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The handling of the purchase of real estate in France
runs along strict legal guidelines. From the initial offer to the final entry into the Land Register, certain official regulations will have to be fulfilled. Each sale must be handled therefore by a notary.
As of June 1, 2001 all agreements between private persons
regarding the acquisition of a property for housing are subject to a right to withdraw by the purchaser within seven days and no one is enabled to receive funds before this legal delay expires with the exception of a professional agent or notary having received a sales mandat and holding a financial guarantee regarding the repayment of the funds.
The signed contract is delivered to the purchaser by registered mail or equivalent. The delay of withdrawal starts on the following day after the first presentation of this letter.
If you choose to buy, a legal preliminary agreement is arranged
taking into consideration the above conditions. This can be made by a notary or an officially certified broker. In this preliminary agreement, the main points of the contract are determined These form the basis of
the notary contract later. This preliminary agreement is absolutely binding. Non-compliance, and refusal to sign the notary contract, incurs a penalty, usually 10% of the purchase price, to be paid to other party.
If you require financing, indicate this when making the
preliminary agreement. If the other party agrees with it, this financing requirement can be included as a safeguard, or get-out, clause.
The preliminary agreement is passed on to the notary, who creates
the final notary contract within a period of 2-3 months. This period is relatively long, since the notary must collect various documents from the Mairie, the Land Register and the Revenue offices. The notary vouches
for the legal passage of title with his signature, and for the new Land Register entry which can then take place.
After the purchase price, the buyer must also pay the notary
costs. This amount includes the tax on real estate transactions, all fees and the notary fee. The size of the amount depends on the type and the age of the property. In general, the notary costs with properties
which are not older than 5 years are about 3% of purchase price. With older properties the cost is about 6 % of the purchase price.
The maximum loan amount is usually 70-80% of appraisal
value, not necessary equal to the price that you agreed on with the seller. If you are getting a mortgage for a second home, this percentage can drop to 50% and you may want to consider taking a equity loan on your
main property. Most French lenders will charge fees and also the "notaire" will charge a fee for registering the mortgage claim on the property. The lender fees usually include:
· origination fee or frais de dossier
· administration fee and
· cost of property appraisal.
Assuming seller's mortgage, which is common as in
Spain, is not possible in France. If you lend from a co-op such as Crédit Agricole, and you are French resident, you will receive certificates from the bank. The amount of shares that you are obliged to buy is
determined by the board of directors of the bank. The amount payable for these shares will be deducted with the amounts of repayments that you are making. When the loan is paid off the shares will be reimbursed.
Another popular choice is using an SCI to purchase a property in France
A common way of buying a property in France is through the use of a
Société Civile Immobilière, or SCI. The use of this method has benefits for French residents, as well as foreign residents.
What is an SCI?
· An SCI is essentially a fully incorporated company with a registered office in France. This office can be the property itself.
· The SCI then owns the property in question.
· Being a company, the SCI is itself owned by shareholders, in most cases, family members.
· The shareholders can be resident or nonresident in France.
Note: It is important to note at this point that the tax
consequences of the purchase through an SCI should be analyzed according to French law and the tax treaty between France and the home country before going ahead with any purchase.
Advantages of an SCI
1. In terms of inheritance, the use of an SCI overcomes
some of the disadvantages that France's Napoleonic laws ctainon.
· French law dictates that upon the death of the home's owner, the property is divided up between the surviving spouse and any children.
The decision about what to do with a property which may now be too big for - for example - an elderly widow, is passed on to the widow and any
children either from that marriage or previous. This can be potentially "uncomfortable" where stepchildren are involved.
However, using an SCI and its shareholder status means that the
parents can appoint themselves as majority shareholders.
· They can make provision that upon the death of one or the other that his or her shares are passed onto the surviving spouse, therefore
ensuring that the controlling share remains in the hands of the parent, and any decision regarding the property belongs to the partner of the deceased.
2. Where succession remains the issue, shares in a company are
easier to distribute than immovable property, and so managing inheritance, and transferring the property, is simplified.
3. The shareholder structure means that it is
easier to divide up shares, rather than splitting the ownership of a property.
In turn, this makes it easier for individuals with
small budgets to pool their funds and buy a property that they would not be able to buy individually.
