Review of the year 2016

16 JANUARY 2017

Review of the year 2016 as regards real estate taxation    

The year 2016 brought us plenty of events in terms of real estate taxation. 

Indeed it seemed appropriate to review some of 2016’s “new arrivals”. This Newsletter therefore both complements and summarizes the various articles we published last year.      

It focuses on real estate taxation, but other events are likely to have an impact on the real estate business (for example, under the 2017 Finance Law, the progressive reduction of the rate of French Corporate Income Tax (CIT) to 28% by 2020). 


International: treaty modifications and state of play of the BEPS project 
 ♦ Amendment to the Franco-Luxembourg Double Tax Agreement 
 ♦ Final implementation of BEPS measures: multilateral convention now signed! 
 ♦ 3% tax: the end of the distinction between legal and economic ownerships? 

Challenge to the Quemener judgment: what are the practical consequences of the Lupa ruling? 

Current issues as regards VAT adjustments: which angles of attack are the French Tax Authorities (FTA) using? 
 ♦ Operations by property dealers on business properties rented under the VAT rules: a matter of timing! 
 ♦ Application of article 257 bis of the French Tax Code (FTC): did the taxpayer intend to keep the property? 
 ♦ VAT on the margin
Rental guarantees: VAT or no VAT? 

Allocations of land and buildings: a risky issue!

State of play of the reform of the levy on the creation of offices (RCB) and legal rulings

Undertakings to resell: purchasers are not subject to the additional 0.6% tax on registration fees (applicable in the Ile-de-France region)

Dividing up of ownership: caution is required! 
 ♦ Who may charge losses on land arising from an SCI – the usufructuary or the bare owner? 
 ♦ Disposals of temporary usufruct of shares in an SCI to a company subject to CT: beware of any abuse of law!  


International : treaty modifications and state of play of the BEPS project?

◊ Amendment to the Franco-Luxembourg Double Tax Agreement (DTA)  

The amendment to the Franco-Luxembourg DTA came into force on 1 January 2017. As from this date, capital gains on disposals of shares in French companies trading mainly in real estate will be taxable in France: in particular, such gains will incur a specific tax charge of 33.⅓% (article 244 bis A of the French Tax Code, (FTC)).

The scheme targeted by the amendment involves the disposal by a Luxembourg company of shares in a French company trading mainly in real estate: 


♦ The notion of trading companies with a majority of real estate assets under the convention differs from the definition in French law as regards capital gains.

Definition under article 3 of the France/Luxembourg DTA: “gains arising from the alienation of shares, units or other rights in a company, trust or any other institution or entity whose assets or property constitute more than 50% of their value, or which derive more than 50% of their value –  directly or indirectly through the interposition of one or more other companies, trusts, institutions or entities – from immovable property located in a contracting State of Rights deriving from such property, shall only be taxed in that State. By applying this provision, immovable property attributable by such a company to the activities of its own enterprise shall not be taken into consideration. The provisions of the above paragraph will also apply to the disposals by a company of said shares, units or other rights”. 

♦ Amendments to international tax treaties now tend to conflate securities in companies whose main holdings consist of real estate with real estate assets themselves, thus permitting the taxation of capital gains on shares in the state where the properties are located; 

♦ Certain treaties still contain exceptions (i.e. the right to tax is granted to a state other than France): Belgium, Netherlands, Ireland (but note that negotiations may be underway!).   

◊ Final implementation of BEPS measures: multilateral convention now signed!   

On 24 November 2016, around one hundred jurisdictions concluded negotiations relating to the signature of the multilateral convention intended to implement the measures of the “Base Erosion and Profit Shifting” (“BEPS”) project.

This multilateral convention permits the amendment of 2,000 tax treaties worldwide by means of the direct transposition of 4 BEPS actions: 

The convention was opened for signature as of 31 December 2016 and may be approved, accepted or ratified under the terms of article 27 of the text.

The following rules will govern its implementation:

  • withholding taxes: the provisions of the convention will come into effect on the first day of the calendar year following the more recent of the dates when the convention came into force in each of the two contracting states;
  • concerning other taxes: the provisions of the convention will apply to taxes received upon expiry or following expiry of a period of six months (or less by common agreement) as from the more recent of the dates when the convention came into force in each of the two contracting states.

