Business real estate: ownership, IFI exemption and transfer

Business real estate, or operating real estate, refers to real-estate assets allocated to the company's activity: offices, commercial premises, warehouses, workshops, industrial sites. For tax purposes, this allocation to the operating activity distinguishes it from investment real estate and opens, subject to conditions, favourable regimes: exemption from the French real-estate wealth tax (IFI) as a business asset (Article 975 of the French Tax Code) and a reduced-cost transfer under the Dutreil pact (Article 787 B of the French Tax Code). A building held merely to generate rental income, with no connection to an operating activity of the taxpayer, does not benefit from these regimes.

Yes, subject to conditions. Article 975 of the French Tax Code exempts from the real-estate wealth tax the real-estate assets necessary for the taxpayer's professional activity. The exemption in principle requires the person concerned to hold an effective management function in the company, to receive from it normal remuneration representing a significant share of his or her income, to hold a certain shareholding threshold, and for the asset to be genuinely used for the activity. A building that the executive lets to his or her own operating company may, on that basis, qualify as a business asset and escape IFI, provided it is necessary for the activity.

There is no single answer, as each mode of ownership carries its own consequences. Direct ownership by the operating company simplifies management but exposes the real estate to business risk. Ownership through a property company (SCI) that lets the building to the operating company isolates the asset and facilitates its separate transfer, while allowing, subject to conditions, the qualification as a business asset for IFI purposes to be preserved. Keeping the building in the executive's private estate offers flexibility but increases exposure to IFI if the professional allocation is not established. The choice is assessed in light of IFI, the taxation of rents, the capital gain on sale and the intended transfer.

The letting of the operating building to the group company must rest on a written lease and a rent in line with the market. A rent that is manifestly excessive or insufficient exposes the parties to a challenge for abnormal act of management and may be disputed by the tax authorities. A market rent secures the deduction of the rent for the tenant company and the consistency of the rental income for the landlord. Where the building is held by an SCI whose shares are owned by the executive, the coordination with the business-assets regime (Article 975 of the French Tax Code) must be verified, as the building must remain necessary for the activity of the company in which the taxpayer holds office.

Yes, indirectly. The Dutreil pact (Article 787 B of the French Tax Code) exempts from gift and inheritance tax 75% of the value of the shares of a company carrying on an operating activity (industrial, commercial, craft, agricultural or professional). Operating real estate held by that company, or by a group company it controls, is transferred within the scope of the eligible shares provided the operating activity remains predominant. Investment real estate, with no connection to an operating activity, does not qualify for the regime. The line between operating real estate and investment real estate is therefore decisive for Dutreil eligibility.

An active holding company is a company that, beyond the mere management of a portfolio, actively participates in the conduct of its group's policy and the control of its subsidiaries, providing them with services where appropriate. It is treated as an operating company for the purposes of the Dutreil pact (Article 787 B of the French Tax Code) and, subject to conditions, the business-assets regime for IFI (Article 975 of the French Tax Code). Where it leads a group with an operating activity, business real estate held within the group may thus fall within the exempt scope. The active role must nevertheless be established and documented, failing which the tax authorities may challenge it.

The dismemberment of ownership consists of separating the usufruct, the right to use the asset and receive its income, from the bare ownership, the right to dispose of the asset. Applied to business real estate, it allows the executive to give the bare ownership of the building or of the shares of the company that holds it, while retaining the usufruct and the rents. The value transferred is reduced under the scale of Article 669 of the French Tax Code, which lowers the gift tax due. For IFI purposes, the allocation of the tax base between usufructuary and bare owner follows specific rules. Dismemberment is frequently combined with the Dutreil pact to optimise the transfer of the real-estate and business assets as a whole.

The objective is to reconcile two logics: neutralising IFI on the operating building during ownership (Article 975 of the French Tax Code) and preparing its transfer at a reduced cost (Article 787 B of the French Tax Code and dismemberment of ownership). These regimes rest on similar but distinct conditions, relating to the allocation to the activity, the predominance of the operating business and the management role. A consistent structure verifies that the mode of ownership, the letting to the group and any active holding company simultaneously meet the requirements of IFI and the Dutreil pact, without one regime compromising the other. The firm builds this coordination case by case, according to the configuration of the group and the family objectives.