13 NOVEMBER 2017
The 3% tax: the mere late filing of a return cannot trigger liability to tax!
In its judgment of 6 November 20171, the Paris Court of Appeal ruled on the following question: Can the late filing of a n°2746 tax return be punished by the obligation to make payment of the amount of tax due?
The 3% tax: summary of principles (article 990 D ff. of the French Tax Code, ("FTC")
Legal entities, organisations, trusts and comparable institutions, whether French or foreign, who directly or via an intermediary possess one or more properties in France are liable to an annual tax equal to 3% of the market value of such properties2.
The aim of this tax is not such much its capacity to raise revenue as to ascertain the ultimate shareholders (in particular for the purposes of wealth tax (ISF) / wealth tax on real estate assets (IFI)). Thus the above-mentioned persons may avoid payment of this tax if they provide or undertake to communicate certain information concerning the real estate and the shareholders at the request of the French Tax Authorities, (“FTA”). Indeed, article 990 E, 3° of the FTC provides that the tax is not applicable to legal entities “who each year communicate, or undertake to and actually communicate to the FTA upon their request, the location, nature and value of the real estate assets in their possession as of 1 January, as well as the identity and address of all shareholders, associates or other members who hold, in whatever form, more than 1% of the shares, securities or other rights, as well as the number of shares, securities or other rights that each of them holds”.
In brief: can the late filing of a n° 2746 tax return be punished by the obligation to make payment of the amount of the tax due? This is the position of the FTA.
The Paris Court of Appeal ruled that the answer is no!
Payment of the 3% tax is related to the nature of the liability of the entity holding the real estate assets. For example, a taxpayer who under article 990 E FTC is exempt from the 3% tax provided that it annually communicates (i) the location, (ii) the nature and (iii) the value of the real estate that it owns on 1 January cannot be considered liable for tax on the sole ground that its return was filed late (assuming that, from the standpoint of its shareholders, it is tax-exempt).
In other words, the only consequences of the late filing of a no. 2746 return are:
- the obligation to pay the penalties provided under ordinary law as regards tax matters (late-payment interest plus a tax penalty of 10%) rather than payment of the tax itself, irrespective of whether or not this is a first offence;
- the obligation to pay late-payment interest plus a tax penalty of 10% based upon the amount of tax actually due by the company. Thus, if the no. 2746 return filed demonstrates that the company is exempt from the 3% tax, no principal is due and, a fortiori, nor is any late-payment interest and the tax penalty of 10% (there is no actual tax base).
N.B.: the FTA can appeal!
In more detail…
- a legal entity established in Luxembourg (hereinafter “Luxco”) held shares in a French SCI (société civile immobilière, real estate partnership) that in turn held real estate assets in France. The Luxco was exempt from the 3% tax under section 990 E FTC, subject to providing the FTA with annual information on the properties held and any intermediaries: it had filed its no. 2746 returns for the years prior to 2005;
- in 2005, as no return had been filed, the FTA sent the Luxco a projected adjustment requiring payment of the full amount of the 3% tax due;
- the Luxco petitioned the Tribunal de Grande Instance in order to challenge the validity of the adjustment: the tribunal rejected its request in a judgment of 25 June 2015. The Luxco appealed against this ruling.
Position of the FTA
- the 3% tax is a penalty applicable to non-observation of the declaration formalities in respect of properties owned and located in France; and
- the period of grace that permits a taxpayer to regularise this situation within 30 days in the event of non-declaration only applies in the case of a first offence 3. However, the Luxco had already previously benefited from such grace period for a first offence.
Decision of the Paris Court of Appeal
The Paris Court of Appeal initially stated that, in the event of an inadequate response or no reply within the period of 30 days following issuance of formal notice by the tax authorities as well as the late filing of the no. 2746 return, only late-payment interest (article 1727 FTC) plus the tax penalty of 10% (article 1728 FTC) will be due, with the base being the amount of tax actually due by the taxpayer.
In this case, the Paris Court of Appeal noted that the Luxco had, albeit late, observed the required declaration formalities by sending the tax authorities its no. 2746 return on 25 August 2015: the information provided to the FTA demonstrated that the Luxco was exempt from the 3% tax.
The Court thus concluded that:
- at all events, the late filing of a no. 2746 return cannot be penalised by the payment of the full amount of the 3% tax;
- as, by communicating information to the FTA, the Luxco demonstrated that it was not actually liable to the 3% tax, no late-payment interest would apply.
The principle established by the Paris Court of Appeal may in practice be very wide in scope, as it appears to indicate that non-observance of the declaration formalities for the 3% tax will never be penalised if the declaring entity as well as all of its shareholders are not actually liable for the 3% tax (either it is exempt as of right, or the final shareholders hold less than 1% of the market value of the real estate assets).
Supposing the decision of the Court of Appeal is confirmed by the Court of Cassation? Some food for thought…
Should the decision of the Court of Appeal be confirmed by the Court of Cassation or, in the absence of any appeal by the FTA (i.e. the decision is final), three scenarios can be distinguished:
1/ Late returns: if, when filing a return late, the declaring entity can show that both it and its shareholders – direct or indirect – benefits from one of the cases of exemption from the 3% tax, no penalty will be applicable, irrespective of whether or not this is a first offence;
2/ Inadequate returns: an inadequate return raises more questions. In practice, the approach may differ depending on the nature of the information regarded as inadequate:
◊ if the information deemed inadequate relates to the value of the real estate assets (e.g. undervaluation), declaring the values of the real estate assets is not an essential element for assessing whether or not exemption will apply. As a result, if the declaring entity can demonstrate its exempt status, no penalties will be incurred;
◊ if the information deemed inadequate relates to the identity of the shareholders:
♦ the declaring entity will be deemed not to have demonstrated its exemption from the 3% tax for the entire chain of possession; nevertheless
♦ it may be possible to file a further return: if information is subsequently communicated that demonstrates exemption then, according to the Court of Appeal, the 3% tax will not be due and neither late-payment interest nor penalties may be applied!
3/ Erroneous information: the current ruling does not cover cases of error, as it simply states that an “inadequate response”, “no reply” or “late filing of a return” may be penalised by late-payment interest plus ther tax penalty of 10%. In addition, in its judgment of 2006, the Commercial Chamber of the French Cour de Cassation ruled that the grace period offered by the FTA would only apply in cases of non-declaration, not of erroneous declaration 4. As a result, it is highly uncertain whether the reasoning of the Court of Appeal will apply in cases of error…
Thus, if inadequacies and errors are to be treated differently, this raises a new question: where does the boundary between these two concepts lie?
For example, if an entity declares its legal beneficiaries rather than its economic beneficiaries, is such a return erroneous – or inadequate?
This is definitely one to watch!
By Pierre Appremont and Clarisse Legac
1. Paris CA, Pole 5, Chamber 10, no.15/15981 of 6 November 2017.
2. Article 990 D of the GTC.
3. This principle is set out in particular in administrative doctrine ref. BOI-PAT-TPC-30-2017004 no. 20. In this case, the tax authorities base their case on the ministerial reply given by François Loncle on 13 March 2000.
4. French Cour de Cassation, Com 02-20.387, 31 January 2016 no. 154 FS-PB. e réflexion …