French property to benefit from safe home in Switzerland
Financial Times 25.8.06 by Rupert Wright
For the original article click this link:
http://search.ft.com/iai?referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Dfrench%2Bproperty%26aje%3Dtrue%26dse%3D%26dsz%3D&queryText=french+property&location=http%3A%2F%2Fsearch.ft.com%2FftArticle%3FqueryText%3Dfrench%2Bproperty%26aje%3Dtrue%26id%3D060825007574%26ct%3D0&aje=true&ct=0&id=060825007574
Sunshine, long lunches and rosé by the pool - all excellent reasons for buying a property in France. But the stumbling block for many has been the complicated tax and ownership issues.
There is a widespread dread of falling foul of the French tax authorities. This is understandable when you consider that they insist that you declare all rental income, that they can hit you with a capital gains tax of 15 per cent on property sales and, if they think you live in France, impose an annual wealth tax of 0.55 per cent on any worldwide assets over €750,000 (£508,000). Given all this, it is perhaps surprising that so many foreigners do buy second homes in France.
Yet one developer believes it has come up with a way to minimise these thorny tax and ownership issues. Its scheme is being closely watched by other property agents as a possible new way for foreigners to purchase on the Riviera and elsewhere in France.
The Amann Group, a Swiss-based company, has spent 25 years developing projects in the south of France. Its latest project, called Le Roc, is a five-star, €180m golf and spa resort between St Tropez and Cannes, set in 100 hectares of wild Provençal landscape. The developer is promising all sorts of facilities ranging from a hotel to horse riding and tennis courts.
But one of the biggest incentives for would-be buyers is the way you pay for your purchase. You can buy the property via an offshore company. The properties are held in a trust in Switzerland, not France, allowing you to
enjoy the sunshine without the bureaucracy.
The structure, based in Switzerland, is known as a Kommandit Gesellschaft or a limited partnership company. In France, the Kommandit Gesellschaft is treated like a company from a tax point of view. So purchase cost, initial losses through write-offs and depreciation against earnings can all be offset against rental income.
For some buyers, the Kommandit Gesellschaft represents an interesting alternative to the traditional ways that foreign buyers have tended to buy foreign property in France. Unlike the practice in other Mediterranean countries, it is difficult to purchase a property in France via a traditional offshore trust and it carries a punitive 3 per cent annual tax of the value of the property. The only options are either to buy as individuals - although this can mean getting involved in Napoleonic inheritance law where you cannot disinherit your children - or buying via a French-based company.
Setting up an SCI, a private French company, to buy in France can be a way to leave the asset to Battersea Dogs' Home rather than your errant son. However, there are other implications. British tax authorities say that if you have shares in a company that owns a property and you stay in that property, this is a benefit in kind. This benefit must be taxed.
The Le Roc scheme gets around the punitive 3 per cent annual tax typically levied on offshore trusts. But it does not take capital gains tax out of the equation, so it is probably not suitable for people who plan to live there full-time, as eventually there would be no capital gains owing. There are also question marks about the security of the investment. In effect it is a limited partnership, rather like a timeshare. Nothing wrong with that, as long as you feel satisfied that the Amann Group will look after your investment.
Le Roc insists its properties will be properly maintained. "We have to, " says Achim Amann, developer of Le Roc. "We are based in Switzerland. If we do anything wrong, we will go to jail. "
A two-bedroom fully-furnished apartment at Le Roc will cost €525,000 (£360,000). You can buy it outright or you can pay €250,000 now and the balance in five years' time. Purchasers have the choice of living there full-time or renting it out. If you do rent it out, the management company will take care of rentals and buyers are allowed to use the property for 39 days a year. All building work is scheduled to be completed by 2008.
In 2011 investors have the choice of either paying any balance and owning the apartment outright, or selling it back to Amann for the initial stake, minus any rental income that they have made.
So what's the catch? According to Amann, there isn't one. "We have used this structure successfully on a number of projects, " he says. "The French authorities seem happy with it. Obviously there are tax implications, but they are in Switzerland, not France. As there is a double tax treaty for many European buyers, including those from the UK with Switzerland, there is no further taxation in Switzerland except for the individual and that is avoided for rental income by redistributing partner capital instead of dividends. "
However, one solicitor, who does not want to be named, is more pessimistic about the structure. "It simply doesn't make any sense, " he says. "You will still be liable for [tax on] the rental income in France, you will still be liable for the wealth tax in France because of indirect ownership. You might get away with inheritance tax, but you won't manage to escape the capital gains tax. As an individual, if you hold a property in France for long enough, the capital gains disappears. For a company structure, it doesn't. "
"The sensible thing is to take advice, " says David Franks, partner of Blevins Franks. "But even if you do, it can be hard to know that you are getting the right advice. "
Most likely the Le Roc scheme will suit those who fancy a property investment in the south of France without the hassle of dealing with tenants, cleaning swimming pools and mowing lawns. And if it doesn't work out exactly as they planned, there is an easy exit strategy.
Site Index links: