Under the leaseback scheme, which was introduced in France in 1967, real estate investors can purchase property in selected regions of the country and claim a refund of the 20% VAT they originally paid at the time of the transaction.
The scheme has become particularly popular with investors who are looking to save money on their holiday home investment.
In this guide, you will find everything to know about the French leaseback scheme plus information on how to save taxes when you buy a leaseback property in France.
What is a leaseback property?
This is a unique French scheme under which the purchaser buys a property, on the condition that the property is leased back to a management company to be let out.
Typically, investments under this scheme are made in tourist destinations throughout France, such as ski areas and coastal resorts.
This rental/management company usually offers the owner a guaranteed rental income for the term of the lease, which in most cases is twenty years, but it is split into two terms and the minimum lease agreement is nine years. During this period, you get an agreed time in which the property is at your disposal for holidays.
The French government refunds to the owner the VAT at 20% which is included in the asking price.
Who can purchase a property through this scheme?
The leaseback scheme is designed for people who want to invest their money in a property and have a guaranteed annual income from it without the hassle for managing and renting it, with an option to use it for their own holiday.
What bills will I have to pay?
After the purchase, the owner of the property pays local taxe foncière or property tax, which is usually a modest sum, their mortgage protection payment (if applicable) and their mortgage repayments (if applicable again). The rates for the property tax vary, but for a two-bedroom apartment, this could be around €300 a year and this is depending on the region/ community where the property is situated. For a new build, the tax is usually not payable for the first two years.
You need to check the lease you sign carefully to see what you need to pay as an owner- these costs are usually reflected in the rental income you receive and the management company pays the other bills.
Is the rental income guaranteed?
Yes, and the rental income should increase during the time of the lease.
Can I use a mortgage to buy a leaseback property in France?
Yes, you can, even if you are a non-resident. Some lenders and French banks are used to providing mortgages for leasebacks. The mortgages for non-residents could be up to 80% of the purchase price of the property.
To find out if you could get a mortgage in France, complete our Overseas Mortgage Enquiry Form here.
How much could you borrow?
Take a look at our French mortgage calculator here to see how much you might be able to borrow. Then complete our Overseas Mortgage Enquiry Form for an indication if you may possibly be able to get a mortgage for a property in France, how much you may be eligible to borrow and at what rates.
Can I sell the property before the leaseback period expires?
Yes, even though this may not be a good idea. You will have to pay back a portion of the VAT refund you received unless the new owner carries on the leaseback.
What are the tax advantages of the French leaseback scheme?
The leaseback scheme has been popular in France for the last 30 years because there are significant tax advantages.
The owners of the property are entitled to a refund of the 20% VAT paid on the price of the purchase, and this makes the deal considerably better value.
All owners in France must pay taxe foncière, so this is still payable by the purchaser.
Owners of leaseback properties do not pay Cotisation Foncières des Entreprises (CFE) and Taxe d’ Habitation in France because these local taxes are paid by the management company.
The sale-leaseback may provide a tax benefit for the seller-lessee because the deduction for rental payments could be greater than the interest deductions and depreciation from interest financing.
Are there any disadvantages of the leaseback scheme in France?
The main one is that the property must remain a leaseback for at least 20 years, otherwise, it is not exempt from VAT and the owner must pay 1/20th of the VAT to the government, which was due at the time of purchase for every year left of the 20.
Should you decide to sell your leaseback property, you must ensure that the new owners will buy it as a leaseback as otherwise, you will be liable for the VAT refund.
The other drawback of a leaseback is that the owner has restricted access to their own property. The contract with the management company will define how often the owner can visit it, but it is usually no more than 2-6 weeks during the high, medium and low season.
In some cases, you can negotiate the number of weeks for personal use, but of course, this will reduce the rental income.
Should I pay tax on my rental income from a leaseback property in France?
Yes, tax is due for the current year. And even if you do not earn any rental income or make a loss you are still obliged to file a French tax return.
It is also important to note that there are a number of eligible deductions – such as mortgage interest – which can be offset against your taxable rental income.
Income tax for residents and non-residents in France
Your Rental income is liable to tax and it does not matter if you are a resident or not. This means that you will need to submit a tax return to the French authorities each year.
The tax rate is 20% for income up to €27,519. For rental income beyond this level, the tax is 30%. The rates apply to the net rental income.
France has double-taxation agreements with some countries, which means that you won’t be taxed in your home country again.
If you are a resident in France, the rental income is added to your other income and is taxed at the progressive rate (up to 45%).
Can I file my French tax return online?
Yes, you can file your personal tax return online. It’s mandatory for business tax returns to be filed online.
To create your personal online account, you will need to have these three tax identification numbers:
- Numéro de télé-déclarant,
- Numéro fiscal
- Revenu fiscal de référence
To create a business online account, you will need your number SIREN and a valid e-mail address.
Who can help me with my French tax return?
The French tax system can be really complicated – especially for non-residents.
(Property Tax International) PTI offers a specialised French tax filing service to minimise your tax bill and maximise your profit potential. Their tax experts will assist you with the entire process of filing rental tax forms in respect and will even communicate with the French tax authorities on your behalf. They will keep you updated through the entire process.
You can find out more above PTI’s French tax return service through their website.
