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The 3% tax
A system to prevent tax evasion
The ownership of property in France by foreign-based companies does not enable these companies to escape taxation in France : the anti tax evasion system consisting of a 3% taxation aimed at property located in France proves to be an efficient tool in the hands of the French Ministry of Economy and Finance, in Bercy.

The ministry in Bercy has set upa taxation system which applies to all companies, and even to all organisations, who gain ownership of property in France. And 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 inFrance, either directly or by the means of shareholding channels. 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 taxpolicies, 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 examplethe Parisian apartment they were planning on living in, through companies generally based in either Switzerland or Lichtenstein.
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 therent paid to the shell companies. In such circumstances, there were real difficulties in determining who the shareholders were in order to subject them to the payment of wealth tax. In addition, when the property was sold the tran
sfer duties were lost.
As the relevant legislation and the way it was applied evolved, this provision came to gain a much broader scope of application.

>> A legalprovision forever rethought 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.
Moreover, the legal entities or organisations to whom this system may be applied are numerous. Trust funds, fiduciaryrelationships as well as investment funds are also concerned. It was indeed difficult, up until now, to know whether this measure would be applied 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 “Courde 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 thelegal provision applied mainly to legal entities based in states with 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 reassessments were actually undertaken. It fully fulfilled its objective to act...