Letting furnished property in France: abstract

Have you ever considered letting furnished your property  (Loueur Meublé Non Professionnel)) in France? Because the LMNP is a tax niche that allows you to benefit from (i) the advantages of company taxation on the rental income and (ii) the advantages of personal taxation on the capital gains. If you think this solution is for you, you also need the assistance of a chartered accountant. Let us explain.

Letting furnished property in France and income from property rentals.

Rather than let your property in the usual French way (unfurnished), rent it out furnished. The apartment should meet 11 criteria by law and be rented out to a person who uses it as a principal residence. This will allow you to deduct all the costs you incur as a landlord. In practical terms, it means that you can deduct from the taxable income (i) the depreciation of the property (ii) all the purchase costs (stamp duty, conveyancing fees) and (iii) the day-to-day costs of owning a property (management company charges, insurance, costs of repairs, etc.), local taxes and interest payments.

If you rent out your property unfurnished, you cannot depreciate the property, nor can you deduct the purchase costs or some of the running costs (those of a caretaker in particular).

Also, given the rules for calculating the taxable income, which are far more favourable for furnished rentals than unfurnished ones, you will probably record a loss in the first case, but a profit in the second.

To use this arrangement, you must use company accounting, which by law requires a chartered accountant.

Renting out furnished property and capital gains

Letting furnished property and gains – the rules in detail

Even though you can deduct the depreciation of rental properties from your taxable income, the accumulated depreciation is never subtracted from the gross value to calculate capital gains. In other words, the rules of company accounting do not apply. Rather, the capital gains tax is calculated according to the rules for personal taxation. You benefit from a sliding scale of taxation on the price of sale throughout the time you own the property, so that you are totally exonerated from income tax on the capital gains after 22 years, and from the CSG/RDS social security charges (if these apply to you) after 30 years.

Letting unfurnished property and gains – a summary

To sum up, capital gains on property calculated according to personal taxation rules by and large taxed less than those computed according to company taxation.

Letting furnished property for French tax residents…

If you are fiscally resident in France, losses from letting a property as LMNP are not deductible from your overall income because they do not come from a professional activity. They can, however, be applied to income of the same type over the following 6 years (10 years before 1 January 2017). If you have recorded a profit, it is added to your overall income and taxed as income according to your tax band (IRPP – impôt sur le revenu des personnes physiques). In addition to this, you will pay the social security charges CGS/RDS (15.50% of the taxable income).

As for the capital gains, they are taxed as income in the same way as the rental income.

…And  for non-residents

If you are not a French tax resident, you must submit a tax return to the centre for non-residents. As long as a property is situated in France, it is taxable in France. When your taxable income only concerns the LMNP, this tax return becomes a simple formality.

Taxes on capital gains from property are levied at the proportional rate of 34.5% and paid on the day of sale.

If, however, you pay income tax and CSG/CRDS, you can deduct this from the tax paid in the country in which you are resident, subject to the double taxation avoidance treaty that may exist between your country and France.

Renting out furnished property in France, a summary

Jean-Claude ARMAND and Partners assist you in benefiting from this tax niche.

How to open a bank account in France – Context

When opening a bank account in France, many foreign businesses underestimate the delays and obstacles they may encounter.  These are multiplied if you want to open it from a distance, without a company director having to visit in person. What follows are a few useful rules that will help you get a head start and open an account in record time.

…, legal status

First of all, businesses must have a K-bis, which forms the legal identity card of the company and establishes a branch of the company in France. Indeed, you need to have this document in order to open a business banking account in France. The branch does not have to be considered as such in fiscal terms. In other words, it can have a simple commercial status without a fiscal status.

… the banking network

A very efficient way is to have opened an account in the home country with a subsidiary of a French bank, or one that has concluded a partnership with a banking network in France. In the interests of anti-money laundering, all French banks enquire into the commercial activity, the seniority, the shareholders and directors of a company, and require a minimum of prior existence and turnover before proceeding to open a business account.

What can you do if you cannot fulfill the conditions in the previous paragraph?

