an advance payment is made to the contractor, owners also often request a corporate or bank guarantee to secure the repayment of such advance payment in case of termination of the contract.

In most contractor agreements, the owner shall provide for a direct payment by the bank to the contractor in the event that a loan was secured by the owner to finance the construction works, or provide the contractor with a joint bank guarantee (or any other type of guarantee agreed) equal to the entire price of the contract.

These provisions are mandatory. Should the owner not arrange the direct payment or provide the bank guarantee, the contractor – if unpaid – can legally suspend the construction works.

Architects and contractors benefit from a legal lien (privilège) over the building.

A building is deemed to be completed once the works and associated essential equipment can be operated in compliance with the agreed use. Parties are free to provide for any other definition of completion, except for residential buildings subject to mandatory requirements.

Parties are free to agree on the mechanism and proceedings to ascertain the completion. Contracts often provide that completion shall be mutually agreed by the parties and that, should the parties fail to reach an agreement, an expert (either designated in the contract or appointed by the court) will decide whether the building is completed.

From a town planning perspective, the owner has the obligation to file a declaration of completion and compliance of the works. Upon receiving this declaration, the administrative authorities have from three to five months to verify if the works are compliant with the administrative authorisation obtained. Then, the owner can request a certificate of non-opposition to the compliance of the works.

Specific administrative authorisations may be necessary to be able to use/operate the building in some limited cases (eg, high-rise buildings and premises to be open to the public).

The purchase of property is subject to transfer taxes and/or VAT, depending on whether the seller and the buyer are VAT payers.

The rules applicable specifically to transactions entered into by a French acquisition vehicle (SPV) registered for French VAT and a seller registered for VAT are described below.

  • Transactions involving non-developable land (terrain non-constructible) are exempt from VAT (unless an election for VAT to be payable is filed, in which case the VAT is due on the total purchase price) and are subject to transfer tax at a rate between 5.09% and 6.40%, depending on the type and location of the relevant property (0.715% if the buyer undertakes to resell the land within five years, or a EUR125 registration duty if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with the undertaking).
  • Transactions involving developable land (terrain à bâtir) are subject to VAT (i) on the total purchase price if the VAT incurred by the seller on the initial acquisition was deducted (in addition, the transaction gives rise to transfer tax at a rate of 0.715%, or to a EUR125 registration duty if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with the undertaking), or (ii) on the margin if the VAT incurred by the seller on the initial acquisition was not deducted; in addition, the transaction gives rise to transfer tax at a rate between 5.09% and 6.40%, depending on the type and location of the relevant property (or a reduced rate of 0.715% if a commitment to resell the land within five years is made by the buyer, or a EUR125 registration duty if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with the undertaking).
  • Transactions involving new buildings for VAT purposes (a building is considered as new for VAT purposes when it is acquired less than five years after its completion from a VAT-liable entity acting as such; pursuant to Article 257-I-2-2° of the French Tax Code, works carried out on an existing building consisting of an increase in height (surélévation) or a refurbishment (remise à l'état neuf) are assimilated to the delivery of a new building, subject to certain conditions) are subject to VAT on the total purchase price and to 0.715% transfer tax (or a EUR125 registration duty if the buyer intends to erect a building on the land, provided that the buyer undertakes to complete the construction works within four years and complies with such undertaking).
  • Transactions involving other properties are exempt from VAT (unless an election for VAT to be payable is filed, in which case the VAT is due on the total purchase price if the VAT incurred by the seller on the initial acquisition was deducted, or on the margin if the VAT incurred by the seller on the initial acquisition was not deducted) and are subject to transfer tax at a rate between 5.09% and 6.40%, depending on the type and location of the relevant property (or a reduced rate of 0.715% if the buyer commits to reselling the property within a five-year period, or a fixed fee of EUR125 if the buyer commits to developing a building within a certain period).

Regardless of the acquirer's registration in France for VAT, if the seller is not registered for French VAT, the transaction is not subject to VAT. Transfer taxes are due at the 5.09% to 6.40% normal rates specified above, unless the acquirer is indeed registered for French VAT and undertakes to resell or to erect a building.

The transfer tax regime also differs if the seller is registered for VAT in France but the acquirer is not, in which case the benefit of the reduced rates of transfer taxes subject to the above-mentioned undertakings are not available.

A share deal usually triggers fewer transfer taxes than an asset deal.

The sale of shares in a company owning real estate assets (where the value of the real estate represents more than 50% of the company's assets) is subject to a transfer tax of 5% on the price paid for the shares.

