Fractional Ownership in France Problems

7 Comments »

1. Comment by Andy Sirkin

   Although I agree that there are possible tax disadvantages to ownership of Frech fractionals through a U.S. nonprofit or other entity, these potential disadvantages need to be carefully weighed against the disadvantages of a totally French structure, specifically: (i) the cost, time-consumption and difficulty of enforcing the co-ownership agreement including collecting dues and assessments; (ii) the cost and difficulty of selling, gifting, or succession following death; and (iii) the inability of a totally French structure to enable fractional financing from U.S. fractional lenders. The tax downsides a debatable, and even if the worst turns out to be true, the actual fiscal impact on the owner in light of tax treaties need to be looked at closely before a decision is made. I agree this is a luxury purchase, and this is exactly why any tax downside needs to be weighed against the avoidance of expensive and annoying co-ownership hassles. After all, the tax issue is about money, but the difficulty of enforcement, transfer, and inability to acquire due to lack of financing are about quality of life.

2. Comment by Tony

   Andy,
   Thank you for opening this exchange of emails we have had - having been through the mill of the tax system in France for nearly 20 years and having seen friends devastated by the tax inspectors in France because they set up operations similar to the ones you recommend, I would never suggest that anyone ever tried to avoid the inheritance or capital transfer taxes implied in a Fractional Ownership property in France.

   I do undertand the “comfort factor” for an American owner having access to a company or shares in an American homeowners association - I can see that a rougue shareholder could have their American assets seized if they did not pay their dues, however, for a non American resident or citizen I see this as a confusion and a reason not to get involved with the French property.

   The fact is the property is French, is in France and subject to all French laws and taxes - any obfustication will be seen as a “device” by the French authorities and put the property under the microscope - this will lead to a demand for taxes which after some time can exceed the value of the property.

   This is a luxury purchase, finance should not be an issue - if a buyer needs a loan, they shouldn’t buy.

   I strongly disagree that the tax issue is just “about money” if one of the owners breakes the deal, rents out their time or acts in a commercial way - all owners (shareholders) are penalised and risk losing their total investment.

   By keeping it simple and in France in a French company with strict rules this can be avoided.

   The risk of one shareholder damaging the property or not paying their share of the costs is always there. It is possible to get insurance and a bond to protect this.

   In ten years of renting properties in France with many tens of thousands of rentals, the incidence of “bad” tenants I have experienced is insignificant (two actually) although I have seen plenty of bad owners.

3. Comment by Andy Sirkin

   Tony,

   First, just to clarify, the structure that I reccomend is not intended to avoid or diminish any type of taxes oridinarily payable in France: transfer, capital gains or inheritance. As far as I know and tell clients, the taxes will be the same whether you do direct ownership or not.

   Second, I disagree that direct ownership of a French company for a non-French person “keeps it simple”. To the contrary, according to all of the French, British, and American experts I have consulted (and there have been very many at this point), that type of arrangement is anything but “simple”. In fact, the problems with doing fractional through a French company are well-known in France, and are the reason fractionals have not caught on there. As far as I can see, the French-structure fractional projects have terrible reputations among both the French and the non-French. All of the recent projects I know of have used some variation of the hybrid French/non-French structure. I am wondering if you know of some actual fractional project that has been done recently that has the “simple” structure you suggest? I would be interested to know the details of how it works and, more important, whether it works.

   Third, although I have also heard many horror stories about French tax authorities and offshore companies (probably a lot of the same ones you have heard), my experience is that when you hear the details it turns out these have absolutely nothing in common with the structure we are discussing. In fact, these horror stories turn out to be about offshore companies that actually were intended to avoid taxes, where people actually didn’t pay the French taxes they owed, and where people actually were running businesses such as renting out their apartments “under the table”. The problem wasn’t the offshore company, it was that fact that the owner was cheating and lying and playing games. If everything is done above board, and all taxes are paid just as if the offshore company did not exist, I think an examination by French authorities would go just fine. You would simply show you paid the taxes.

   Next, I disagree that using a U.S. nonprofit only makes sense for U.S. owners. This is an area were are currently researching, but our preliminary work indicates the benefits–non-judicial enforecement and ease of transfer/inheritance– are there for any non-French. Soeone who is interested in a fractional in France (or for that matter anywhere outside their home country) should investigate whether there is a disadvantage for them based on the legal structure or the fractional they are considering, and should never except a blanket, non-detailed conclusion like “unless yyou’re from the U.S., a U.S. system is bad”. The vast majority of fractional use a U.S. structure–that is not by accident and it is not because all the buyers are U.S.

   You mention the problem you preceive if someone “breaks the deal and rents out their time”. Assuming this is prohibited in the deal, it would be just as much of a problem (likely, more of a problem) for the group if the owners owned the French company directly.