There are two possibilities. The first solution is to open an account at home with a bank that is represented (or has partners) in France. In this case, it is best to enquire in advance to make sure that you fulfill all the rules for opening a banking account in France. The second solution is to procure the K-bis and then to approach any bank in France requesting to open an account. If the bank refuses in writing, you can resort to the procedure of “right to an account”. By this procedure, the Banque de France designates a commercial bank in which the foreign business may open an account. In other words, the commercial bank cannot oppose the opening of the said account. To sum up, this second procedure exists as a last resort but it carries the inconvenience of being time-consuming.

Banking account in France, to sum up…

Open a bank account

When a foreign company wishes to create a subsidiary in France, it can either select the SAS status (French simplified joint stock company), or the SARL status (French limited responsibility company).

The advantages and disadvantages of each status

The SAS is comparable to the incorporated company in English-speaking countries (or the AG in Germany), whereas the SARL is closer to the LLC (English) or the GmbH (German).

The advantages of the SAS status for a subsidiary in France

An SAS has a significantly flexible legal status. It allows the separation of ownership and management. In such a case, the company’s by-laws can enable the formation of a board of directors where all shareholders (operational and non-operational) are represented.

The above-mentioned possibility makes the SAS highly recommended for co-owned companies. In other words, the situation when the foreign company is a shareholder of the French subsidiary alongside another company. The foreign company does not have to participate on a daily basis in the subsidiary’s operations.

A SAS also allows its corporate shareholders to be corporate officers. A SAS does not have to appoint a person as a shareholder corporate officer. This fact provides three benefits on legal and fiscal aspects.

On the legal aspect:

The company appointed as the corporate officer does not need to request for any authorisation. However, for individual shareholders, this situation differs according to the person’s citizenship. Citizens of the European Economic Area do not have to make any demands either. But other citizens who reside in France must request a temporary resident permit (carte de séjour) If the person lives outside of France, authorization from the French authorities (authorisation préfectorale) is required. This authorization can be simple to acquire for North American, Australian and Japanese people, but it can be more difficult for others.

This aspect enables the driving force of the company to be employed by the subsidiary under contract. Henceforth, it would not be liable on commercial law. On the other hand, legal proceedings practices on corporate officers are extremely rare.

Lastly, if the subsidiary only has one shareholder, it is not mandatory to appoint a permanent representative.

On the fiscal aspect:

The appointment of companies as corporate officers significantly eases management fee invoicing and considerably limits the risks of non-deductible costs for the subsidiary. If managers are at the same time a company and a person, a close consideration should be done on the management fees scope to be sure that it does not come in conflict with the person’s responsibilities. This could challenge the cost deductibility of the subsidiary.

The advantages of the SARL status for a subsidiary in France

The main drawback of this status is that you can only appoint a natural person as a corporate officer (no legal entities). As a result, the status is not recommended for subsidiaries. Appointing a natural person as a corporate officer in SARL means the deductibility of the management fees can be easily challenged by tax authorities.

Foreign companies pick SAS over SARL when creating a subsidiary in France

To sum up, below is a summary of the pros and cons of each status when creating a subsidiary in France.

The Jean-Claude ARMAND and Associates firm assists you in the selection of the most suitable choice of legal status when creating a subsidiary in France.

Liaison office branch or subsidiary : In other words, in order to establish a business in France, does a foreign company have to systematically create a subsidiary company? In other words, can we find solutions more flexible, less expensive?   A simple registration towards social bodies to hire staff, or  a liaison office, or a branch. The answer to this question depends not only on the means that will be deployed in France.

In which circumstances consider a liaison office in France or a branch with no activity …

When the foreign company simply wishes to hire one staff aimed at having contacts, collecting information, giving information for the mother company’s account, or assuming the advertising of it. In other words, its employees are never allowed to sign any order forms. This task is performed by the mother company’s representatives in the country of origin. To decide which the most suitable option is between a simple SIRET number and a liaison office, – click here.

Concerning fiscal law, the liaison office does not have a literal existence. The charges of the liaison office are in principle deductible from the taxable income of the foreign company in its country of origin. However, if the liaison office has in fact commercial activities, it can be requalified as a permanent establishment (see  below).

…Or a branch with activity or a subsidiary

If the activity within France is commercial, the mother company has to create a branch with activity.

