The French 3% tax

The French 3% tax (articles 990 D to 990 H of the French Tax Code) is an annual French tax charged on the fair market value, as at 1 January, of real estate or real-estate rights located in France and held, directly or indirectly, by legal entities (companies, funds, trusts, foundations). Its purpose is to counteract the opacity of cross-border ownership chains by imposing a recurring cost on foreign entities that do not disclose their shareholder base.

All legal entities, whether French or foreign, that hold French real estate directly or through intermediaries are liable: companies (SCIs, SAS, foreign companies), funds (FCPI, FPCI, foreign funds), trusts (article 990 D para. 2 of the French Tax Code), private foundations, Stiftung entities and anstalts. Where the chain has several tiers, each entity is in principle liable in proportion to its direct or indirect share in the French real estate.

Four main routes to exemption are provided by article 990 E of the French Tax Code: (i) entities listed on a regulated market; (ii) entities whose French real estate represents less than 50% of their assets (asset test); (iii) international organisations, States and central banks; (iv) entities located in a State that has concluded an administrative assistance agreement with France (EU, EEA, treaty States) which undertake to disclose each year to the French tax authorities the list of their shareholders holding more than 1% and to pay the tax in respect of undisclosed shareholders.

Form 2746-SD is the annual return for the French 3% tax. It must be filed each year by 15 May with the tax office for foreign businesses (SIEE) or the competent local tax office. For entities claiming the exemption under article 990 E 4° of the French Tax Code, the form includes a signed undertaking to disclose the list of shareholders and to pay the tax in respect of undisclosed shareholders. Failure to file results in the loss of the exemption and the application of the tax on the fair market value.

Yes. Article 990 D para. 2 of the French Tax Code expressly treats trusts as legal entities for the purposes of the tax. The trustee may give the 990 E 4° undertaking and disclose the list of beneficial owners and settlors in order to qualify for the exemption. Failing that, the French 3% tax is due. Coordination with the reporting obligations of article 1649 AB of the French Tax Code (2181-Trust returns) is essential, as is coordination with administrative assistance agreements.

Jurisdiction lies with the civil court (the tax is treated as a registration duty). The taxpayer first files a preliminary claim with the tax authorities, then issues a summons before the civil court if the claim is rejected. Disputes frequently concern (i) compliance with the conditions of the 990 E 4° exemption, (ii) the qualification of the main asset under the asset test, and (iii) compliance with European Union law (free movement of capital). Appeals may reach the Cour de cassation, and even the CJEU.

The due diligence should cover (i) compliance with past filing obligations by all entities in the chain, (ii) the quantification of the latent tax liability (tax plus interest plus fines), and (iii) the negotiation of protections in the SPA (representations & warranties, indemnity mechanism). After completion, a simplification of the chain or a formal undertaking should be considered to limit the recurring risk.

Yes, because their scope differs. The French 3% tax is payable by the legal entity on the fair market value of French real estate as at 1 January. The IFI (real-estate wealth tax) is payable by individuals on the net value of their real-estate wealth (held directly or through predominantly real-estate companies). The two taxes can therefore apply cumulatively in a chain where the legal entity pays the French 3% tax and the individual shareholders are liable for the IFI on the value of their shares.