Ski chalets in France are often fractionally owned by French families, this is nothing new. There is a simple structure that they use that is legally correct in France - why try to reinvent the wheel?

An SCI ( a special type of french limited liability company that owns property) with contracts for each shareholder specifying how their occupation periods are fixed. Furnishings owned in common by the individual owners and not by the SCI.

Set up this way, the SCI is ‘transparent’ meaning that it is not treated as a commercial or trading entity by the French tax authorities. Each owner can sublet periods of his own time allocation and be responsible for any tax implications without prejudicing the transparent nature of the SCI and hence the rights, tax liabilities etc of the other owners.

Simple as that.

A fractional owner can then, happily swap , sublet or use his periods of occupation , giving all the advantages of timeshare with none of the faults.

The French rail system is good, clean cheap and reliable - except when they are on strike, but they are always polite.

I am Paris to develop some new Fractional Ownership and Rentals opportunities - for nearly two years I have been researching the legal and finanacial implications of shared property ownership in France - the complexities of Ineheritance, wealth and property taxes combined with the tax authorities understanding of the tax application to a business as opposed to a private not commercial individual are racky waters and I believe many people may be sailing too close to a lee shore. But carefully structured, Fractional Ownerhsip is a brilliant way to own a pied a terre in Paris.

I know that owning shares in a propery and sharing the use of it with a few other like minded people is a brilliant way of using and even investing in real estate - but - it is a luxury purchase, it should not be considered an investment to give you income, you have maintainence costs and service charges and in France it is very unwise to have other paid rentals in the property. It is more like collecting fine wines or luxury classic cars, you get a great deal of pleasure and possibly very good capital appreciation, but you will not earn from them unless you sell them.

I have a very nice apartment to offer in Fractional Ownership - I will try to get details online later today - but contact me quickly if you are looking, this one is going to sell out fast

Discover France, Fractional Ownership, French life, living in france, Paris, Personal, Real Estate, Rentals

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Most SCIs are set up and owned by people who know each other , very often family groups - the advantages are important when applied to inheritance tax, wealth taxes and other matters affecting something which is very dear to the heart of every French person - their “patrimoine”, their cultural inheritance and nothing is closer to their hearts than land and property.

Here is an exchange of mail I had today which focuses on an important point in owning a property in a SCI.

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Dear Tony,

I’ve been following your website for some time and have just subscribed to your newsletter. I have the utmost respect for the care and thought you’ve put into the prospects for fractional share ownership of properties in France. You have no reason to respond to my question because I am not now looking for a fractional share property — but here goes.

I am perplexed. My husband and I own 50% of a property through an SCI. The other shareholders are another couple whom we’ve known for years. On our French accountant’s advice and to avoid the possibility of the SCI’s engaging in the rental of a furnished property, we have commodats formally filed which permits the right to possession of the property in one-year segments, changing mid-way through each year. My year starts in the annees impaires and the other woman’s right to possession starts in the annees impaires. We rent the property. The rental revenues and expenses of the property (other than mortgage) are paid by us as individuals, not the SCI.

We are relatively comfortable with this situation because the SCI is clearly not renting the furnished property — in fact,the SCI does not even own the furniture and never has.

However, recently our partners (co-shareholders) informed us that they would like to sell their share of the property and my husband and I are evaluating what to do. Previously, you seemed to be very wary of renting the property owned by an SCI in any way. Now, your new website does not seem to express such caution. I have been following your dialogue with Andy Sirkin and also don’t expect you to give me legal advice (I’m a lawyer myself anyway), but I would appreciate knowing your current thinking and also would appreciate your pointing me in the right direction.

My husband and I are specifically concerned that perhaps allowing our partners to put their shares in the property on the open market would preclude continuing to rent the property — which has been very important to keeping our expenses down and making our ownership of the property a non-frivolous venture. We are afraid that offering it for sale would make it appear more like a commercial venture rather than two couples who are friends sharing the property together despite the commodats (which are like common-law bailments in a legal sense)we have filed. We would undoubtedly file a new commodat substituting the new owner and sell the share of the personal property separately from the sale of the real property.

I’d really appreciate your current thinking on the matter and will promise not to rely on it if you would be so kind as to just give me your opinion and/or any direction to other expertise that you can suggest.

Thank you in advance for your response.

Lynda

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Hello Lynda,

Thank you for your mail and for your understanding that I am trying to make a little clearer some of the things which concern the owning and renting of property in France. I always recommend that people get proper legal and/or financial advice from insured professionals capable of answering these points.

Much of the misunderstanding and legal/taxation problems I see are mainly due to cultural and comprehension differences between the French and what they call the “anglo saxon” mentality. The way anything like this has to be done is the way that it is done in France.

My current understanding is that a SCI, if it is seen as a trading entity, will attract a lot of tax liabilities - my thoughts and understanding of this have not changed for several years.

