Lawyer Monthly - February 2023

inheritance purposes are extremely numerous and depend on many factors. These include the type of real estate investment, ownership structure, destination, ownership and capital gains involved. How can the introduction of an international element complicate such situations? Beyond the potential for double taxation in case of a cross-border investment, France has implemented an extremely detailed patchwork of procedures when it comes to international investors. As a few examples, any entity (French or foreign) has to be registered in France. In addition, any investment via a special purpose vehicle triggers a 3% tax declaration by 15 May to disclose the channel of investors up to the UBO. In case of a second omission, delay or mistake, the French tax authorities reassess the taxpayer (with a joint liability of intermediary entities) at 3% of the fair market value of the property and generally apply a 40% penalty. When French real estate assets or rights have been financed abroad, the deductibility of the financing is often challenged if the financing has not complied with French rules. In case of a French property owned by a trust, yearly reporting is also required. Many other specifications apply which require significant administrative and accounting costs to be anticipated upon acquisition. We highly recommend that foreign investors ask their French tax advisors to determine the exact tax and indirect costs upon acquisition, ownership, resale and inheritance upon the acquisition. It is ideal to insert a substitution clause upon the promise of sale to take the time to define the relevant type of acquisition (direct or indirect) before the final deed. Indeed, modifying the structure after acquisition incurs a significant transfer tax in France. What are the main tax issues encountered during property-related transactions in France and across borders? Due to the French tax declarative system, the burden is put on the investor’s shoulders. Contrary to many overseas authorities, the French tax authorities tend to consider any HNWI or foreign company as potentially fraudulent. The French procedural rules for prosecution of tax fraud have been significantly amended since October 2018 in order to increase the number of tax fraud prosecutions against both individuals and legal entities. Our practice focuses on assisting cross-border investments. Since October 2018, the French tax authorities automatically refer cases to prosecutors where: - the tax reassessment exceeds €100,000, and; - the French tax authorities apply a 100%, 80% or 40% penalty. This new procedural rule mechanically increases the number of files which arrive at the prosecutor’s level. Today, the 40% penalty applies almost automatically when there is an omission in any tax filing. This period is particularly complex as clients have to deal with a lack of responsiveness from the authorities and the tight timeline of the transaction. Today, it takes approximately one year for a deed to be fully registered by the land registry. In what ways can procedural tax issues be prepared for before they become problematic? The ideal time of action is definitively before the closing of the transaction. This is where one is able to determine a strict costs and modalities plan with the support of a coordinated team of lawyers, surveyors and experts in valuation who are aware of the French tax landscape for international clients. In addition to their technical expertise, the capacity of the advisors to connect with involved parties is key to easing the full process. In this new environment, it is critical to anticipate the criminal risk as soon as possible in order to limit the risk that the tax audit leads to a criminal enquiry for tax fraud against the HNWI, the legal entity or its directors. The most difficult 20 LAWYERMONTHLY FEBRUARY 2023 In this new environment, it is critical to anticipate the criminal risk as soon as possible in order to limit the risk that the tax audit leads to a criminal enquiry for tax fraud.

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