Why Rental of "Le Palace des Vosges" is Not Advisable

Many people have asked about renting the property. Our legal advisors at The International Law Partnership have provided this explanation for why we will not make rental an option:

Why it is advisable NOT to rent out fractional ownership property

Capital Gains Tax (“CGT”) is payable following each sale of a foreign company share, based on the difference between the cost of the share and its net sale price. The CGT rate is 33 1/3% for non-EU residents and 16% for (non French) EU residents. The taper rule may reduce the amount of the gain by 10% per annum after the first 5 years of ownership, so that no CGT is payable upon the sale of shares held 15 years or more.

However if the foreign company is classed as commercial (see below) the taper rule will not apply, resulting in a higher capital gain subject to tax. In addition, the cost basis of the share will be reduced by 2% for each year of ownership, which will also result in a higher capital gain subject to tax.

This is very relevant to the issue of renting out the property because commercial characterization of the foreign company or its SCI is automatic if the company rents the property furnished.

In order to avoid commercial characterization it is therefore very important to prohibit both companies (ie the LLC and the SCI, via a clause in their Articles of Association) from renting out the property. Further, if the foreign company is qualified as a non-profit entity, such qualification generally necessitates a prohibition of all commercial activities, including renting out, by the foreign company.

It may still be possible to rent out the property and avoid commercial characterization if the above recommendations are complied with but the fractional interest owners are permitted to rent out their own allotted usage and retain all the rental income (net of fees) rather than pooling rental income. However, there is absolutely no guarantee of this and therefore the only way to avoid the adverse tax consequences of commercial characterization for sure is to prohibit the rental of the property altogether.

In addition to the adverse CGT consequences of the foreign company (or its SCI) renting out the property, individual fractional share owners will also have to pay French income tax on any net rental income they receive. This tax must be paid whether or not the company in question is characterized as commercial. Although such income tax can generally be offset against tax in the owner’s country of residence, owners should bear in mind that the rate of income tax payable in France may be higher than the tax payable in their country of residence.