The way you are using the SCI, for your own purposes, seems reasonable and it does not appear that the SCI is in fact “trading” - as long as the SCI is simply the way you share the ownership and as long as you openly declare to the French authorities and French revenue that this is what you do and who the owners are and as long as the income you derive personally is declared and taxes paid (this can be in your own country as long as there is a taxation agreement in place) then I believe this is OK.

My conversations with Andy Sirkin are focused on the implications of Fractional Ownership where the SCI is usually owned by another trading entity (a LLC or Homeowners Association in America or a Limited company in the UK for example) - this structure will make it more susceptible for the French authorities to consider the activity of the SCI as a commercial enterprise and they may see the overseas company as a device to avoid tax on share transfers, Inheritance tax and income taxes - if this is considered a “device” in this way then all hell could be let loose and big penalties incurred by the owners of the shares in the property.

Assuming that you do not wish to buy the other shares yourself (normally you have the right of first refusal), I do not see that the other half of the shares of the SCI being sold to other people will change the situation. Your partners will have to pay a transfer tax and Capital Gains Tax on the sale of the shares. You will still declare the ownership of the SCI to the authorities and maintain that it is a transparent, non trading company so there should be no problem.

The best person to get an opinion from is likely to be Andy Sirkin who is immersed in this specific question and has a wealth of experience in these matters (he is also a very nice and straightforward gentleman).

Hope this helps - do let me know how you get on as this may help others.

Best wishes

Tony

Business in France, Fractional Ownership, french inheritance tax, French life, french patrimoine, fruk, Investment, living in france, Personal, Property rentals, societe civile immobiliere

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During the next week I plan to re-launch our specialist site http://HarmonyOwnership.com and to publish more papers and information on Fractional Ownership in France.

At present there seem to be two market “presences” - it is like the old days of VHS and Betamax - or today HD/DVD and blu-ray - in Fractional Ownership it seems to be “luxury” and “commercial”. I believe that, in France, the Fractional Ownership of a property is a luxury decision and that to involve anything to do with rental incomes or large property premiums will cause long term problems for buyers.

Buying a share in real-estate in Fractional Ownership is not an investment for income- it is a lifestyle decision - but also it should be a viable return on the use of your money. A quarter share of a villa or apartment with a market value of one million euro will have a higher value for Fractional ownership - the quality of finish will be higher and there will be a high standard of furnishings and fittings - the property will be ready for occupation and fully equipped - but this premium is usually in the region of 15 to 20 percent of the property value - higher and it can have other implications.

This is one of the aspects we are considering for the way we are putting together our community sites and a very god reason why you should keep reading this blog.

Business in France, Fractional Ownership, fruk, Personal, Real Estate

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With predictions of falling property prices in the UK and USA, looming recession and a credit crunch (whatever that is) - investing in property in France looks to me to be an even better place to invest and live.

I am sure the problems which other countries are having will have some effect, but I believe that France will be one of the best places to buy property for a while. Why do I say that?

Buying a property in France has up-front legal costs and taxes so a quick speculation is not so attractive, there has to be a 10 to 15 percent margin just to cover these costs. This has helped to keep prices” realistic” for many years and deterred “grab abd run” speculation.

Capital gains taxes are fixed for the first five years, so again a quick profit is reduced.

Borrowing money for investment is usually a maximum of 70 percent of the price and, importantly, this is not advanced against the property value, but secured against proven income, so risky speculation and loans are not possible. “Sub Prime” is not visible in France.

Unlike most “developed” countries, the population of France is growing and demand for property is constantly increasing, this is not an increase due to immigration, but completely home grown.

There are family and lifestyle values in France that have been lost or eroded elsewhere, this basically means if you are a “politically correct”, vegan, anti-hunt, non-smoking social worker dealing with health and safety in the home counties, you may not feel comfortable in France. But for most of us it is a good place to live with family values and a polite social warmth.

Great weather and lots of sunshine.

Great wine and food.

Advising a specific location, region or town depends so much on personal preferences that I need to meet and talk to somone looking wanting this sort of advice, but two areas are head and shoulders above the rest - Paris and Languedoc.

The Paris of interest is in a relatively small area confined inside the inner peripherique road - restrict this further to about half of the 20 arrondissments in this area and this is a finite resource in a similar way to Manhatten and central London. Prices are still low for the fantastic services and features this magical town offers so it is a good place to buy.

Languedoc is many ways is the opposite - one of the largest and lowest populated regions of France, yet is has the best climate and conditions and a good lifestyle - the first humans in Europe lived in this area and it is obvious why.

On the main route from Spain to Italy, just about every invading army for the last four thousand years has pillaged (an stayed) in this region - some of the first cultivated vines and the first teaching hospital and university in Europe were in Languedoc - Languedoc is the region of the advanced culture of the “courts of love” and troubadours of the 13th century.

More recently Languedoc has had a massive investment for transport and communications, road rail and air links are the best in France and Languedoc Roussillon is designated for a strong population growth, even doubled this will still be a low population region of space and beauty. Combine this with the longest Mediterranean coastline and under developed tourism and you get a formula for growth and success.

I will soon be relaunching another website dealing with property opportunities in Languedoc and Paris.

