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The purchase of real property in France by a same-sex couple will often raise a number of somewhat complex legal and inheritance issues at French Law which, whilst not insurmountable, will influence the manner in which the acquisition is structured.

The optimum situation would usually be considered to be that of being able to leave the real property to one of the partners upon the death of the other whilst mitigating insofar as possible the French inheritance tax consequences.

An overview of certain possible French law structures is set out below. However, it is strongly recommended that professional advice from a duly qualified French Law practitioner should be obtained well prior to entering into any commitment, including binding preliminary documents such as a “compromis” or a “promesse unilatérale de vente” or “contrat de réservation”.
 
I. Indivision

The French civil law concept of “indivision” is somewhat akin to the common law concept of joint ownership. In France, this is usually the default structure where two or more individuals who are not related by marriage decide to acquire property in France. It is thus often the manner in which same-sex couples are led to envisage purchasing real property in France.

“Indivision” at French Law is the legal situation in which two or more individuals hold real property rights in land or a dwelling (a house or an apartment for example) and each individual concerned is therefore the owner of a right to a share of the property and is referred to as an “indivisaire”

The respective share of the whole owned by each “indivisaire” (e.g. 50 % - 50%, or, say, 80 %-20%) corresponds to the percentage amount each has theoretically contributed to financing the acquisition of the real property.

It follows that in the event of it being established that there is a considerable difference between the stated percentage of the joint ownership which is held by an “indivisaire” and the actual funding contribution made thereby, there is a risk that the French tax authorities might well seek to re-qualify the situation.

For example, in the particular circumstance of a same-sex couple, where the earnings were considerably different as between the partners, the French tax authorities might seek to hold that any shareholding which does not correspond to the actual funding contribution is in fact a disguised gift made by one partner to the other and the French tax authorities could claim up to 60% of the value of whatever monetary amount were involved.

It should also be made clear that the “indivision”, although a French legal concept, is not a legal person or body corporate and thus the “indivisaires” would only be held to be jointly and severally liable for those debts of the whole which are set down by statute or pursuant to a specific contractual stipulation.

Advantages of an “indivision”

  • An “indivision” constitutes a simple and inexpensive legal framework and is generally considered to be the default situation where a real property purchase is undertaken by two or more people.

Disadvantages of an “indivision”  

  • French statute, and notably the applicable provisions of the Civil Code, set down the legal principle that "nul n’est tenu de rester en indivision" or in unofficial translation “no one shall be held to remain in an “indivision” and therefore the “indivision” may be brought to an end, at any time, by one of the “indivisaires”.
  • The other principal disadvantage is that for an “indivision” to take a valid decision, a unanimous vote is required (or in special circumstances relating to the management of an “indivision” a 2/3 majority is needed). Thus the “co-indivisaires” need to get on relatively well together; failing which the management of the “indivision” could be completely blocked and no valid decisions taken.
  • There are limited palliatives to such disadvantages, for example
  • to put in place a “convention d'indivision” or co-ownership agreement between all the “co-indivisaires” (limited to a maximum period of 5 years but renewable)
  • to put in place contractually a preferential right to purchase the share in favour of the other “co-indivisaire(s)”
  • to put in place a Will or a PACS agreement (same sex civil union pact) to deal with the inheritance issues in the event of the death of one of the “co-indivisaires”
  • French Law does though provide for a number of other possible legal structures which will generally overcome many of the disadvantages of an “indivision”

II. Société Civile Immobilière

The Société Civile Immobilière (SCI or Real Estate Holding Company) is a French company or body corporate.

It is should be clearly noted however that the SCI is not a limited liability corporation and is held to be a transparent entity in regard to its shareholders.

In other words, if the unlimited liability company is not able to meet its debts, then the creditors of the company would generally be able to pursue the individual shareholders on their personal assets.

The essential, if not the only, vocation of the SCI is therefore to hold real property and it should not be used as a trading company.

This particular form of French company is governed by the applicable French Civil Code provisions and notably articles 1845 et seq.