Further details on Action 6 relating to the prevention of Treaty Shopping:

First measure – indicating the aim of Tax Treaties:

Article 6 of the convention provides for a preamble to be inserted into any OECD model convention;

Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions) […]”. 

Second measure – 3 options to prevent the abuse of Tax Treaties:



♦ The FTA pay particular attention to issues of substance (a material analysis of the concept of residence).

 Introduction of these measures may permit the FTA to bypass the material criteria by adopting a functional analysis (what is the purpose of establishment in a particular state?).

♦ I
mplementation of these new measures will involve several years of uncertainty in tax terms, which will certainly prompt investors to display prudence when structuring their investments.

♦ T
aking account of these measures and the renegotiation of several tax conventions (Luxembourg and Germany in particular), some investors may prefer special regimes under domestic law (in particular OPCIs [collective investment schemes specialising in real estate]).

◊ The 3% tax: an end to the distinction between legal and economic ownership?   

The commercial chamber of the French “Cour de Cassation” ruled on 18 October 20161 in respect of the nature of information to be communicated by a company in proof of the identity of its shareholders.

It then held that a company that declares the economic beneficiary of its shares, rather than the shareholders in the legal sense, will meet its declaration obligation and benefit from exemption from the 3% tax.

The structure in question was as follows: 

This decision came just a few days after the BOFIP (Official Taxation Bulletin) was updated by the FTA2, specifying the documents required for the identification of shareholders. It is thus an additional reference when determining the relevant elements for the identification of shareholders, but also raises certain questions:

  • equating the economic beneficiary with the legal owner may result in a systematic obligation to reveal the economic owner;
  • therefore, if only the legal owner is declared, the FTA may deem that such a person is not the person “holding” or “possessing” the shares within the meaning of the provisions governing the 3% tax.

>For further details concerning the judgment, the decision of the French Cour de Cassation and its application, see News of 27 December 2016 .  

Challenge to the Quemener judgment: what are the practical consequences of the Lupa ruling? 

Following its publication we commented on the Lupa ruling in a News on 26 July 2016.

At that time we mentioned the detrimental impact that this ruling might have on future real estate transactions, while keeping in mind that the particular case involved in fact combined:

  • the use of the Franco-Luxembourg convention;
  • the Quemener judgment;
  • no economic disposal of the underlying asset;
  • an abuse of law, initially cited before the courts dealing with the substance of the case. 


Quemener scheme:


The capital gain on the SCI’s disposal by the SAS, on the basis of latter’s accounting data, is calculated as follows:  
Capital gain or loss for accounting purposes: 1025 - 1000 = 25 

The Quemener mechanism aims to neutralise this capital gain by regarding the sum of 25 as not actually distributed (in the legal sense), but instead taxed at partner level (as the SCI is transparent and the partner will be taxed on its share of the SCI’s actual earnings, which are for tax purposes received at the end of the SCI’s financial year). 

On this basis the capital gain for tax purposes is as follows: 
→Capital gain or loss for tax purposes: capital gain for accounting purposes minus share of profits already taxed at the level of the partner that have not been distributed = 25 - 25 = 0  

♦ Corrective measure to the Quemener scheme as set out in the Lupa ruling:  
In this case the French Conseil d’Etat held that the Quemener judgment can only be applied in cases of actual double taxation at the level of the partners of the SCI in question. The strict application of the Lupa ruling means that the Quemener scheme does not permit: 
  - avoidance of taxation at taxpayer level of profits already taxed at the level of another taxpayer (economic double taxation); 
  - the clearing of an unrealised capital gain at no tax cost that however does not correspond to any economic profit on the part of the purchaser. 

What is the situation a few months later?

◊ No change to official doctrine!

The official doctrine of the FTA contains a ruling3 relating to the calculation of capital gains or losses realised upon when an SCI is dissolved but not liquidated. The question is whether such gains or losses should be calculated by adding the profit on revaluation directly prior to dissolution to the cost price for tax purposes of the shares in the company.