One interesting town in Languedoc to look out for is Cerbere, I got this mail today…

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Hi Tony,

I am thinking of buying a flat at Cerbere, do you know that area, near the Spanish border?
I hope it is a good investment but not sure…

Enjoy your newsletters..

regards
Steve

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Hi Steve

Yes I know Cerbere well, it is very busy in summer, if you are buying to let then rentals in the summer are in big demand if the property is nice - prices are higher than most of the area and return on investment is usually about 3 to 4 percent before tax - take the returns and letting figures given by agents with a pinch of salt.

Let me know more detail if you wish, we have property for sale in that area.

Tony

Building in France, Business in France, Discover France, Fractional Ownership, fruk, Investment, Languedoc, living in france, New Ideas, Paris, Personal, Real Estate

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I have been worried about the tax implications and have had many discussions with specialists.

One of these is an American lawyer I have gained considerable respect for, Andrew Sirkin, he has just sent me a paper he has written about this and I consider this to be open, well researched and as up-to-date as anything that exists. He has given me permission to share this and you can see it online at…

Fractional Ownership in France

I strongly recommend that anyone interested in Fractional Ownership in France reads this thoroughly and carefully.

If the link from that page takes too long to load - it is a big pdf file - I have put the same article online at Fractional Ownership in France, Taxation Implications it is still a big page of text but should load more easily.

Building in France, Business in France, Fractional Ownership, fractional ownership, fractions, French life, French Property, Investment, living in france, Personal, property investment, Real Estate, tax implications

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I have removed a lot of the offers from that site as the more I looked into this subject, the less “comfortable” I was feeling about the way it is being presented.

All the people I found who are selling shares seem honest, trustworthy, sincere and enthusiastic - but - I believe most will face serious financial and legal problems with their shareholders when the implications of the French tax liabilities come home to roost.

There is a recent post in my which blog touches on a couple of the points I am worried about, a writer recommends an International lawyer who I respect, but although his firm claims experience with six thousand Fractional Ownership contracts, at present they have only completed two in France.

I know of properties for sale in France which, due to bad advice, instead of reducing their capital gains each year, actually have an increasing annual capital gain liability because they bought their property in an offshore company share structure.

Don’t get me wrong, I believe Fractional Ownership is a very good way of having efficient and viable use of a property, but I consider it a luxury purchase, not an investment and I think it should be done simply and totally within a French structure with no complications of overseas ownership or associations.

Fractional Ownership, French life, Investment, living in france, Personal, Real Estate

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However, I decided not to jump in the deep end until I had thoroughly researched many of the tax and legal implications fractional ownership has in France. I believe the ways that many offers are being made and the way shares and ownership is structured through American or British companies is going to cause serious problems for the shareholders in a few years time due to the French tax rules.

One person I am following closely and who I believe is offering a very fair and well structured fractional ownership of Paris apartments is an American in Paris, Steve Navaro - you can see his offers through his website at parishomeshares

I plan to be in Paris in the next couple of weeks for a few days, one reason for my visit is to meet Steve and I will report about him and his property offers in this blog

Fractional Ownership, French Property, Paris, Personal, Property in France, Real Estate, shared ownership

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With twenty years experience of being a stranger in this strange land, I am acutely aware of the strength and efficiency of the vast French beaurocratic machine - I have tasted the sting of the tax-mans lash and seen at first hand how this awesome (but fair) system works.

If you buy a property in France, you can rent it out simply and openly, there are no restrictions and it is straightforward. You must make a tax return on the income in France - there are fair allowances and it is profitable - there are tax agreements with most countries so you are not likely to pay tax twice.

However, (there is always a “but” in this sort of thing) if you buy a property in Fractional Ownership, this will be in the structure of a company, if the company is seen by the French tax authorities to be trading (that is to be making charges for a profit) then you will be liable for a tax of 3 percent of the value of the property per annum. This is in addition to any other taxes which will be liable.

The more complex the ownership of the Fractionally Owned property is, then the more the tax authorities in France will consider this as a “device” and persue the taxes due.

Our advice in all these situations is to keep the structure simple - use only a French registered company for the property shares, do not use the device of an overseas LLC, Ltd or Homeowners Associations - if you do it could be seen as a trading company.

But most importantly, make sure that the company rules do not permit any renting out of the property. If anyone rents the property to a third party then this will beconsidered by the French tax assessors as commercial use of the property and the annual taxation on the value of the property will apply.

You, your family and your personal friends can use your home of course, but avoid any Fractionally owned property where any income is shown or it is advertised for rental.

Do not risk taking the advice of anyone who tells you this is not the case - it is very simple, if a company rents out any property then this is considered a commercial activity and therefore tax is liable. The taxman can wait years and then claim all the back taxes and interest and you have lost all your money and your home in France.

Fractional Ownership, French Property, french company, french rentals, french tax authorities, fruk, homeowners associations, Investment, life in france, living in france, Personal, Property rentals, property shares, Real Estate, Rentals

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