FRANCE: An Introduction to Tax: Real Estate
The French professional real estate market is a significant contributor to the country's economy, comprising a range of property types, including office buildings, retail space, industrial facilities and hotels. In recent years, the market has experienced strong growth, driven by demand from both domestic and international investors. However, the market is subject to a range of economic, legal and political trends that are shaping its development and performance.
Clearly, after the very destabilizing period of COVID-19 on the property uses, the real estate investment sector is going to be greatly disrupted by the increase in interest rates and the period of high inflation not seen to this extent for several decades.
This situation demands even greater responsiveness and flexibility from tax advisors in managing and disposing of assets.
The French professional real estate market is heavily influenced by economic conditions, both in France and globally. One of the key economic conditions affecting clients is the growing demand for sustainable and energy-efficient properties. This trend is driven by new regulations that require buildings to meet strict energy efficiency standards, as well as a growing awareness of environmental issues among businesses and consumers. Clients looking to invest in commercial properties are increasingly seeking out sustainable and energy-efficient buildings to meet these requirements.
This trend will be strongly reinforced with the constraint of the explosion of energy costs. This impact will influence sales transactions resulting in significant discounts if assets do not meet these constraints. It could also lead to the arbitration of obsolete assets that cannot be renovated by their current owners.
The other significant impact will be the impact of rising interest rates on property prices. For buyers, this could also mean greater difficulties in financing with lower LTV levels than in previous years. Another economic condition affecting clients is the shift towards flexible office arrangements, such as coworking spaces and serviced offices. This trend is driven by the rise of startups and small businesses in France, which require flexible office space that can be adapted to their changing needs. As a result, clients looking to invest in commercial properties are increasingly seeking out buildings that offer flexible office arrangements to meet the demands of these businesses.
The COVID-19 pandemic has also had a significant impact on the French professional real estate market, with changes in the way that businesses use property. Remote working has become a habit for a large majority of employees. Offices are adapting to the new ways of working with more collaborative spaces for formal exchanges (meeting rooms) but also informal ones, to give free rein to creation and imagination. People no longer come to the office to be present, but to work in a different way in comparison to how they work from home. Clients looking to invest in commercial properties are increasingly seeking out properties that meet these new requirements.
The French professional real estate market has experienced strong growth in recent years, driven by demand from both domestic and international investors. One of the key trends in the market is the growth of alternative forms of commercial real estate investment, such as crowdfunding and real estate investment trusts (REITs) or funds (such as OPCI). These alternative investment vehicles offer smaller investors the opportunity to participate in the commercial real estate market and are becoming more popular as investors look for new ways to diversify their portfolios.
Another trend in the market is the increasing focus on sustainable and energy-efficient properties. This trend is driven by new regulations that require buildings to meet strict energy efficiency standards, as well as a growing awareness of environmental issues among businesses and consumers. As a result, there has been a growing demand for sustainable and energy-efficient properties in the market.
The COVID-19 pandemic has also led to changes in the way that businesses use property, with more people working remotely and an increased focus on outdoor spaces. This has led to a growing demand for properties that offer larger outdoor spaces or located in more rural areas outside of major cities.
In this situation of profound changes in the real estate market, players need to find the right strategies, including in relation to tax, to limit their negative impacts and possibly seize the opportunities that may arise.
For example, favorable tax regimes (VAT, transfer tax) must be assessed at the time of the transfer of assets. The decision on whether of not to proceed with substantial renovation work may provide an incentive by the crease of transfer tax when the asset sold. To a certain extent, this may also affect all the constructions taxes than an operator may face.
The choice of holding structures, taxable entities, exempt investment funds are also factors that impact on the investment business plan. This is particularly true for foreign investors, whose structure must be able to contain taxation during the holding phase, but also in case of divestment without creating tax risks. From this point of view, tax administrations are increasingly scrupulous about the conditions for repatriating cash from holding structures to foreign investments. The notion of economic beneficiary is increasingly used by audit brigades to challenge the use of tax treaties that combat double taxation.
The advisors to these transactions must be able to integrate all these issues while providing maximum added value to their clients. From this point of view, only a strong expertise in these matters constitutes an adequate response to investors' expectations, supported by teams whose depth allows them to provide a 360-degree view. It will then be a matter of turning all these constraints into opportunities.
Proximity to the investment teams and a good understanding of the financial translation of tax impacts is essential. Similarly, a good understanding of the set-up of investment vehicles and their adaptation to the investment strategy developed by the client is required to reach excellence.