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Investing in a French holiday property via an entity – be careful with French direct tax impacts and criminal law impacts
1. Investing in a French holiday property via a French SCI: such structure does not trigger any French income tax impacts
2. Investing in a French holiday property via a non French vehicle: such structure triggers exclusively French corporate income tax impacts
It follows from old principles laid down by case law that the administration cannot validly question the appropriateness of management decisions taken by companies (CE, 30 December 2003, no. 233894). Indeed, a taxpayer is never obliged to derive the highest possible profit from the management of a property or a business. However, this principle of non-interference of the administration in the management of companies does not, according to case law, preclude the auditor from rectifying the consequences of abnormal management acts in terms of corporate tax. In general, the abnormal act of management is one by which a company decides to impoverish itself for purposes unrelated to its interest (CE plen. 21 December 2018, n°402006). It may be, for example, an act which imposes an expense or a loss on the company or which deprives it of revenue without being justified by the interests of commercial exploitation. It is a principle that when a capital company grants one of its partners or shareholders free of charge the enjoyment of accommodation in a building it owns, it is appropriate to relate to the gross income taken into account for the determination of the taxable profit, an amount representing the real rental value, during the tax period in question, of the premises reserved for this use (BOI-BIC-PDSTK-10-10-20, n°220). By failing to do so, the company runs the risk of being qualified by the French tax authorities as an act of abnormal management (reintegration of uncollected rents plus penalties at the rate of 40% or even 80% in certain cases and late payment interest at the rate of 0.20% per month). It appears in particular from a judgment of the Administrative Court of Appeal of Versailles of May 24, 2022 that reinstatement is automatic and is not subject to any minimum or even reasonable duration of occupation, and the amount of reinstatement must correspond to the rent that would have been received from any tenant, whether he had occupied the accommodation by the day, by the week, at least or by the year (CAA Versailles, May 24, 2022, n°20VE01950). It also appears from a judgment of the Council of State dated July 22, 2022 that the fact that the company’s articles of association expressly provide in the subject matter for the company’s buildings to be made available free of charge to the partners does not allow not to rule out the qualification of an abnormal act of management (CE, July 22, 2022, n°444942, Sté Phoenix Union Co). The non French vehicle has to :
- Add into the taxable result for French CIT purposes the amount of uncollected rents and their submission to corporation tax (hereinafter “IS”) at the rate of 15% up to €42,500 of profit and at the rate of 25% on -of the;
- Possible application of increases for deliberate failure (40%) or for fraudulent maneuvers (80%) to notified adjustments if the adjustments derived from a tax audit;
- The application of late payment interest at the rate of 0.20% per mont to notified adjustments if the adjustments derived from a tax audit.
When no notional rent is declared, the tax authorities stick to the gross profitability expected on comparable properties. The gross profitability of properties is generally up to 6%.
3. Investing in a French holiday property via a non French vehicle: such structure triggers exclusively French corporate income tax impacts
The applicable French corporate income tax impacts are identical to point 2. However, it also falls into the scope of French criminal law. In other words, it is forbidden.
Article L241-3, 4° of the Commercial Code incriminates in particular
- “The fact, for the directors, to make, in bad faith, of the property or the credit of the company, a use which they know is contrary to the interest of the latter, for personal ends or to favor another company or business in which they have a direct or indirect interest”
- As a preliminary point, the characteristics of the perpetrator, the concealer, the property and the commercial company do not raise any particular difficulties.
- On the other hand, if the specificities of a case relating to the use (for free) of the asset by a third party (and not by the director) could complicate the characterization of the offence, there is a real risk of characterization the material element as regards the misuse of the property as well as the intentional element as regards the demonstration of the personal interest of the manager with regard to the extensive assessment of the criminal chamber.
For more information, please contact:
Delphine Parigi
Partner
E: delphine.parigi@dpz-avocats.com
T: +33 9 81 25 89 87
W: www.dpz-avocats.com
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