French Sale and Leaseback Tax and Legal Implications Q & A - April 2004

Please note that taxation and national insurance is a complex subject and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.

Q. These schemes are very popular. How do they work legally?
A. A developer sells residential units to you for, say, €200,000 and you then enter into a commercial lease with a management company which agrees to pay you, say, €10,000 pa rent. The developer also provides furniture for the property.

Q. Why is it a commercial lease? There are residential units shouldn’t it be a residential lease?
A. No. This is an important point. The management company is not going to occupy the flat. It will rent it to tourists for the purposes of its business so it is a commercial lease.

Q. So this means legally I am a commercial landlord and the management company is my commercial tenant?
A. Yes. You should think of it in these terms.

Q. What are the implications of it being a commercial lease?
A. The same issues arise as for commercial leases in England. The main points are the management company’s right to assign the lease to another management company and its right to renew the lease or to be compensated at the end of the lease if you deny this renewal. It is important these points are dealt with properly in the commercial lease to ensure you are fully protected and you should take legal advice on this. Sykes Anderson LLP has experience in ways of protecting your position.

Q. Doesn’t the notary deal with this for me?
A. Surprisingly, normally not. The notary’s remit is to ensure you get good title to the flat. Also remember there are other clauses in the lease - especially the way your rent increases - which should be checked carefully.

Q. I understand you can recover the VAT on the price?
A. Yes. Very broadly on new sales VAT at 19.6% is paid instead of stamp duty. This VAT cannot normally be recovered by the buyer. It is simply added to the price you pay. However in case of qualifying leasebacks for holiday lets you can recover the VAT.

Q. This makes the investment attractive!
A. Yes. In the above example you will recover (£200,000 @ 19.6%). Remember if you sell the property within 20 years you will have to repay the VAT pro rata.

Q. Do I charge VAT on the rent?
A. Yes. Because you are a commercial landlord you have to charge VAT at 5.5. You should check whether the rental figure you are given is inclusive or exclusive of VAT as this will obviously make a big difference to your returns over 9 years.

Q. How is my income taxed?
A. In France you are taxed as a commercial business because the arrangements involve furnished premises. There are various regimes under which you can elect to be taxed including ‘Micro-Bic’ or the simplified ‘real’ regime. You may also be able to elect to be treated as a “professional landlord” which has other tax advantages. You should remember that the way you are taxed for income purposes can have a significant effect on the French Capital Gains Tax, Inheritance Tax and Wealth Tax positions.

Q. Do I need to put in a French Income Tax Return?
A. Yes. Remember the management company will claim a deduction each year in the tax return for the payments it has made to you. The French Revenue will be aware you are letting the property as they will have repaid the VAT to you.

Q. Do I need to declare the income in England?
A. Yes. The net income in your English tax return may be different from that declared in France. You will get a credit for any tax paid in France.

Q. Do I pay Capital Gains Tax when I sell?
A. Yes. However the exemptions and rates in France are very attractive and many investors will, with some planning, be able to legitimately avoid all French CGT. The UK CGT position is generally more of a problem though it may be possible to avoid or minimise the CGT here.

Q. I am not UK domiciled; what advantages does this give me?
A. Many. If you do not remit the rent to the UK you pay no UK tax on it. Also when you sell you will again have no UK CGT liability if you do not remit the money to the UK but there may be problems ahead in the new draft UK-France Tax Treaty though it is not expected to become law until late 2004.

Q. What other tax could apply?
A. Taxe professionelle may be payable.

Q. Can I claim depreciation?
A. Yes, but only on the building part, not on the land. This is done over a period of between 20 and 30 years. Furniture is depreciated over 5 to 10 years.

This article is provided by courtesy of Sykes Anderson LLP who is able to assist with purchasing through sale and leaseback schemes. Further information is available from Saul Brownstein - sbrownstein@sykesanderson.com- and the website www.sykesanderson.com