The usual approach to acquiring property via an SCI would be for each of the prospective shareholders to sign the memorandum and articles of association which inter alia define the respective share holding of each and to appoint at the same time one or more Gérant(s) i.e. the CEO(s) of the company (in that an SCI does not have Directors in the common-law sense).

There is not normally any legal obstacle to the SCI acquiring property by having recourse to a bank loan which would though be guaranteed personally by each of the shareholders. Moreover, the shareholders are sometime required to give a joint and several guarantee (as between them) to the lender in this circumstance.

As a matter of French law however, it is the SCI which is the owner of the property and the shareholders are simply held to own the shares thereof rather than the property itself, although it is clear that such a distinction is not necessarily self evident to the layman.

Advantages of an SCI

Among the perceived advantages of an SCI are

  • the possibility of having a greater number of shareholders and a relatively easier and clearer method of sharing property
  • one individual who is a shareholder may not force the other shareholders to sell the property (as is the case in an “indivision”); instead such decisions are taken according the majority requirement set down in the memorandum and articles of association
  • for the event of the death of one of the shareholders, the memorandum and articles may provide for an approval system for any new shareholder and which limits the possibility for the heirs of the deceased becoming shareholders in his or her stead
  • it is possible, in theory at least, to sell the shares without selling the property as a whole, but, that said, in practice it is rare to find a buyer for shares in an SCI who is not a already an existing shareholder of the SCI in question
  • the shares in an SCI are considered at French Law to be movable property (as opposed to real property) and thus the inheritance rules applicable to movable property are governed by the law of the place of final domicile of the deceased
  • thus, for individuals who are not French residents, the fact of acquiring property through an SCI will often mean that the part of the estate at death which is made up of movable property will avoid being held to be subject to the mandatory French reserved heir-ship rules in favour of the sole offspring of the deceased.

Disadvantages of an SCI
  
Among the perceived disadvantages of an SCI are

  • as in the case of an “indivision”, the first major disadvantage is seen to be the heavy tax burden upon the same-sex partner of the shareholder in an SCI who inherits the said shares from the deceased shareholder
  • the rate of inheritance tax is 60% and this figure is the same whether the inheritance flows from an “indivision” or from the inheritance of shares in an SCI.
  • the palliative is often held to be to put in place a PACS (civil union agreement) which would normally permit the surviving partner to inherit the estate of his or her deceased partner with no inheritance tax being due
  • the other major disadvantage is usually held to flow from the day-to-day legal obligations involved in running a company e.g. keeping up-to-date books and accounts, filing the relevant papers regularly with the French Tax and Company authorities, holding, and preparing and filing minutes for, AGMs and/or EGMs at the requisite time of the company’s year, appointing and changing Gérant(s) etc.
  • over and above the cost in undertaking such mandatory tasks, there is always the risk of the shareholders being held civilly (and possibly criminally) liable if the requisite steps are not undertaken
III. The tontine

The “tontine” which is more usually called a “clause d’accroissement” by French law practitioners in this field is a contractual agreement between several people which brings property or capital into a notional common structure, but which property or capital (and/or the fruit thereof) will be ultimately held as a matter of French law to belong solely to the last surviving individual of the original grouping.
 
It is not a structure generally favoured by French law practitioners in this field, but has over the years been relatively widely used by non-French nationals wishing to acquire property in France and notably by unmarried or same-sex couples.
 
Thus, in the event that one of the spouses or partners were to die, the surviving spouse or partner would be held to be the sole owner of the property ab initio and the deceased would be held never to have enjoyed any ownership rights over the property.

Advantages of the tontine
  • The principal perceived advantage of the tontine is that in the case of a same-sex relationship, the transfer of the property to the surviving partner is assured; in that, upon the death of the first partner, the property is held to have been part of the estate of the surviving partner since the date that the property was originally acquired.

