Credit: Pedro Lastra / UnsplashTaxation in France: the tax measures introduced by the 2021 Finance Bill impact
May 6, 2021Real Estate
We asked the CMS law firm to provide clarifications regarding the 2021 finance law and, in particular, the tax credit mechanism.
You will find CMS's response below:
In practice, lessors will have to pay a particular attention to the situation of the tenants who will benefit from this waiver, since the following rules also apply:
The waiver may be granted until December 31, 2021 and the tax credit will be offset against the tax due for the fiscal year during which the waiver is granted. If the tax credit exceeds the tax due for that year, it may be refunded. As the measure applies in particular to companies subject to CIT under Articles 207 to 208 septies of the French Tax Code, it applies in particular to real estate funds such as listed real estate companies (so called “SIIC”), real estate funds (so called “SPPICAVs”) and their subsidiaries that have elected for the “SIIC regime”. Tax guidelines expressly includes the French branches of foreign investment funds benefitting from the SPPICAV regime in the scope of the measure. In the absence of tax due for the fiscal year concerned, these entities are entitled to a refund of the tax credit.
The shareholders of real estate look-though entities such as “SCI” or “SCPI”, will be able to offset the tax credit against the tax in proportion to their share of profits in the entity.
More particularly:
This measure will be applicable to the first revaluation carried out in respect of financial years ending on or after 31 December 2020 and until 31 December 2022.
The benefits of carrying out such a revaluation should be analysed taking into account the specific situation of each company.
Indeed, the tax deferral may not be interesting if a significant tax loss is anticipated by the company for the year in which the revaluation is carried out or in the event of significant losses carried forward.
Moreover, the revaluation surplus, as defined by law, is calculated taking into account to the net book value of the assets and not their tax value.
In practice, this means that companies which hold real estate assets with a tax value exceeding their book value, and therefore record derogatory tax depreciation, may not have any tax benefits to revalue. Indeed, such a revaluation should lead to the reinstatement of the tax depreciation carried out from a tax standpoint. Based on the wording of the law and in the absence of clarification from the French tax authorities at this stage, this tax reinstatement would be immediately taxable without any possibility to spread such taxation. Such a situation could deprive the taxpayer of any interest in revaluing the assets. Among the properties likely to be concerned, we can think about those purchased via a leasing contract, whose net book value is often equal to one euro.
In such a case, the tax consequences of the sale could be totally or partially cancelled for the lessee, which would reinstate the capital gain realised upon the sale into his taxable income at the same time as the rent paid to the lessor is deducted.
This measure applies only to real estate allocated by the lessee to his own commercial, industrial, artisanal or agricultural activity or to that of an enterprise with which he has intra-group relationships within the meaning of Article 39-12 of the FTC. In other words, real estate investments which are not allocated to the above-mentioned activities, are excluded from this measure.
The purchase of the real estate asset before the end of the lease agreement, the termination of the leasing contract or of the seller’s activity in France would result in the immediate taxation of the amount of the capital gain that is still to be reinstated.
This measure is applicable to lease-back transactions carried out between January 1st, 2021 and June 30rd, 2023 provided that they are preceded by a financing agreement accepted by the lessee between September 28th, 2020 and December 31st, 2022 (cumulative conditions).
This measure applies to fiscal years ending on or after 31 December 2020.
The French Finance Bill for 2021 provides for several changes to this measure:
As of fiscal year 2021, the rate of the CVAE (and the minimum CVAE contribution) is reduced by half. As a result, the maximum applicable rate decreases from 1.5% to 0.75% and the minimum contribution from €250 to €125.
The amount of the CVAE, together with the one of the CFE, is in principle capped at 3% of the amount of added value produced by the company. From 2021, the ceiling is reduced to 2%.
In practice, real estate companies should not be concerned by the capping mechanism since, for these entities, the cost of the CFE is limited to the minimum contribution (limited to a few thousand euros, the CFE being payable by the “user” of the property - i.e. the tenant) and the maximum rate of the CVAE is in any event less than 2%.
The due date for payment of the tax, which until now has been the date of issue of the collection title, is postponed to the date of final completion of building operations, change of consistency or use of the built and non-built properties.
At the same time, the person liable to pay the development tax becomes the holder of the planning permission on the due date (and no longer the beneficiary of the planning permission).
You will find CMS's response below:
I. Measures with respect to CIT
1.1 Granting of a tax credit for lessors who waive rents to certain lessees for the month of November 2020
An exceptional tax credit of 50% is granted to lessors who waive their right to claim the November 2020 rent from lessees of premises located in France and who satisfy the following conditions:- Renting premises closed to the public due to lockdown measures or carrying out their main activities in certain sectors particularly affected by the Covid-19 crisis (such as hotels, cafés and restaurants),
- Having less than 5,000 employees,
- Not being “in difficulty” on 31 December 2019 within the meaning of European Regulation no. 651/2014 of 17 June 2014 and not being in judicial liquidation on 1 March 2020,
- Where intra-group relationships within the meaning of Article 39-12 of the French Tax Code ("FTC") exist between the lessor and the lessee (one controls the other or both are placed under the control of the same third party company), the lessor must be able to justify, in the event of control, of the cash flow difficulties faced by the lessee company.
