The 3% tax : general mechanism To prevent tax evasion…

The ownership of property in France by foreign-based companies does not enable these companies to escape taxation in France : Created to fight against the tax evasion (mostly the wealth tax at that time) this mechanism has been put in place to reach any non French company owning property located in France. Over the years this has been extended and now applies to all companies, and even to all organisations, which gain ownership of property in France.

The financial consequences are far from being insubstantial. Paid for on a yearly basis, this tax amounts to 3% of the buildings’ or real property right’s market value. It applies to all French or foreign entities which come into the ownership of real estate property in France, either directly or by the means of a succession of shares. These entities are numerous, for they not only include companies but also other institutions such as trust funds, etc.

An anti tax evasion system

Since its creation in 1983, this system has aimed for discouraging the acquisition of property in France through the means of legal entities based in states with attractive tax policies, or at least states which have not concluded any treaty with France regarding administrative assistance for the prevention of fraud and tax evasion: tax havens or at least states regarded as such.


In reality, its scope is much larger than this.

Originally, the legal provision applied to schemes which consisted in private individuals living in France buying real estate property, for example the Parisian apartment they were planning on living in, through companies generally based in either Switzerland or Liechtenstein.


Two favourable consequences were expected from such transactions:

  • On the one hand, it was rendered possible to circumvent the regulations regarding exchange rates control by using foreign bank accounts;
  • On the other hand, money was brought into these accounts through the rent paid to the shell companies. In such circumstances, there were real difficulties in determining who the shareholders for wealth tax purposes. In addition, when the property was sold in the form of sale of shares, the stamp duty on the transfer was mostly not paid to the French government.


As the relevant legislation and the way it was applied evolved, this provision came to gain a much broader scope of application.

A legal provision forever amended and extended

Successive rewritings have resulted in the application scope of the 3% tax being extended. As from now, this tax applies not only to foreign-based entities but also to those based within the European Union, or even in France itself.

Likewise, the legal entities or organisations to whom this system may be applied are numerous. Institutions such as trust funds, French ‘fiducies’ as well as investment funds are also concerned. It was indeed difficult, up until now, to know whether this measure would apply to these entities and they therefore had to fulfill, as a precaution, all the relevant formalities required by the French administration.

Theoretical extension to French companies

In order to work around a judgment of the French Supreme Court, the “Cour de cassation” (Cass. Com. 21st December 1990, SA Royal n°322 P) in which it was stated that the 3% tax system was discriminatory towards foreign companies, it was decided in 1993 that this tax should be extended to French companies.


On a practical aspect, legal provisions allowed for exemption in certain circumstances, in order for this extension to remain confined to a theoretical aspect. And the legal provision applied mainly to legal entities based in states with very attractive tax policies, or at least states which had not concluded any treaty with France regarding administrative assistance for the prevention of fraud and tax evasion.

The system was not much used by the tax administration and few upward tax adjustments were actually undertaken. It fully fulfilled its objective to act as a deterrent. And few were the investors who weren’t discouraged from evading tax by this system.

Companies based in the European Community

This is the context in which the European judge was called upon in 2007 in what is now called the “Elisa matter” to judge this tax illegal because of it being contrary to European law (ECJ 11th October 2007, Européenne et Luxembourgeoise d’investissements SA). While French companies benefitted from full tax exemption, those not based in France were faced with an additional condition. The country they were based in had to have concluded with France a treaty regarding administrative assistance. The legislator has since acted upon this precedent and engaged a reform of articles 990D and 990E of the France CGI (‘General Tax Code’) regarding the 3% tax. Nowadays, all entities based within the European Union benefit from the same tax exemption as those based in France.


The existence of many tax exemption opportunities

There are multiple such opportunities; only the main ones will be listed below.

The first one relates to companies whose real estate assets in France make up less than 50% of all the property they own in France. Clearly, the 3% tax disposition applies only to companies whose main activity is real estate.

Secondly, the legal entities, organisms or trust funds whose shares are listed do not fall within the scope of this disposition.


The third main opportunity for this tax exemption is aimed at companies based in France, in member states of the EU or in a foreign state which has concluded, with France, treaties regarding administrative assistance or including a ‘clause for equal treatment’.


Such entities can, amongst others, benefit from exemption if they own a share on the relevant assets which amounts to less than 100,000 euros or 5% of the property’s full market value: this introduction of a simpler system is welcome for small shareholders.

Such is also the case when the legal entities, organisations or trust funds commit to provide to the Administration, within two months of acquiring the property and upon demand, information regarding the shareholders or other company members who own more than 1% of the shares or company titles.


A similar approach is taken regarding legal entities, organisations or trust funds annually subjected to the “déclaration. 2746” This document must be sent to the administrative services at the latest on 15th May. It must relate the property’s geographical location, its capacity, its market value as it was on 1st January, as well as the identity of the shareholders and other members of the company who own more than 1% of the shares.


The exemption is proportionate with the quantity of titles / shares whose owners’ identities and addresses have been established.

A system to replace the “ISF” (wealth tax)

The 3% tax has come to be thought of as a tax to replace the former “ISF” (wealth tax) in the mind of the financial authorities in Bercy. However, its cost is much higher for its rate is of 3%. In addition to this, and contrarily to the system in place for the wealth tax, the new provision does not provide for any potential tax liability deduction opportunities. In addition to this, the scopes for the wealth tax and the 3% tax respectively are different, which makes it harder to apprehend the new system.

The opinion of the notaire ; The price of anonymity

The idea behind this legal disposition is relatively simple. If the legal entity reveals who the real owner of the property is behind the entity, company, funds etc…, it does not have to pay tax.

If such isn’t the case, the company needs to pay a yearly tax which amounts to 3% of the property’s gross market value which is the price to pay in order to guarantee its anonymity. Indeed, we must remember that this disposition was introduced in 1983 in order to prevent schemes aiming to escape a new taxation system : the “impôt sur les grandes fortunes” (IGF)” (an earlier form of the French ‘wealth tax’, which has since become the “ISF” and later “IFI” (current ‘wealth tax’). The objective set by the French Ministry of Economy and Finance in Bercy is to prevent entities from entering the game in order to dissimulate who the real owners are.

In reality, the majority of our clients agree to disclose their identity. It is therefore necessary to rely on tax/legal advisers to draft the relevant declarations nb 2746 or the formalities required by article 990E of the French ‘CGI’. The most complicated situations for us are those where a client already owns a non-transparent entity with regards to the French tax administration, for example when they own an offshore entity in a State which hasn’t signed any convention with the French administration and who wishes to complete a transaction through its means. Indeed, even if the tax exoneration system is widely spread from a geographical point of view, its scope does not include this type of situation. We therefore need to explain to these investors that it is sometimes better, civilly and fiscally speaking, to purchase the property by a simple French entity, such as a “société civile” (civil entity). This is generally well accepted.