The answer was affirmative, which led us to believe that – following the Lupa ruling – official doctrine would be changed at once, but this was not the case!

In this respect, the scope of this ruling is unclear, but the application of the Quemener judgement does not appear any less risky. 

◊ Residual application of the Quemener ruling

In certain cases, the Quemener ruling will remain applicable, in particular in cases of the restatement of assets by the company being sold prior to the disposal of its shares. The advantage of this method will not however cover all cases (→ it is advantageous if the deferred tax liabilities on the property at the level of the company being sold are similar to the deferred tax liabilities of the partner making the disposal as regards the shares in the company being sold, i.e. the seller did not acquire this company with any “historic” deferred tax liabilities). 

◊ What are the alternative solutions to the Quemener ruling?

In most cases, alternative solutions exist (in particular restructuring operations involving distributions).

However, they should be handled on a case-by-case basis, in particular to avoid any charge of an abuse of law. 

For further details of the context and facts underlying the Lupa ruling, see News of 26 July 2016 . 


Current issues as regards VAT adjustments: which angles of attack are the FTA using? 

After rent free period, VAT adjustments now seem to be directed towards:

  • deduction of VAT on acquisitions by property dealers of buildings completed over five years ago; 
  • the scope of application of article 257 bis of the FTC; and 
  • VAT on the margin.
     Franchises de loyers : quelques rappels …


A rent free period should normally be seen as a reduction in the rent (as shown by the general stability of the concluded lease).

Thus, as an element determining the price, it should as such not be subject to VAT.

♦ rent of 100 without free period → VAT = 20 
♦ rent free period of 20 
♦ thus the “net” rent is 80 → VAT = 16 

Many adjustments have however been made in this regard, with the FTA considering that rent free period are actually an exchange of services between landlord and tenant and are thus subject to VAT. 

◊ Operations by property dealers on business properties rented under the VAT rules: a matter of timing!

This issue concerns operations to acquire older properties (i.e. buildings completed over five years previously) by a property dealer who posts the real estate assets to stock. If however the property is rented out by the purchaser under the VAT rules in anticipation of its resale, the FTA hold that the VAT charged on acquisition may only be deducted at the time of resale, which triggers the right to deduct it (the point at which the option for VAT on the resale is actually exercised). 

The position of the FTA can be set out as follows: 

  • Position of FTA: VAT paid in Year N for the acquisition of the property (VAT on the acquisition price and VAT on the acquisition costs) only becomes deductible in N+4;
  • Position that should result from the principle of VAT neutrality: the VAT on the acquisition of the property should be immediately deductible, as the property is being used continuously for activities that are subject to VAT (the property is being rented under the VAT rules in anticipation of its resale). The repayment in whole or in part of such VAT refund may subsequently be required in the event of a change in the use of the property (e.g. its resale without opting for the VAT regime).

We have previously mentioned the problems of “carrying VAT” in a News on 5 October 2015.

Since this time, the “Tribunal Administratif” has issued judgment on this matter in a ruling of 28 January 20164.

In its judgment, the Tribunal supported the position of the FTA and thus the latter’s refusal to refund VAT charged on the acquisition of an older property posted to stock even if it was rented out under the VAT rules, stating in particular that: “as the company acquired the property on 30 June 2014 with the intention of reselling it within a period of less than five years, it cannot seriously claim that the value added tax charged on the price can be deducted on account of the rental of the property in anticipation of its resale”.

→An appeal was made against this decision and the Paris Administrative Court of Appeal adopted a different view!

For further details on the problems of “carrying VAT”, see News of 5 October 2015. 

◊ Application of article 257 bis of the FTC: did the taxpayer intend to keep the property?

In certain cases, the FTA are attempting to challenge the posting of real estate to capital assets by considering a posteriori (once the property has been sold) that the taxpayer had no long-term intention to keep the property.

Article 257 bis of the FTC provides for exemption from VAT where a disposal represents the transfer of the totality of assets: thus, according to the FTA, the provision will not apply as the disposal is merely of an item of stock.