In practice, lessors will have to pay a particular attention to the situation of the tenants who will benefit from this waiver, since the following rules also apply:
- The condition relating to the number of the lessee's employees will be assessed by taking into account all the employees of entities related to the lessee company within the meaning of Article L233-3 of the French Commercial Code. This means that this threshold, above which the tax credit will not be granted to the lessor, will be assessed by taking into account the employees of all the companies that the lessee controls or that are placed under the control of the same third-party company as the lessee company. As control is defined by Article L233-3 of the French Commercial Code as a de jure or de facto control, specific attention must be paid on this point.
- The total amount of (i) rent waivers giving rise to a tax credit and (ii) other aids granted in the frame of the sanitary crisis toeach corporate lessee (regardless of the number of premises rented) is limited to €800,000. Particular consideration should be given to the drafting of the agreements by which the lessors agree to rent waivers, for example, by attaching a certificate from the tenant certifying that he meets the requirements provided for the application of the measure. Tax guidelines also specify that only final rent waivers can give rise to a tax credit. In particular, rent waivers with a better fortune clause are not eligible to the measure.
The waiver may be granted until December 31, 2021 and the tax credit will be offset against the tax due for the fiscal year during which the waiver is granted. If the tax credit exceeds the tax due for that year, it may be refunded. As the measure applies in particular to companies subject to CIT under Articles 207 to 208 septies of the French Tax Code, it applies in particular to real estate funds such as listed real estate companies (so called “SIIC”), real estate funds (so called “SPPICAVs”) and their subsidiaries that have elected for the “SIIC regime”. Tax guidelines expressly includes the French branches of foreign investment funds benefitting from the SPPICAV regime in the scope of the measure. In the absence of tax due for the fiscal year concerned, these entities are entitled to a refund of the tax credit.
The shareholders of real estate look-though entities such as “SCI” or “SCPI”, will be able to offset the tax credit against the tax in proportion to their share of profits in the entity.
1.2 Neutralisation of the adverse tax consequences triggered by rent waivers granted between 15 April 2020 and 30 June 2021
The measure providing for the deduction, from the taxable profit of lessor companies, of rent waivers relating to properties leased to companies granted between 15 April and 31 December 2020 without having to prove any commercial interest in this respect, is extended to rent waivers granted until 30 June 2021. In practice, this waiver constitutes a deductible expense that offsets the profit recorded in the accounts of the lessor company. It is worth noting that this measure is applicable to companies subject to CIT or income tax, provided that the lessee does not have an intra-group relationship with the lessor within the meaning of Article 39, 12 of the FTC.1.3 Option for a deferment of taxation of the capital gain resulting from the free revaluation of companies' tangible and financial assets
Companies which, in accordance with the provisions of Article L123-18 of the French Commercial Code, revalue all their tangible and financial assets, may, if an election is made in this respect, spread over time or defer the taxation of the revaluation surplus (equal to the difference between the real value of the assets and their net book value).More particularly:
- The taxation of capital gains arising from the revaluation of non-depreciable assets (such as securities) will be deferred until the sale of these assets,
- Capital gains arising from the revaluation of depreciable assets (such as real estate which are directly held) may be spread over a period of up to 15 years, which would be terminated early in the event of sale of the assets concerned.
This measure will be applicable to the first revaluation carried out in respect of financial years ending on or after 31 December 2020 and until 31 December 2022.
The benefits of carrying out such a revaluation should be analysed taking into account the specific situation of each company.
Indeed, the tax deferral may not be interesting if a significant tax loss is anticipated by the company for the year in which the revaluation is carried out or in the event of significant losses carried forward.
Moreover, the revaluation surplus, as defined by law, is calculated taking into account to the net book value of the assets and not their tax value.
In practice, this means that companies which hold real estate assets with a tax value exceeding their book value, and therefore record derogatory tax depreciation, may not have any tax benefits to revalue. Indeed, such a revaluation should lead to the reinstatement of the tax depreciation carried out from a tax standpoint. Based on the wording of the law and in the absence of clarification from the French tax authorities at this stage, this tax reinstatement would be immediately taxable without any possibility to spread such taxation. Such a situation could deprive the taxpayer of any interest in revaluing the assets. Among the properties likely to be concerned, we can think about those purchased via a leasing contract, whose net book value is often equal to one euro.