If the price of the shares reflects the fair market value of the real estate assets minus the liabilities of the company, the transfer taxes are, in principle, lower than those due on the sale of the real estate assets.

Property tax (taxe foncière) is payable for the whole calendar year by the owner of a property asset as of January 1st of each calendar year. The tax base is equal to the net cadastral income (revenu net cadastral). The amount of property tax is calculated by applying the rate of the tax set by each local authority to the cadastral income.

Housing tax (taxe d'habitation) is payable by the occupier of the property as of January 1st. The tax is calculated on the cadastral rental value (valeur locative cadastrale) of the dwelling and outbuildings.

Office tax is payable yearly by the owner (as of January 1st) of premises used as offices or for commercial or storage purposes located in Île-de-France. The tax is determined pursuant to a rate per square metre, which varies according to which part of Île-de-France the premises are located in.

Office development tax is payable for the development of office premises in the Paris area, whose rates vary from EUR0 to EUR407 per square metre depending on the district in which the office is located. This tax has to be paid by the owner of the premises

Tax on unoccupied premises is payable by the owner of any premises that have been unoccupied for at least one year (as of January 1st). It only applies to premises located in certain areas. The tax is calculated on the basis of the rental value of the premises at the rate of 12.5% in the first year and 25% thereafter.

Local development tax is payable in relation to building, rebuilding or extension projects for all types of premises. The tax is calculated by multiplying the taxable value of the construction surface by the rate set by the local authorities, which is between 1% and 5% (up to 20% in specific areas for the municipal part).

A 3% tax applies on the market value of real estate properties owned in France, directly or indirectly, by any French or foreign legal entity, regardless of whether the entity has a legal personality. The tax is based on the market value of real estate property assets and rights held in France (eg, separate property rights such as usufruct and bar ownership), and is subject to various exemptions linked to the quality of investors or resulting from the disclosure of certain information regarding the ultimate investors.

Rental Income

Owning a property in France does not itself constitute a permanent establishment.

If a permanent establishment exists, current income is fully taxable in France at 31% (the effective rate is increased by additional contributions to 32.02% for corporate taxpayers whose turnover exceeds EUR7,630,000).

Foreign owners are generally subject to French tax on rental income either under the individual income tax regime at a progressive rate ranging from a minimum of 30% up to 45% (increased by additional contributions), or under the corporate income tax regime at the standard rate of 31% (increased by additional contributions – the effective rate is 32.02% for corporate taxpayers whose turnover exceeds EUR7,630,000), provided that the conditions to benefit from the reduced rate provided for in Article 219, I-b of the General Tax Code are met. The same applies to property owned via a tax-transparent entity. Depending on the applicable tax treaty, tax paid in France may generate a tax credit or otherwise be taken into account in the owner's country of residence.

If property is owned directly by a French corporation, income will be subject to corporate tax in France at the normal rate of 31% in the hands of the French corporation (increased by additional contributions – effective rate of 32.02%).

The following is an overview of applicable rates of corporate income tax, by fraction of taxable profit, for the coming fiscal years resulting from the French Finance Law for 2018:

  • Small and medium enterprises (SMEs) with a turnover of less than EUR7.63 million:
    1. EUR0-38,120: 2019 – 15%; 2020 – 15%; 2021 – 15%; 2022 – 5%
    2. EUR38,120-75,000: 2019 – 28%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
    3. EUR75,000-500,000: 2019 – 28%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
    4. above EUR500,000: 2019 – 31%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
  • EU SMEs
    1. EUR0-75,000: 2019 – 28%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
    2. EUR75,000-500,000: 2019 – 28%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
    3. above EUR500,000: 2019 – 31%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
  • Other:
    1. EUR0-500,000: 2019 – 28%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%
    2. above EUR500,000: 2019 – 31%; 2020 – 28%; 2021 – 26.5%; 2022 – 25%

Deductions

It is normally possible for any interest paid on debt used to finance the acquisition of property to be deducted, for a portion, against income generated by the property. There is no mandatory debt-to-equity ratio (except in the case of loans from related companies), but the tax authorities may disallow interest deductions if they exceed the borrower's repayment capacity.

Moreover, the French Finance Law for 2019 transposing the anti-avoidance Directive (UE/2016/1164) has introduced, as from 1 January 2019, new interest deduction limitations. This text provides in particular that net financial charges may be deductible up to the higher of the following two amounts: (i) EUR3 million and (ii) 30% of the adjusted taxable income, before offsetting of tax losses.

