Under the impetus of Gilles Carrez, reporter of the Finance Commission, the Parliament also adopted a modification of the basis on which 5 per cent transfer tax is assessed upon the disposal of shares and fractional interests in companies which are principally invested in French real estate.
At the current time, the 5 per cent rate applies to the value of the shares sold (ie, after deduction of all liabilities of the company, including those liabilities which have not been incurred for the acquisition of real estate assets).
The modification as voted, which has escaped much notice, will increase significantly the basis on which transfer tax will be assessed, as it will be based on the fair market value of the real estate assets and other real estate holdings, held either directly or held through other companies principally invested in French real estate, after deduction only of those liabilities relating to the acquisition of such real estate assets and holdings, as well as the fair market value of the other gross assets (prorated to the shareholding sold).
This measure was initially aimed at combating tax evasion schemes under which debt levels were fortuitously increased (for example by shareholder loans) just prior to the disposal of the company in order to reduce the basis for transfer tax. It is regrettable that this goal was lost sight of when the actual text of the provision was prepared, since all debt subscribed by the companies the shares of which are sold will be excluded provided that it has not been incurred for the acquisition of real estate assets, no distinction being made on the basis on the nature either of the creditor or the debt. Although the question was not raised during the parliamentary debates, there is some doubt regarding the treatment to be given to debt corresponding to the refinancing of original acquisition debt.
Only the shares of the sociétés civiles à prépondérance immobilière (SCPI) were excluded from the provisions at the last minute.
This measure will be applicable to all disposals occurring as from the day following the promulgation of the finance bill (which occurred on 3 January 2012).
It is likely that application of the provisions will trigger a number of practical difficulties with the relevant tax registration offices.
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