1.4 Option for the spreading of capital gains realised by companies liable for CIT carrying out a “sale & leaseback transaction” with a leasing company
Companies liable to CIT (as well as partnerships whose members are subject to the industrial and commercial profits taxation rules), which sell their real estate to a leasing company and enter into a lease agreement with the latter, may opt to spread the capital gain on the sale over the term of the lease agreement without exceeding a period of 15 years.In such a case, the tax consequences of the sale could be totally or partially cancelled for the lessee, which would reinstate the capital gain realised upon the sale into his taxable income at the same time as the rent paid to the lessor is deducted.
This measure applies only to real estate allocated by the lessee to his own commercial, industrial, artisanal or agricultural activity or to that of an enterprise with which he has intra-group relationships within the meaning of Article 39-12 of the FTC. In other words, real estate investments which are not allocated to the above-mentioned activities, are excluded from this measure.
The purchase of the real estate asset before the end of the lease agreement, the termination of the leasing contract or of the seller’s activity in France would result in the immediate taxation of the amount of the capital gain that is still to be reinstated.
This measure is applicable to lease-back transactions carried out between January 1st, 2021 and June 30rd, 2023 provided that they are preceded by a financing agreement accepted by the lessee between September 28th, 2020 and December 31st, 2022 (cumulative conditions).
1.5 The obligation to distribute the merger surplus earned by a “SIIC company” (or “SIIC subsidiary”) following a merger is increased to 70%
The distribution obligation regarding the capital gain on the cancellation of shares, or the merger surplus generated by a SIIC, or a subsidiary of a SIIC and SPPICAV that has opted for the “SIIC regime”, in the event of a merger between companies subject to this regime, is now consistent with the distribution obligation applicable to capital gains realised in the event of sale of real estate assets or shares in real estate companies, i.e. it is increased from 60% to 70%.This measure applies to fiscal years ending on or after 31 December 2020.
1.6 Extension and modification of the regime applicable to the sale of business premises located in certain geographical areas for the purpose of converting them into residential premises
To date, according to Article 210 F of the FTC, the net capital gains realised by companies subject to CIT at the time of transfer, until 31 December 2020, of premises for professional use or building land were taxed at the reduced rate of 19% where the property was located in a geographical area with a high level of housing demand and the purchaser (i) was a company subject to CIT or had one of the forms listed by law (such as SIIC, SPPICAV, joint public-private companies, civil construction-sale companies) and (ii) committed to transforming the building into a residential building (or constructing residential premises) within 4 years.The French Finance Bill for 2021 provides for several changes to this measure:
- extension for 2 years: this specific measure remains applicable to the sales carried out until 31 December 2022 and to unilateral or reciprocal promises to sell concluded between 1 January 2021 and 31 December 2022, provided that the sales are carried out by 31 December 2024 at the latest;
- extension of the scope of eligible purchasers to all legal entities regardless of their legal status and tax regime;
- limitation of the fine for failure to comply with the buyer’s commitment to the amount of the tax savings made by the seller thanks of this measure (i.e. the difference between the amount of tax calculated by applying the rate of 19% and the standard CIT rate) instead of the penalty of 25% calculated on the asset transfer price;
- possibility, for the purchaser, to request an exceptional extension of the 4-year period within which he has committed to transform or build the premises, within the limit of one year, renewable once (i.e. bringing the total duration to 6 years in such a case).
II. Measures with respect to local taxes and urban planning taxes
2.1 Reduction of the contribution on added value of enterprises (so called Cotisation sur la Valeur Ajoutée des Entreprises - “CVAE”) rate by 50% and lowering of the business property tax (so called “CET”) ceiling
Companies with an annual turnover exceeding €500,000 are liable for the CVAE, which is based on the added value produced by the company and whose rate increases along with the turnover realised.As of fiscal year 2021, the rate of the CVAE (and the minimum CVAE contribution) is reduced by half. As a result, the maximum applicable rate decreases from 1.5% to 0.75% and the minimum contribution from €250 to €125.
The amount of the CVAE, together with the one of the CFE, is in principle capped at 3% of the amount of added value produced by the company. From 2021, the ceiling is reduced to 2%.
In practice, real estate companies should not be concerned by the capping mechanism since, for these entities, the cost of the CFE is limited to the minimum contribution (limited to a few thousand euros, the CFE being payable by the “user” of the property - i.e. the tenant) and the maximum rate of the CVAE is in any event less than 2%.
2.2 Exemption from development tax on certain parking spaces and adjustment of the tax collection system
As of 1st January 2022, parking spaces built above or below buildings or integrated into buildings will be exempt from development tax.The due date for payment of the tax, which until now has been the date of issue of the collection title, is postponed to the date of final completion of building operations, change of consistency or use of the built and non-built properties.
At the same time, the person liable to pay the development tax becomes the holder of the planning permission on the due date (and no longer the beneficiary of the planning permission).