Specific rules apply in the case where a company is considered to be thin capitalised, which is the case when the average amount of sums left or made available by all affiliated companies, directly or indirectly within the meaning of Article 39.12 of the FTC, during a financial year, exceeds one and a half times the amount of its net equity that it can assess, at the beginning or end of the financial year.

In such a case, the limit on the deductibility of net financial expenses is to be assessed taking into account (i) the interest on debt to third parties and related-party debt inferior to 1.5 times the net equity of the company that is subject to the same threshold of EUR3 million pro-rated or 30% of the pro-rated tax earnings before interest, tax, depreciation and amortisation (EBITDA) if higher and (ii) the interest on the debt owed to related parties exceeding 1.5 times the net equity of the company, which deduction is then limited to 10% of the pro-rated tax EBITDA or to EUR1 million pro-rated if the latter amount is higher.

In addition, interest deductibility is subject to certain limitations regarding intercompany loans under the maximum deductible interest rate provision and the anti-hybrid provision.

No withholding tax on interest expenses applies in France, except when they are paid in a non-cooperative state, in which case a 75% withholding tax is triggered.

Depreciation

If the owner of the property is a company subject to French corporate income tax, depreciation is allowed (on a straight-line basis) on the acquisition value of the buildings but not the land (generally at rates between 2% and 5% per year for commercial buildings). Accelerated tax depreciation is possible for industrial buildings if their expected lifespan is less than 15 years.

If some elements of the building are expected to have a shorter lifespan than the building as a whole then the depreciation value is broken down into different categories of asset, each with its own depreciation rate.

Depreciation on land is not permitted (unless the land contains a quarry, in which case the value of materials to be sold after treatment can be depreciated).

A participation in an entity owning real estate cannot be depreciated.

No depreciation is deductible under the individual income tax regime.

Dividends

Resident individuals

A flat tax (PFU) is applicable to capital gains, interest and dividend income. The rate for the PFU is set to 30% (12.8% of individual income tax and 17.2% of social contributions) and applies to dividends distributed as from 1 January 2018.

Prior to the introduction of the PFU, dividends were subject to French individual income tax at a progressive rate, after a flat-rate rebate of 40%. As of 1 January 2018, individual taxpayers may still elect for dividends to be taxed at the progressive income tax rate. However, this election is global for all capital gains, interests and dividend income received within the fiscal year, and it is thus not possible to combine the PFU and individual income tax at a progressive rate; and when the PFU applies, the 40% rebate is not applicable and nor is the deduction of 6.8% out of the 17.20% social contributions.

Non-resident individuals

Withholding tax rates depend on the applicable tax treaties. The French standard withholding tax rate on dividend distributions to non-resident individuals is aligned to the PFU rate (12.8%). The withholding tax rate is 75% for dividends paid on a bank account located in a non-cooperative state within the meaning of the French tax code, or paid or accrued to persons established or domiciled in the non-cooperative state.

Under certain conditions, the same rules apply (including the application of a double tax treaty) to the shareholders of tax-transparent partnerships.

Resident companies

Unless the participation exemption on dividends applies, dividends arising in France paid to corporate shareholders are included in taxable income for corporate income tax purposes.

Under the French participation exemption regime, 95% (99% in certain circumstances) of the dividend is tax exempt. The participation exemption is available if resident parent companies elect to apply such regime to dividends received from their resident and non-resident subsidiaries. The parent company may benefit from the participation exemption if it holds a participation in the subsidiary equal to at least 5% of its share capital and has held – or commits to hold – the participation for at least two years.

Non-resident companies

Dividends arising in France distributed to non-resident shareholders are subject to a final withholding tax at a rate of 30%, subject to the provisions of applicable tax treaties. The Finance Act for 2018 provides for a decrease of the withholding tax rate from 30% to 28% applicable to dividend distributions as from 1 January 2020, to 26.5% applicable to dividend distributions as from 1 January 2021 and to 25% for dividends distributed as from 1 January 2022.

Subject to certain conditions, the withholding tax is reduced to nil for dividends paid by a French resident company to a qualifying EU parent company if the parent company holds at least a 10% shareholding in a French subsidiary for at least two years (or 5% when the EU parent company cannot offset the withholding tax in its country of residency). The rate is 75% for dividends paid on a bank account located in a non-cooperative state, or paid or accrued to persons established or domiciled in such a non-cooperative state.

Capital gains

Other than usual profits derived by asset dealers, profits on the sale of a French property by a non-resident company are subject to a 31% tax in France (the effective rate is 32.02% for corporate taxpayers whose turnover exceeds EUR7,630,0001), although certain treaty exemptions may apply.