This approach affects the following cases:

  • if the property is a new building for VAT purposes, the sale should be subject to VAT on the total price of the asset;
  • if the property is a building completed more than five years previously, the sale should necessitate payment of the upstream VAT by the seller (unless the seller takes a subsidiary option to apply VAT to the sale).

→What is to be done in this situation?

If possible, matters should be determined in advance (as the application or otherwise of VAT is not inevitably a major issue for the parties, in particular if the property in question is rented under the VAT regime), for example by requesting the FTA to rule on the regime to be applied to the sale.

If the difficulty cannot be resolved beforehand, it should at least be possible to rebill the reassessment of VAT on the principal amount to the purchaser, who can deduct such VAT and obtain a refund. This procedure will limit any adjustment simply to the sum of the late-payment interest.   

◊ VAT on the margin


VAT is normally due on the total price, except: 
where the sale relates to a building plot or an older property, and 
the seller’s acquisition of such property did not entail any entitlement to deduct VAT. 

The margin to which VAT is applied, whether “internal” or “external” according to case, is calculated as follows: disposal price – purchase price

In replies given on 30 August 2016 and 20 September 20165, the Minister of Economy and Finances and the Minister of Finance and Public Accounts specified that the application of the regime governing VAT on the margin presupposed the nature and surface area of the property bought and the property sold to be identical. According to one of these replies, such requirement would result in a modification to the BOFIP (Official Taxation Bulletin) of 2 March 2016 (ed. note: the updated BOFIP of 2 March 2016 does not include any such modification, as the reference to the surface area predated this and concerned a remark related to acquisitions prior to 11 March 2010, i.e. before the reform of VAT on real estate). 

Example :  

In this situation, according to the ministerial reply, VAT will be due on the total price as there is no physical identity between the plots being resold and the land that was acquired.

If the purchaser is a private individual, VAT will be calculated “internally”.   

Rental garantees: VAT or not VAT?

In a ruling of 28 September 20166, the French "Conseil d’Etat" reaffirmed that a rental guarantee granted by the seller in principle constituted a reduction in price and was not in return for a service (since the existence of any link between the service rendered and the consideration received was insufficiently demonstrated in the case in point, the decision of the court dealing with the substance of the case was quashed and the matter referred to the Court of Appeal). 

◊ Facts 

In the case in question, a company offered the purchasers a “not taken” guarantee, whereby it undertook to pay the purchasers, in the event that no tenant could be found immediately (up to a maximum period of six months) a sum equivalent to the income that they would have received if the property had actually been rented.

The granting of this rental guarantee was linked to the obligation on the part of the purchaser to conclude a rental management agreement with a management agent approved by the seller.

Following an accounting inspection, the FTA held that such guarantees were not a reduction in price but rather a consideration for a service provided to the company by the purchasers (i.e. the choice of appointing an approved management agent).

The Administrative Court, followed by the Versailles Administrative Court of Appeal (“ACA”), upheld the position of the FTA. 

◊ Conseil d’Etat judgment

The French “Conseil d’Etat” overturned the judgment handed down by the ACA, stating that: “in ruling that the sums paid under such a guarantee in the case in point represented a remuneration for a service provided by the purchaser to the seller, without establishing whether the choice imposed upon the purchaser of appointing a management agent approved by the seller was of direct benefit to latter, the Court insufficiently demonstrated the existence of a direct link between the service rendered and the consideration received and, consequently, failed to demonstrate the existence of a service provided, thus prejudicing its judgment with an error of law”. 

◊ In practice this means...

The question of whether or not a rental guarantee is subject to VAT may play an important role in the context of an acquisition, in particular for the purchaser:

  • indeed, for many purchasers, a rental guarantee must represent a form of income in order to be taken into account when calculating the return on the investment being made (defined contractually as a form of compensation);
  • if the guarantee is not subject to VAT, it will for the purchaser represent an item of turnover that is not subject to VAT, which might potentially have an impact on the deduction of the VAT charged on the acquisition.

Allocations of land and buildings: a risky issue! 

 The question of the percentages to be allocated between land and buildings was the subject of the News of 21 December 2016 following the French “Conseil d’Etat" rulings of
15 February 20167.