According to the French tax regulations, such a branch is considered as a permanent establishment, which designates for the purpose of tax treaties between countries of the OECD, a fixed establishment of business where the company practices all or a part of its activity: Are in particular permanent establishments, headquarters, transformation plants, construction sites which in time exceed 12 months. Are not considered as permanent establishments, non-commercial activities as storage, exposition, delivery, transformation by another company, etc.

Consequently, the branch is subject to corporate tax according to the common law rate. To determine its fiscal income (for both corporate tax and VAT purposes), the accounting income needs to be restated, as if the branch were a separate legal entity.

Finally, the company can create a subsidiary company; which is detached from the mother company. The income is taxed in France (see Milestones when starting a business in France)Milestones when starting a business in France.

The aforementioned writings may be summarized as follows:

Liaison office branch subsidiary

Jean-Claude Armand and Partners advices you to choose the establishment structure in France (liaison office, stable establishment, subsidiary company).

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How are profits made by branches and subsidiaries taxed ?

Foreign companies’ branches and subsidiaries  are taxed on profits made in France. Therefore, the profit has to be separated from the one made by the parent company in the country of origin. Yet, taking in consideration the economic dependence of the branch or the subsidiary from the company it belongs to, the French fiscal administration can challenge the amount of profit made by the subsidiary or the branch. In these circumstances, what can be done to avoid such a situation to arise?

Invoicing upon market conditions is key to avoid any challenges by the French fiscal administration

Principle…..

On principle, it has to be demonstrated that the products and expenses recorded by the French branch or subsidiary have been invoiced upon market conditions. In other words, the revenue and the expenses have to be invoiced as if no capitalistic relations existed between the French entity and the group.  This rule is set out  in  OECD’s transfer pricing guidelines 

And practise –  consider the economical model of the branches and subsidiaries…

For that purpose, the branch’s or the subsidiary’s economic model has to be taken into account.

Wholesale model versus….

If this entity acquires products or services abroad and sells them back in France (from a tax perspective, merchandise or services transfers from another country towards the French subsidiary or branch is always considered as a purchase), it has to prove that the transfer price to the entity covers the global cost, with a margin consistent with professional practices. If the prices proposed by the competition are not known, the entity can base itself on prices charged to companies external to the group.

Intermediary role

If on the other hand the branch or the subsidiary only plays the role of intermediary between the group and the end costumers in France (in other words, the parent company sells directly to French clients and the branch merely prospects for them), the French subsidiary or branch can conclude a “marketing service agreement” with the parent group by which the latter can have its committed cost reimbursed with a margin. The difficulties arising from such a contract called “cost plus” are double: primarily, the margin calculation base has to be established. Does this calculation base only include operational expenses, or the total expense, including or excluding financial expenses and/or exceptional charges? Furthermore, what margin rate can be applied on expenses logged in accountancy? Often, there is a 10% rate applied on the entire charge recorded by the subsidiary or branch.

The French entity can also set the rate according to the gross sale margin that it would record if it had acquired and resold the product.

It can also base the percentage on the commission rate it applied or would have applied to distributors. The creation of a subsidiary often follows the end of contractual relations with a local distributor. In the absence of such a situation, it is possible to base it on market condition commissioning practices.

Resorting to the first of the two above-mentioned methods could have the advantage of reducing the taxable profit in France during the start up phase, considering that the establishment of a distribution business in a country is rarely profitable the first years (as a reminder, the French corporate tax rate is 25%). Conversely, at cruising speed, i.e. when the business is profitable, applying a 10% rate to expenses can be more interesting. Indeed, taking into account a margin rate as if the subsidiary was selling products to the parent company, or if the subsidiary was collecting a sales commission on the group can result in the application of a rate superior to 10%.

The choice between the first method, which constitute a less risky economic model (the entity will still declare its profit in France), and the two others, more risky, will depend on anticipated taxable profit in France.

Of course, as explained above, it is appropriate to describe the chosen methodology and to document it. And if the company wishes to go from a flat rate to an effective rate (and vice versa), it has to justify this change and support it by a convincing documentation.

(1) (in  principle they are identified to French tax authorities, the exception being the branch with no tax identifcation

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