Annual 3% tax on real estate: accrued severity if you don’t file on time… for the second time!

In a LUPA decision dated November 4, 2020[1], the French Supreme Court specifies the consequences of a late filing of the #2746 tax form regarding the annual 3% tax on real estate in case of “recidivism” (“3% Tax“). The sanction, although severe but in accordance with the law, leads to the payment of the 3% Tax in case of repeated late filing.

As a reminder

Pursuant to Articles 990 D et seq. of the French Tax Code, the 3% Tax is payable by French or foreign legal entities that hold, on January 1st, directly or indirectly, real estate assets located in France. Such tax is based on the market value of the underlying properties.

There are, however, many cases of exemption, including the filing of a tax form #2746 aiming to provide to the French tax authorities information related to the situation, consistency and value of the real estate assets, as well as the identity of the direct and indirect shareholders of the French real estate assets.

The declaration must be filed no later than May 15 of each year.

With respect to legal entities that have not filed their tax form #2746 within the prescribed deadline, the French tax authorities accept, as a tolerance, that such entities may regularize their situation and thus be exempted from payment of the tax, being specified that this tolerance may only apply to the first regularization.

Late filing of the tax form? Once yes, but not twice!

Let us recall the facts of the Case law:

On August 25, 2005, LUPA, a company incorporated under Luxembourg’s law, belatedly filed its #2746 tax form with the French tax authorities, being specified that such form confirmed that the company was not liable for the 3% Tax. On September 6, 2005, the French tax authorities sent the company a reassessment proposal of the total amount of the 3% Tax.

As the company had previously benefited from the French tax authorities’ tolerance enabling to regularize its situation in the event of a first regularization[2] for the tax years 2002 and 2003, the Company would be deprived of the possibility of regularizing its situation in the event of a second infraction.

However, the question is whether or not the company can be punished by the payment of the 3% Tax – the company having communicated the information establishing that it is not liable for the 3% Tax.

The Paris Court of Appeal[3] held that a company that complies – even belatedly – with the reporting formalism required to establish that it is an entity exempt from the 3% Tax cannot be sanctioned by the payment of the 3% Tax, due to the lack of an effective tax basis, whether or not it is a first offense.

In this decision, the French Supreme Court censors the decision of the Paris Court of Appeal and refers the case back to the Court of Appeal. Now, the debate appears to be closed: the late filing of the 3% Tax form entails, in addition to the payment of penalties and late interest, the liability for the tax itself when the company has previously benefited from the administrative tolerance.

The financial consequences of a late filing of #2746 tax form can therefore be very significant (3% of the market value of the underlying assets as at January 1). In the event of companies’ sales, the guarantees to be granted to a potential buyer would also be greater in the absence of the possibility of regularization.

Therefore, given the extent of the penalties incurred, the deadlines for filing tax form #2746 must be scrupulously respected in order to ensure the benefit of the 3% Tax exemption. Moreover, the fact of being deprived of the benefit of the administrative tolerance in case of recidivism leads one to wonder whether it is even advisable to spontaneously regularize. In other words, after the first regularization, no more mistake allowed!

Moreover, it should be noted that the obligation to electronically file the #2746 tax forms will apply as from 2021. Legal entities must now anticipate these new reporting procedures and implement the necessary formalities: indeed, foreign entities that do not have a tax account in France will have to register and create a business account in order to be able to carry out their online filing before May 15, 2021.

Time to take (or get back to) smart declarative habits to avoid possible colossal penalties!

Real Estate Tax Team

[1] French Supreme Court, November 4, 2020, #18-11.771
[2] French ministerial answer – March 13, 2020
[3] Paris Court of Appeal, November 6, 2017, #15/15981