Real estate investments – recent developments in French law

Whether you have already existing real estate investments in France or you contemplate to invest in France, please find hereafter a selection of the main recent legal, tax and regulatory changes in the French real estate investment sector that could impact your activities in a French and / or cross border context:

Decrease in the corporate tax rate

Structuring real estate investments via corporations (French SA / SAS) could be less tax intensive in the upcoming years. The Finance law of 2018 provided for a gradual decrease of the corporate tax rate:

• In 2019, the tax rate is of 28% for the portion of taxable income comprised between 0€ and 500 000€, and of 31 % beyond;
• In 2020, the corporate tax rate will be of 28% of the taxable income;
• In 2021, the rate will be of 26.5%; and
• In 2022, it will reach 25%.

Attention to limited interest deduction in case of indirect investment

France has already been vested with many interest deduction rules limitation. Yet, the transposition of the ATAD (Anti Treaty Avoidance Directive) I and II has contributed to further interest limitation rules which might restrain the deductibility, especially in case of high leverage through shareholder loans (> EUR 3m interest balance).

Danger of higher withholding tax due to Double Treaty Convention, esp. Luxembourg

Foreign investors investing into French fund structures have often been routed via Luxembourg. French fund structures are usually tax exempted on fund level (e.g. OPCI in the corporate form of SPPICAV). The advantage of corporate tax exemption on French fund level could lead to an effective low tax rate if the withholding taxes on the dividend distributions from the French SPPICAV was reduced by Double Taxation Treaties (DTT).

The DTT France-Luxembourg has been amended on March 20, 2018, and will enter into force on January 1, 2020. Instead of a limited withholding tax rate of 15% or 5%, a future 30% withholding tax will be levied on SPPICAV distributions in case of min. 10% holding. Yet, a 15% withholding tax can be applicable according to French domestic law if the SPPICAV is held by another regulated vehicle managed by an AIFM.

Other amendments concern the tax residency according to the DTT which should lead to the consequence that the DTT will no longer be applicable. In the end, the amendments could give reasons to overthink existing fund structures, especially from institutional investors invested via Luxembourg structures into French funds.

Increase in the construction and rent indexes

Over the past year (Second trimester 2018 – Second trimester 2019), the following increases have been witnessed:

• Construction cost index: +2,76%
• Commercial rent index: + 2,33%
• Tertiary activities rent index: +2,20%
• Rent reference index: +1,52%

More generally, there has been an upward trend concerning these indexes for the past two years.

Loi ELAN

The law dated November 23, 2018 relating to evolution of housing, of the planning and of the digital technology (“Loi ELAN”) introduced several noteworthy legal developments:

Control of the rents in the Parisian region: this experimental scheme will be in force for a 5-year period. The local authorities shall determine the amount of reference rents (minimal, median and maximal) every year. The tenant and the landlord shall then be able to freely set the amount of the rent, without exceeding the maximal reference rate. If this rule is not respected, the judges will be able to sentence the landlord to the payment of a fine and to reimburse the overpayment to the tenant.

Common areas in allotments: under the previous legal regime, it was possible for a simple majority of owners to overcome the enhanced majority decision rule and request from the competent authorities to modify the official documents of the allotment, to the sole exception of provisions relating to common areas. Loi ELAN now extends this possibility to the provisions pertaining to the common areas.

Planning permissions: Loi ELAN now restricts the grounds on which a request for cancellation of a planning permit may occur, shortens the delays applicable to the procedure and eases the ways to regularise an illegal permit.

“Bail mobilité”: Loi ELAN brings more flexibility in the leasing of furnished housing premises through the creation of a new type of lease agreement. The bail mobilité is a short-term non-renewable lease (minimum 1 month and maximum 10 months) that may solely be entered into with tenants being in a temporary professional situation (such as students, professionals in a training course, short term professional transfer, etc.).

Airbnb

In large French cities (Paris, Bordeaux, etc.), Airbnb-like seasonal renting is either prohibited (secondary residences) or limited to 120 days a year (primary residence). Owners in these cities have also to register beforehand with the town hall offices.

Since September 12, 2019, the French Supreme Court confirmed that a tenant may not let the premises he rents on Airbnb, without getting the prior consent of his landlord. Failing which, he is to return the undue rents perceived to the said landlord.

Since January 1, 2019, the Airbnb-like platforms are now to communicate the amounts collected by the host for the rent directly to French authorities, for them to be included in the taxable income of the host.

Loophole in the 10-year warranty

The French Supreme Court, in a decision dated April 4, 2019 ruled that insurance contract provisions applying between a construction company and its insurer, whereby the tacit delivery of the works may solely occur in the absence of comments for a long enough period of time after the taking of possession of the works shall be enforceable against the owner himself.

This surprising decision weakens the general theory of the relativity of contracts, whereby obligations cannot be imposed on third parties to the agreement.

Moreover, from a practical view point, this entails that if the owner makes any comments after taking possession of the work, this will be analysed as a refusal to accept the delivery, and thus the owner may not be able to benefit from the 10-year guarantee. Thus, the need to transcript the delivery of the work in a written form is more than ever necessary.

Real Estate transactions & Blockchain

On June 25, 2019, for the first time in France, took place a real estate transaction using the blockchain technology. The private Mansion, AnnA, located in Boulogne-Billancourt, with an estimated value of 6.5 million euros, was sold to an investment company whose shares are represented by 10 tokens on the blockchain, separable in 100.000 sub-units each. This would allow investors to acquire some property ownership over the mansion for as little as 6,5€.

This process enables a higher liquidity of the assets as it allows investments from those who would not have been able to invest the minimal amount requested within the frame of other investment vehicles.