These rulings are particularly interesting as, for the first time, the Conseil d’Etat set forth various methods for calculating the allocation and determined their particular hierarchy.   



The French "Conseil d’Etat" set out 3 methods of division: 

 1/ 1st method: the value of the land is to be determined with regard to transactions carried out on dates similar to the date on which the building was recorded on the company’s  balance sheet in reference to vacant land located in the same geographical area. 

 2/ 2nd method: failing this, the value of the building is to be determined on the basis of the cost of its rebuilding on the date on which the building was recorded on the  company’s balance sheet, taking account of its dilapidation and state of repair. 

 3/ 3rd method: if it is not possible to use one of the two above methods, the division of the cost  between land and buildings is to be determined on the basis of data taken  from the accounts of other companies that have, on similar dates, acquired buildings of a comparable  location and type of construction. 

In practice, the first method could be  used only in very limited circumstances (existence of comparable sales). The second method will thus  be most widely used but, as it does not take into account the rental  conditions of the property, it will increase the value of land compared to that of buildings, inevitably reducing  the depreciation that may subsequently be deducted.   

Investors are thus advised to obtain as much information as possible, in particular through expert reports during the acquisition process, in order to determine the optimum division between land and buildings.

Note that AFREXIM (the French Association of Property Valuation Firms) recently published a report summarising these various methods.  

  > For further details on the Conseil d’Etat rulings of 15 February 2016 and on their practical application, see News of 21 December 2016.    

State of play of the reform of the levy on the creation of offices (RCB) and legal rulings 


1/ A change of name for the RCB: it will from now on be called a tax (even if, in practice, the term “RCB” will undoubtedly remain in general use). 

2/ Its field of application has not been modified, but its rates have significantly changed. New zones and rates for offices were created, with a mechanism to smoothe zone changes caused by the reform.  

3/ Rates:

4/ The tax is capped at 30% of the portion of the cost of the operation ascribable to the acquisition and improvement of the construction surface (pursuant to article L 331-10 of the Town Planning Code). 

5/ The FTA’ clawback deadline is 31 December of the sixth year following that of the trigger event. 

6/ The reform came into effect on 1 January 2016 as regards requests for building permits, declarations of site works or changes of use lodged as from this date.

One year after the reform was introduced by the amended Finance Law for 20159, what is the situation of the tax on the creation of offices in the Ile-de-France region?

♦A decree is soon to be published providing further details of:

  • the methods for calculating the cap on the tax;
  • the due date for the tax;
  • the deadline by which appeals must be lodged. 

♦As regards the field of application of the RCB, the French “Conseil d’Etat” has now ruled on the liability to tax of premises that have been substantially restructured10.

It held that the levy will only apply to “those surfaces usable as office floor space that exceed those of the building before restructuring”.

→This means that, in the case of the restructuring of a building, only the net surface areas created will be subject to tax (which was not previously the position of the FTA).

Handed down as regards the RCB, this position should also apply to the new tax insofar as its field of application remains unchanged following the reform. 

 >For further details of this French “Conseil d’Etat” decision, see News of 23 February 2016.


Undertakings to resell: purchasers are not subject to the additional 0.6% tax on registration fees (in the Ile-de-France region)! 

Since 1 January 2016, a tax in addition to registration fees or the land tax of 0.60%, collected for the benefit of the Ile-de-France region, has applied to certain transfers of real estate11 (mainly buildings for business use).

The official doctrine states that the tax will not apply to transfers that are exempt from registration fees or land tax12. Following a request from CRIDON13, the Directorate of Tax Legislation (“DLF”) specified that “taxable persons who have made a commitment to resell under article 1115 of the FTC are not liable to pay the additional tax under article 1599 sexies of the [French Tax] Code14.

→If payment was incorrectly made at the beginning of 2016, claims for refunds may be made up until 31 December 2018!

 > For further details of the DLF opinion, see News of 7 June 2016.   


Dividing up of ownership: caution is required! 

◊ Who may charge losses on land arising fram an SCI: the usufructuary or the bare owner? 

