Investment in real estate in Europe is attracting an increasing number of foreign investors. Property can be an excellent investment for the buyer with an average yield of between 5% and 7% a year and a good level of legal security and political stability compared to other places of the world. Commercial properties offer higher return and attract both individuals looking to diversify their portfolio and international real estate funds looking for prime buildings.
When buying or selling real estate the legal, contractual, tax and estate planning issues will need to be considered carefully. They will differ from country to country. We consider some of these aspects below, using France and Monaco as examples.
Legal due diligence
The purchasing process is reasonably straightforward with expert assistance to avoid common pitfalls. Specific legal due diligence should always been carried out especially when investing outside of your home country. Building and urbanism law should be checked to ensure the legal status of the property. Rosemont Consulting is used to assist purchasers from A to Z for the acquisition and this legal due diligence is sometimes very time consuming.
It could also be important to instruct an independent technical surveyor to inspect the property. His work can then be used by a lawyer to ensure that the current status of the property is in conformity with the building permit obtained.
From a contractual standpoint different types of preliminary contracts can be used. Whilst the buyer will seek to maximise the suspensive conditions to be able to retract without loosing the deposit (usually 10%), the seller may request a preliminary contract which obliges completion by a certain date subject to forfeiting the deposit (“promesse unilaterale”).
Having found a suitable property to purchase in France or in Monaco for example, the buyer and the seller can either instruct a common notary or have their own notary. In case share transactions are organised instead of a direct property purchase, lawyers can also draft and register share exchange deeds independently. In this case proper due diligence on the property should be done, in addition to the due diligence on the company. It is a value added in this type of transaction to instruct a firm, like Rosemont Consulting, who can cover all aspects including legal, tax and financial ones.
The real estate structure which may be used to buy can be either civil (for patrimonial use) or commercial (for rental activity). If the activity is civil and the company is not subject to corporate tax, only certain limited expenses, e.g. loan interest, insurance and repairs, are tax deductible in France. For a commercial activity, there is a greater range of deductible expenses including property depreciation in most countries and corporate taxes in Europe and usually lower than marginal income tax rates. However the corporate tax regime could trigger a higher tax liability at the time of sale of the property. Careful comparison of the two regimes should be done prior to acquisition.
For specific investors, property dealer regimes exist in most countries and usually allow reduced acquisition cost whilst putting various obligations to the buyer. A careful analysis should be done before entering these regimes.
Special regime of professional landlord for rental activity
It could be interesting for investors to opt for a special French regime of 'professional' landlords (loueur en meublé professionnel - LMP). To obtain the LMP status the owner should be registered at the Commercial and Companies Register and realise gross annual receipts of more than € 23,000 per year.
The LMP status grants major tax advantages such as a total exemption from new wealth tax liability and a total exemption from capital gains tax (CGT) under certain conditions. The landlord will be expected to pay social security contributions on net rental income.
Real estate investments funds
Commercial properties can also be structured using special real estate funds. Various European funds could be used (Luxembourg, Malta or even Monaco ones), either by family investors or a larger group of investors. These funds usually ease the financing and the tax deferral allows a quicker increase of the funds. Usually a spread of investment locations can be selected to diversify the ratio “security versus yield of return” thereby balancing the risk.
Advantages of Monaco SCP for real estate ownership
Using a Monaco SCP to hold properties in Monaco, in France but also in other jurisdictions, can be advantageous from an estate planning and taxation point of view.
In terms of estate planning, the use of a vehicle such as a Monaco SCP will allow the inheritance law of the residency of the partners to apply and avoid in various cases a conflict of law. It will also be possible to better fulfil the estate wishes of the partner, and protect certain heirs within the statutes or through a separate shareholder agreement, without depriving potential privileged legal heirs from their rights.
In terms of taxation, a Monaco SCP can be transferred to the spouse or children upon gift or death without Monaco tax. No CGT will be due in Monaco in case the shares are sold, only transfer duty. Tax aspects in the country where properties are located and in the countries of residency of the partners should be considered.
For holding French real estate, a Monaco SCP is of particular benefit as it allows the reduction of French inheritance tax (in case partners of the SCP are not resident in France). French marginal tax rates of 45% in case of transfers to children can then be avoided. The 60% rate in case of transfer to a third party will be reduced to 16%. CGT can also be optimised especially if the company is holding other assets such as artworks, financial portfolios or other valuable assets.
This could lead to using this SCP as a vehicle to hold various family and non-commercial assets as a patrimonial holding structure. We provide all services relating to SCPs so that the legal tax and administrative aspects of such a company is properly dealt with from Monaco in respect of the local and international requirements with sufficient substance to protect the arrangement set up.
This article is published in issue 24 of MONACO БИЗНЕС (Monaco Business) Magazine -
Rosemont Consulting SARL assists clients to achieve their estate planning objectives through other alternative legitimate compliant structuring of their assets. Please feel free to contact us.
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