Disadvantages of the tontine

The perceived disadvantages of the tontine would include
  • Notwithstanding its appearance, the tontine agreement is extremely rigid and does not create an “indivision”. It is therefore not possible for one of the partners to bring the agreement to an end unilaterally or to withdraw without the formal approval of the other.
  • For example, the fact of a same-sex couple splitting up would have no effect on the tontine agreement and, even in such a circumstance; the tontine agreement may only be brought to an end with the formal agreement of all the parties thereto.
  • Moreover, the only way for the property to be sold is for all parties to the tontine to grant their full and unfettered agreement to the proposed sale. If one of the partners is not willing to do so, the only way to resolve the situation (on the basis the property was acquired by two individuals) would be to wait for the demise of one of the parties to the tontine agreement
  • A further perceived strong disadvantage flows from the position taken by the French Tax authorities, which notwithstanding the uncontested civil law position that the property is held to have been in the estate of the surviving partner since its purchase, will in certain circumstances (and subject to exceptions) attempt to levy inheritance tax at the death of the first partner.


 IV. Other possible solutions under French law

There are a number of other somewhat more complex solutions under French law such as the “achat croisé” or the “démembrement de propriété” which are not dealt with here.
  • French legal tools linked to the foregoing
Most of the several possibilities set out above necessitate, in any event, the putting into place (in parallel) of certain other French legal tools in order to enable the property to be freely disposed of at the death of the first partner.

The reason is that under French Law, same-sex partners are not considered to be legally entitled to inherit one from the other.

Last will and testament

Thus, in the event that two same-sex partners wish that the survivor to become the full owner of all the real property, a French Will is necessary in addition to whatever other steps from the foregoing have been taken.

The least complex form of testament under French law is a holographic Will (“testament olographe” in French) which must be entirely hand written, signed and dated in the hand of the testator but great care should be taken in its drafting to avoid ambiguity.

However, in the case that the partners have children (from the current or any previous relationship) then such children have a statutory right to inherit automatically the major part of the estate (which relates to real property situated in France) of the deceased parent. This is a mandatory public policy provision which cannot be overturned by a Will. If there were no children (and no previous un-divorced spouse) the property of the deceased partner may be left to whosoever the latter wishes.

PACS or Pacte Civil de Solidarité

Last, but by no means least, same-sex partners may enter into a PACS (or civil union agreement) which is generally considered to be the most appropriate solution from a French tax perspective, but this would need to be linked to a Will in which each the made the other his or her beneficiary.

Recent legislative amendments have removed any requirement to pay inheritance tax on the death of one of two same-sex partners who have entered into a PACS.

The PACS is subject to the following conditions

  • the partners of whatever sex must be majors (18 is the current age of majority in France)
  • the partners must have a common residence

However, a PACS may not be entered into by
  • direct blood line relatives (father, mother, children etc)
  • collateral relatives up to the 3rd degree (such as siblings, uncles, aunts etc)
  • direct in-laws (mother-in-law, son-in-aw, father-in-law, daughter-in-law)
  • if one of the couple is already married
  • if one of the couple has already entered into a PACS with someone else

How to formalise a PACS?

It is necessary for both the prospective PACS partners to attend, in person the Tribunal d’Instance (Lower District Civil Court) which is competent for the place of their residence.

The couple is then required to file with the Court Registrar the PACS agreement they have entered into and executed as well as a number of ancillary documents.

Certain noteworthy effects of the PACS

The partners with the PACS commit themselves not only to live together but also to provide reciprocal material aid and assistance; such reciprocal material aid and assistance being proportionate to the respective financial means of each of the partners, unless specifically provided otherwise in the agreement.

The partners are jointly and severally liable for debts contracted by either of them in regard to their day-to-day needs but this liability does not extend to commitments which are manifestly excessive.

Unless provided for specifically otherwise, the partners are held to be subject to the “régime légal de la séparation des patrimoines” being the statutory property agreement as between two individuals who have entered into a PACS...

Bringing a PACS to an end

The is brought to an end by
  • the death of one of the partners or
  • the marriage of the partners (or of one of them)
  • the joint declaration by both partners
  • the unilateral decision of one of them

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