Profits on the sale of a property by an individual – resident or non-resident – are subject to a 19% tax, plus 17.2% in social contributions, leading to a total of 38.2% taxation (subject to the provisions of tax treaties as regards non-resident individuals).

Furthermore, a progressive 2% to 6% tax applies on real estate capital gains on sales of property. This tax applies indifferently on real estate rights or assets, other than building lands, and is effective on transfers made by individuals and pass-through entities in the scope of Articles 8 to 8 ter of the FTC (eg, SCI), and on transfers made by non-French tax residents who are subject to taxes levied on the basis of Article 244 bis A of the FTC.

Allowances increasing with the holding period can be deducted from the taxable gain, leading to a full exemption of individual income tax after 22 years of holding and social contributions after 30 years of holding.

Capital gains realised on the sale of French real estate assets by a French permanent establishment or a French company are subject to corporate income tax at the rate of 31% (effective tax rate of 32.02% after the application of miscellaneous contributions).

Real estate wealth tax (IFI)

IFI is assessed on the real estate owned by the taxpayer to the extent that the value of the taxpayer's real estate net assets exceeds EUR1.3 million.

The definition of the taxpayers, the triggering event, the tax threshold and the tax scale as regards IFI are similar to those that were applicable to the previous wealth tax (ISF).

The IFI's tax base is defined as all the real estate owned directly or indirectly by the taxpayer via companies or collective investment vehicles when it is not allocated to the business of the relevant entities. Taxation is not limited to shares in real estate companies.

Measures are designed to exclude professional real estate owned by companies from the taxable fraction, on the one hand, and real estate held by taxpayers through operating companies in which their shareholding is less than 10% on the other. Tax-exempt status may be granted to taxpayers holding less than 10% interest in non-operating companies if they establish that they are not in a position to obtain the information necessary for the assessment of the taxable portion of their shares. A similar exclusion applies in the case of holding less than 10% of the rights in an investment fund or in a collective investment vehicle, provided that these funds hold (directly or indirectly) less than 20% of their assets in property and real estate rights taxable to the IFI. Finally, goods of a professional nature are, under certain conditions, also excluded from the IFI's tax base.

French law sets out the list of deductible debts (in particular, expenditure on the acquisition of taxable property or real estate rights and shares, in proportion to the value of taxable real estate assets) and provides for a deduction cap for large heritage assets. French law also lays down special deduction rules for 'in fine' loans designed to take account of theoretical amortisation. An anti-abuse clause is also provided for the deduction of intra-group loans limiting the deduction of the debt, except in the event that the borrower is able to justify the normal nature of the loan terms and conditions (ie, on an arm's length basis), in particular compliance with due dates, the amount and the actual effectiveness of repayments.

Subject to tax treaties, non-residents holding corporate securities will henceforth be liable to the IFI for the part of the value of such shares corresponding to real estate.

If the owner of the property is a company subject to corporate income tax, depreciation is allowed (on a straight-line basis) on the acquisition value of the buildings but not the land (generally at rates between 2% and 5% per year for commercial buildings). Accelerated tax depreciation is possible for industrial buildings if their expected lifespan is less than 15 years.

If some elements of the building are expected to have a shorter lifespan than the building as a whole then the depreciation value is broken down into different categories of asset, each with its own depreciation rate.

Depreciation on land is not permitted (unless the land contains a quarry, in which case the value of materials to be sold after treatment can be depreciated).

A participation in an SPV holding real estate cannot be depreciated.

Individuals may benefit from certain tax incentives (tax credit or deductible allowance), such as the Duflot/Pinel regime, when investing in real estate properties in France, subject to conditions regarding the location of the properties, the level of rent, the tenant's resources, etc.

DLA Piper France LLP

27 Rue Laffitte,
75009 Paris,
France

+33 1 40 15 24 00

+33 1 40 15 24 01

info@dlapiper.com www.dlapiper.com
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DLA Piper France LLP has a market-leading real estate offering, with an international multidisciplinary team of lawyers that can serve client needs globally across the real estate sector. The firm has more than 750 real estate lawyers operating in more than 40 countries around the world, serving clients in key real estate markets, with strongly established teams in the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA Piper works with clients through all stages of the real estate life cycle, including planning, acquiring, finding, developing, leasing, completing, trading and divesting. Working through this cycle, it offers the following services: financing; acquisitions and disposals; asset management; construction; cross-border investment; development; fund formation; joint ventures; leasing; litigation; planning, zoning and environmental issues; public private partnerships; REITs; restructuring; and tax. The team works alongside investors, lenders, developers and managers on every aspect of their real estate activities.

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