   Finally, as to your comment “if a buyer needs a loan, they shouldn’t buy”, that is a value judgment. Perhaps you are right, but I thiink whether or not someone borrows should be their decision. Many people, regardless of their means, would prefer to pay over time rather than all at once, luxury product or not.

4. Comment by Tony

   Andy,
   Many thanks for sharing this through my blog.

   As much as anyone I would like Fractional Ownership to work in France and I started looking at this seriously two years ago when I saw it as a way to share the benefits of a French lifstyle with more people and as the basis of a good enjoyable business.

   However, I am sure you are correct that it is because of the complexity, possible delays and costs which can be involved in French legal matters that Fractional Ownership has not become established in France. It may well be that we are seeking the impossible, France is not sympathetic to many types of marketing whch are commonplae and work well in other parts of the world - Time Share and Multi Level Marketing are two examples which spring to mind. It appears that Fractional Ownership may also be a non-starter due to the restrictions and potential problems which you outline.

   My concern is the extra level of “complication” in having another corporate level offshore to own the property in France. This does cause a problem for Capital Gains amd I know of people unable to sell their properties as the tax burden for their foreign company is so high.

   France is good at retrospective legislation - witness the recent blight for early retirees from EEC countries who have lost their share of health cover, retrospectively. My understanding is that by having the property in France held by a foreign company it is likely to be considered a commercial undertaking, with the tax liabilities involved.

   I absolutely agree with you that in the event of a “problem” French legislation is very slow. I do not see how having a “settlement” in another country can avoid this if the rougue (unhappy)shareholder chooses to lodge a complaint in France.

   Fractional Ownership seems to me by definition a “luxury” purchase and not an investment - Yes is it a personal choice is someone wishes to fund their purchase through loans and that having offshore shares will facilitate this , but this is not relevant to the problems I forsee relating to commercial charges and taxes.

   It may well be that, like many other business opportunities, it just ain’t going to work in France.

5. Comment by Andy Sirkin

   Tony,

   I appreciate this opportunity to share thoughts on this insight. I plan to keep working on this until we can get it right, and I am optimistic this will be possible. I am working on getting some sort of official letter from the French authorities describing the best approach from a French tax perspective, and I will share it with your readers as soon as I have it. My entire 23 year carreer as a lawyer has been devoted to fractional and shared ownership, and virtually everything I have ever done has initiallly been viewed by other lawyers and the real estate industry as “impossible”. My experience is that if I keep at something, the “impossible” eventually becomes “standard practice”. As they say “impossible n’est pas français”.

6. Comment by katrina riley

   Gentlemen
   I’m very interested in your discussion on fractional ownership as it is something we are looking into given the plateau in the current market. Could you clariy why, if one party wished to rent their weeks out everyone would be penalised? From what I understand their shares allow them to be freehold owners of the said house/estate at that said time so what they do with it and whether they declare or not is nothing to do with the other shareholders or is the house basically still regarded as one entity by the French tax authorities? How would it work if the shareholders *employed* a rental company to let these weeks out or could it work like an SCI familial where the SCI doesn’t actually make money itself but is allowed to sublet (with or without a fee) to someone who wants to run it as a gite.

7. Comment by Tony

   Hello Katrina,

   I believe the point is that the shareholders of a SCI own shares of the company, the freehold is owned not by the individuals, but by that company, therefore any rentals of the property would be assessed as being by the company or at least with the approval of the company and the SCI in this case would be trading commercially and attract taxation.

   If an individual shareholder were to rent out the time they were expected to be using the property, then this would be in breach of the agreement with the other shareholders as it must be stipulated in the shareholders and management agreements that no rentals are allowed to satisfy the requirements of a non-trading and transparent SCI. That shareholder is also obliged to declare the income for taxation and this would attract attention to the apparent trading activity of the SCI.

   If you are interested in sharing any investment for a commercial activity such as a gite, apartment or villa rental then I do not think a SCI is the best way to do this. A SARL or other commercial business structure would be applicable and the taxes and costs involved would be clearer.

   There are special considerations for family businesses in France, families owning a farm or restaurant for example, but his applies to French residents in specific circumstances.

   My opinion is that properties in France being sold as Fractional Ownership are a luxury product and not suitable for rentals or commercial operations as this will attract the attention of the authorities and assessment for taxation could be heavy.

   I am very keen to find ways that I can recommend to my clients, investors and friends ways to invest in and enjoy ownership of property in France, but I would be irresponsible and negligent if I did not explore and express my concerns - I have personal experience of the misery the “steamroller” action of the French tax system can cause by their ” assumed guilt - pay first - then prove your innocence” techniques of taxation.

   I am happy to develop this dialog or help in any way - my bottom line is that I want to sell and rent property.

   Tony

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