The 3% tax applies to legal entities holding real estate in France. At the time of a property sale, the tax lawyer must send a 3% tax regularisation file to the French tax authorities.
In doing so, the seller can ask the accredited tax representative to release the escrow of 3% of the sale price.
In many cases, the regularisation process can be carried out without paying any tax or tax penalties. However, this requires a thorough understanding of the rules and deadlines of the French tax procedure.
To do this, it is essential to contact a tax lawyer specialising in the regularisation of the 3% tax.
Why regularise the 3% tax?
The regularisation of the 3% tax during a real estate sale allows the owner entity to comply with the rules of tax law, and consequently to release the escrow for the benefit of the client.
What is the 3% tax?
It is the tax on the market value of real estate, abbreviated as « TVVI » or « taxe de 3% » in french. This tax has existed in France since 1984. However, in practice, clients often only find out about it when they sell their property in France.
Why did the legislator create the 3% tax? In reality, the purpose of this tax is to reveal the identity of the beneficial owners of real estate. This allows the tax authorities to ensure the correct application of wealth tax, but also of stamp duties on the transfer of shares.
In other words, this tax acts as a deterrent. It forces property owners in France to reveal their identity or face taxation. The 3% tax applies to the market value of the property (without deduction of any liabilities). In addition to the 3% tax, entities also pay tax penalties and late payment interest. This often represents a huge financial burden.
The scope of application of this tax is set out in Article 990 D of the General Tax Code. In the case of chains of holdings, the 3% tax may concern all the interposed entities. Consequently, this means that as many corrective declarations will have to be made as there are interposed entities. This applies regardless of whether the property is held only by the company at the bottom of the chain of holdings. Similarly, it does not matter if the other companies (holding companies) are not preponderantly real estate.
Can the 3% tax be exempted?
Article 990 E of the CGI sets out several cases of exemption. In practice, the most common scenarios concern French SCIs held by non-resident partners and foreign entities.
The 3% tax exemption implies on the one hand that the entity has its registered office in France, in a European Union State or in a country having concluded an administrative assistance tax treaty with France. As tax lawyers specialising in the regularisation of the 3% tax, we can confirm that this condition is met in your case.
On the other hand, the entity in question must file an annual declaration n° 2746-SD with the following information. Firstly, the location of the buildings, their consistency and their market value on 1 January of each year. The form must also indicate the identity of the partners or other members holding more than 1% of the shares and the number of shares held by each. For example, their full names and addresses.
When all fields include the requested information, the entity can claim exemption from the 3% tax.
Otherwise, the tax is applied at the rate of 3% on the market value on 1 January of each year. It should be noted that the administration’s recovery period expires on 31 December of the sixth year following the year of the taxable event. In other words, this is an important tax issue for the non-resident taxpayer. When the property has a significant market value, the taxation applied by the 3% tax can become prohibitive and lead to a significant tax risk.
How does the 3% tax regularisation procedure work?
The process has evolved over the years and must now be carried out in two stages.
Submitting the form n°2746 online
Since 2021, the tax authorities have imposed an online declaration. This results from article 1649 quater B XII of the CGI. At the same time, Article 1738 states that, in the absence of duties, the filing of a return using a method other than the one required shall result in the application of a fine of €15 per document, without the total of the fines applicable to the documents that must be filed simultaneously being less than €60 or more than €150.
It should be noted that the 2746 declarations in paper form continue to exist for the purposes of regularisations relating to years prior to 2021.
It is also important to know that the proximity between your tax lawyer and the tax authorities in charge of the regularisation speeds up the process and therefore releases the escrow more quickly. At AGBC AVOCATS, we work in close collaboration with the various competent tax departments in order to have the funds released as quickly as possible. In addition, the tax authorities ultimately issue us with a discharge in which the department confirms that the company is up to date with its tax obligations in terms of the 3% tax. This is the only way to completely eliminate the risk of a 3% tax adjustment.
The 3% tax adjustment allows the sequestration of the sale price to be lifted
In the event of the sale of real estate by an entity that is not established in the European Union, the representative in France remains responsible for the payment of the outstanding tax at the date of the sale.
For this reason, he systematically asks the client to send him the latest form 2746 for the company. In most cases, the client will discover this obligation at that time. It should be noted that clients who have sent in their paper form 2746 are deemed not to have subscribed to the reporting obligation. The tax representative will therefore also retain the 3% escrow in this case.
The only way for the client to release the escrow is to regularise his situation. In order to do so, our law firm specialised in the 3% tax will contact notary and accountant professionals.
When the tax authorities have never sent a formal notice to the taxpayer, their doctrine indicates that the regularisation can be carried out in principle without penalties. In other words, we can file the forms in the last few years without paying taxes or penalties.
The situation becomes more complicated if the company has already been served with a notice of default for late filing. In this case, the administrative tolerance cannot be applied. The role of the tax lawyer then becomes imperative to submit the regularisation file.
We fill in the paper forms and take the necessary steps online to file the required information. When the 3% tax adjustment file is closed, we send it to the tax authorities to the specialised department. The relationship we have with our contacts enables us to resolve the issue quickly. The client can then obtain a refund of his escrow.
It should be noted that SCIs set up in France are also affected by this reporting obligation. Indeed, the administration retains the possibility of sending a rectification proposal to all entities holding real estate in France.