In a decision of 4 November 2020, the French Supreme Court (Cour de Cassation, no. 18-11.771, Lupa SA) reasserts that foreign companies holding a French property which fail to submit an annual 3% tax return must pay this tax for the relevant year, except if they regularize their position, but only if it is their first failure to submit such declaration. It does not matter that such regularization is made spontaneously or upon request from the tax administration.
When properly advised, foreign property owners holding their asset through one or several companies (such as a Monaco SCI) or other legal entities (trust, foundation) know that each interposed entity must report by 15 May of each year to the French tax authorities the present value of the property (on a mark-to-market basis) and the identity of the shareholders or beneficial owners as at 1 January of the year in consideration. Failure to file the return providing this information in due course results in the defaulting entity being liable to pay to the French Treasury a specific tax of 3% assessed on the value of the property. The 3% tax normally applies regardless of the fact that the French tax authority may have been provided with the required information in another declaration or they may find them out by another channel.
However, the 3% tax may not be automatically due. In case of a first failure to file the return by 15 May, the French administration can give the relevant entity formal notice to regularize its situation by submitting a return within 30 days’ notice. If it complies with this requirement, the entity is relieved of the tax. Otherwise, the tax kicks back in (with late-payment interest and penalties). For clarity, the failing company has only one joker which means that the next omission to report in due time will trigger a 3% tax bill for the relevant year without the possibility to obtain a new relief.
In the case at hand, the Luxembourg company Lupa SA filed its 3% tax return in relation to the 2005 year after the deadline of 15 May. Although the company spontaneously submitted its return a few months later without notice from the administration, the tax administration rejected it and required the tax to be paid for 2005.
The point is that Lupa SA had already missed the deadline once in the past and had been obliged to regularize upon request from the tax administration to avoid paying the tax. Unsurprisingly, the Supreme Court consequently ruled that it could not use its wildcard again. There actually was no debate about this. More strikingly, the Court also ruled that it could not be given an opportunity to avoid paying the tax by late submission of its return, even spontaneously before being requested to do so. Lupa SA was therefore liable for the tax for the 2005 year.
This strict decision clearly is bad news. It is also a good lesson to learn. Taxpayers must pay close attention to meeting the 3% tax return filing deadline going forward as they could lose a chance to regularize their position in the event that they are careless. Needless to say, it is even more crucial for those who may have already missed it once.
Rosemont would be happy to assist you with your French tax declarations. For more information, please contact Jerome Brimaud: j.brimaud@rosemont.mc