In a ruling of 15 March 201615, the Bordeaux Administrative Court of Appeal (“ACA”) held that only the bare owner of the shares in an SCI (société civile immobilière, real estate partnership) could charge the losses generated by the company against its income from land.

This decision, founded on a strict analysis of article 8 of the FTC, would mean that if a usufructuary of shares in an SCI is charged income tax on profits corresponding to his or her portion of the rights in the company, such usufructuary cannot deduct the losses from this company against its income from land. The concept of “profits” under article 8 of the FTC must thus be interpreted stricto sensu as relating only to positive results.  


The provisions of article 8 of the FTC apply to companies that are fiscally transparent/translucent (i.e. company profits are taxed directly at the level of the partners holding shares). 

This article has specific provisions regarding the dismemberment of ownership, in particular that: “in the event of the dismemberment of the ownership of all or some of the shares, the usufructuary will be subject to income tax for the portion corresponding to the rights to the profits that his status as usufructuary confers upon him”.

While the ACA position is unfavourable to the usufructuary, it is nevertheless subject to 2 limits:

  • the Conseil d’Etat may adopt an opposite view;
  • the ACA states that this solution is only applicable where the usufruct agreement does not contain provisions in this regard. This means that it is the responsibility of the usufructuary and the bare owner to contractually agree their rights to the portion they mutually hold.

 > For further details on this Conseil d'Etat decision, see News of 25 November 2016 .

◊ Disposals of temporary usufruct of shares in an SCI to a company subject to CIT: beware of any abuse of law! 

This question was the subject of two opinions by the Committee on the Abuse of Tax Laws:

in opinion no. 2014-33 the committee held that such operations are an abuse of the law insofar as:

  • the CT-subject company that was the beneficiary of the temporary usufruct had neither a bank account nor treasury;
  • its only activity was temporarily to hold the usufruct of the SCI shares (which were subject to income tax) and thus it had no economic substance;
  • the committee thus concluded that the aim of the operation was exclusively tax-driven (the SCI’s income would be taxed under the CT regime and not the progressive IT scale).

in opinion no. 2016-11 the committee adopted a different position, closely related to the methods used to realise the operation in question.

The scheme was as follows: 

The committee found that in fact:

  • each SCI had a bank account that received income arising from the temporary usufruct;
  • such income was allocated to the payment of CT and to financial investments;
  • one of the SCIs had acquired a real estate asset, while the other had acquired a stake in a third-party company.

Insofar as the operation formed part of an asset management strategy, the committee held that the scheme was not an abuse of law.

→Reinvesting the sums involved would thus avoid the pitfall of an abuse of law!

 For further details on the facts and scope of this opinion of the Committee on the Abuse of Tax Laws, see News of 25 November 2016 .


By Pierre Appremont  

1. French Cour de Cassation, commercial chamber, 15-14528, 18 October 2016.

2. BOI-PAT-TPC-20-20-20161005 no. 570, updated 5 October 2016.

3. BOI-BIC-PVMV-40-30-20-20140428 no. 90.

4. Tribunal Administratif de Paris, 28 January 2016, no. 1429085, 2nd sect. 3rd chamber, SNC Omega & SAS Financière Lord Byron.

5. Reply to Nat. Assembly no. 96679 of 20 September 2016.

6. Conseil d’Etat no. 393229, 10th and 9th chambers sitting together, 28 September 2016, “Akerys”.

7. Conseil d’Etat rulings nos. 367467 and 380400 of 15 February 2016.

8. Official Journal no. 0302 of 29 December 2016, text no. 81.

9. 2015 amending Finance Law no. 2015-1786 of 29 December 2015.

10. Conseil d’Etat, 30 December 2015 no. 370096, 9th and 10th s-s, “SCI Aineuil”.

11. Additional tax under article 1599 sexies of the FTC introduced by the 2015 amending Finance Law of 29 December 2015.

12. BOI-ENR-DG-60-10-20-20160406 no. 110.

13. Centre for Notarial Research, Information and Documentation.

14. Ruling of 24 May 2016, DLF, Sub-directorate D, Office D2.

15. Cour d’Appel Administrative Bordeaux, 15 March 2016, no. 14BX01701.