It is also easier to dispose of the shares without the aid of a notaire,
thereby making the SCI more flexible than direct ownership.
4. When using an SCI to buy a property, the net worth of
the property can be reduced for tax purposes by way of debt. This can minimize French wealth tax and inheritance tax liability.
5. Where foreign residents are concerned, the use of an
SCI can be a great advantage for people whose home inheritance laws are more flexible than French laws, outlined above.
· Upon death, the applicable law is normally the one of the country where the property is located. However, if the property is owned through an
SCI, then the applicable law will be the one of the last country of residence of the deceased.
· Owning a home in France via an SCI means that the French property becomes part of the estate of their country, as opposed to direct ownership
of immovable property, which is subject to estate law in France. This is important to bear in mind in terms of inheritance.
5. The terms of an SCI can be changed at any moment.
Disadvantages of an SCI
While there are numerous advantages of owning a property in
France through an SCI, there are also a handful of drawbacks which should be considered.
Using an SCI to purchase a property will incur additional expenses.
No matter what property is purchased, thefuture purchaser
will have to pay purchaser's fees to the notaire. On choosing to set up an SCI, one should equally make provision for the registration expenses as well as its running costs. The latter for example being the
company's annual accounts.
As with any major financial transaction, it is always best to get
the advice of professionals, in this case property law professionals. Each case is different and requires individual, and where possible, an independent study into its necessity and feasibility. Obtaining the
assistance of a locally based professional will ensure that your are receiving the most relevant and current information regarding legislation.
SCI Accounting
If you have chosen to purchase a home in France via the Société Civile Immobilier or
SCI and because the SCI is effectively a company, you will need to:
· establish and register your SCI and
· keep annual accounts.
These are some pointers on how to take care of the paperwork involved in running your SCI.
Accounting System
· A French SCI is obliged to maintain its accounting in French, based on the French Tax Code. This means following the French accounting plan.
Note: The average SCI holds family property and does not have much bookkeeping.
· It would, under these circumstances, be quite hard to maintain normal English (or other) accounting records and it would involve some
training to be able to learn how to keep your books on the French basis. It is often easier to use an accountant who works within the French system, the cost of which is probably justified.
· The accounting of an SCI is not regulated as it is not normally used for commercial purposes. You can obviously control your own accounts but
this does not avoid the French accounting issues.
Accounting Obligations
For an SCI to exist as a real company it must:
· keep regular records,
· prepare annual accounts
· hold an annual general meeting of the members to approve the accounts.
· maintain statutory records in a legal register.
If this is not carried out, the company can, under the civil code, be considered to be nonexistent with the resultant tax consequences. It is
important to understand that an SCI is a "moral person" and by not filing annual tax returns one can be assessed for a 3% tax on the market value of the property annually.
How to manage income received on a SCI
When furnished property owned by an SCI is rented out, it is considered a location meublée.
The French tax authorities see this as a business activity (as it is owned by a company, the SCI) and the relevant corporation taxes are imposed.
This becomes complicated when the owner of the SCI wishes to
cease the rental activity. This is viewed as a change in activity and thus generates an automatic capital gain taxation to which the relative corporate taxes are imposed.
However this problem can be avoided
with correct planning, little inconvenience and can save the owners taxation and money. It is therefore best to seek the advice of a trusted tax lawyer or accountant in order to set up the correct structure to
minimize your tax liability. It is also essential to seek professional advice when planning to set up an SCI.
Wealth tax is due on the net value of the shares of the SCI; that
means the value of the property, less debt. This even applies to nonresidents. Assets are cumulated for wealth tax purposes. (This is not always clearly explained to foreigners.) French case law emphasizes that it
is vitally important that records be maintained.
Note:
The UK currently is reviewing its treatment of SCIs as they have misinterpreted the French administration's notions of a French SCI. There is considerable correspondence and confusion concerning this issue and the UK Inland Revenue service has agreed to suspend all litigation pending their review on this issue.
Disclaimer: By using the contents of this site you accept our user agreement. All contents are intended as study material and a general
guidance. It does not substitute professional legal advise. We advise readers to contact the authorities before making any legal or tax involving decisions.
