TWO WRONGS DON’T MAKE IT RIGHT

IS THERE A RENTAL AGREEMENT WITHOUT A LEASE?
One of my clients is an American woman who is experiencing a complicated and unpleasant situation regarding her rented apartment. Ten years ago, her future French husband had lived there with a girlfriend. When that relationship broke up and he left, he sent a registered letter to the landlord asking that his name be removed from the lease. A year later the girlfriend herself decided to move out, but he was able to convince her to let him move back in without informing the landlord, and therefore without taking her name off the lease. He then married my client, they had a child, and the family lived in the apartment.

When they divorced, the judge gave custody of the child to the mother along with the right to live in the family home, i.e., the said apartment. Recently she panicked because the ex-husband informed the landlord that an intruder was living there. Consequently, the landlord sent her a threatening letter. The good news here is that the tenant, my client, is well protected under French law and can prove the reality of the legal relationship as well as a long lasting usage of the lodging in good faith. Because she had several years of rent receipts made out first in both names, Mr. and Mrs., as well as a few in her own name, she could prove that the landlord had known for years that she had been living there. From the legal standpoint the landlord is showing bad faith to argue that she has no lease. If she should have a problem paying the rent, the landlord cannot use the lease argument when the issue was never brought up before.

The key here is being able to prove that the lodging is your domicile or your home. This illustrates again that the best thing to do in France is to keep all relevant documents and receipts in a file in case there is a legal challenge.

INCOME TAX IN FRANCE
Over the years the month of May has become an important time regarding French income tax. For example, by May 15th you must pay the second installment of your annual income tax. Remember there are three payment dates: February 15th, May 15th, and September 15th. The system is set up so that on each of these dates, people pay a portion of the full amount of taxes due, normally in three equal installments. I would like, however, to highlight one important comment here. The first two payments are equal to one-third of the taxes you owed the previous year (2007), since the tax collection agency does not yet know your income for the current year (2008). The Trésor Public handles the entire process. This division of the French administration only collects income tax, it does not calculate it. Another system has now become popular in which you automatically make monthly payments from your bank account to the tax office and avoid all problems, until, of course, a dispute occurs!

The second May rendez-vous with taxes is the submission of your income declaration to the tax office. The official information I have received is that the forms will be available at the beginning of May and must be filed by May 31st. French residents with foreign income will need to fill out a minimum of these three forms: 2042, 2042C and 2047. The forms will be available on the government Website, http://www.impots.gouv.fr in a few days.

Also, since it is tax season, I would like to remind readers of a few fiscal issues regarding residency and home rental in France. The definition of a French fiscal resident is addressed hereafter in the second Q/A. If a person or a family is considered to be a French fiscal resident, then they must declare their total income to the French administration. Note that declaring both as an American citizen and a French fiscal resident does not mean you are being taxed twice. By strictly applying the tax treaty between both countries, the primary fiscal tax collector is the country of residence – in this case, France. That said, this treaty also defines some exceptions.

The other tax issue is that renting out an apartment or house in France always generates French income that is taxable in France. This is true even if the owner and tenant are American residents, and the payment is made in dollars in the U.S. Naturally, the question is: "How would the French tax inspector know that the place is being rented?" There are telltale signs, such as the taxe d’habitation that applies to a secondary residence, the EDF electricity meter that is in the owner’s name, and the amount of electricity consumed throughout the year – not to mention the gardien(ne) who knows the situation within a couple of months after the rental arrangement has started. The French tax on this income follows almost the same guidelines as in the U.S., that is, only the profit is taxed (rental income minus expenses related to the property). The one exception is when you qualify for the special ‘micro foncier’ status.

The good news in all of this is that French tax inspectors, as part of their job description, are also knowledgeable tax advisors for the public. Interestingly enough, these civil servants enjoy this part of their job and are often polite and helpful. They will show you how to minimize your tax bill while explaining the reasons, which is often the most important part of their service. This, of course, requires you to master French and become accustomed to dealing with the French administration. Though these inspectors can give technical answers to specific questions, they are not good at handling open-ended questions.

Best regards,

Q & A

OWNING FRENCH REAL-ESTATE THROUGH A FOREIGN COMPANY

QUESTION
I purchased an apartment in Paris about ten years ago and, at that time, I listed the owner as being an Isle of Mann corporation. The company signed a Promissory Note, payable to me personally, for the money I lent it when the apartment was purchased and remodeled. I believe the total amount I am owed on the Promissory Note is more than what the apartment is currently worth. I am agreeing to cancel the Promissory Note in exchange for the title of the apartment. I would like to transfer the title to my name in anticipation of the day when I will retire in Paris. I will be representing the company and will have the documentation to establish that I have the power to sign for this transaction. What would be the traditional documents that I would be expected to have? Can you assist me in this transfer?

ANSWER
The question, to start with, requires the advice of an extremely knowledgeable notaire before other professionals are brought in to assist you in the more technical aspects of your situation. In other words, what you think is very simple, is everything but simple. If I summarize your statement, this is what I understand:

“I own the company in full; it owns the apartment. So, I want to change the name of the owner to reflect the reality.”

I would like to go through this process for you below here and show what must be proved in order for this transfer to happen:

1 – WHO REPRESENTS THE COMPANY?
Often the person who owns the majority of the shares is also in charge of running the company. However, it is the decision of the corporation to choose its leadership, which then defines who represents the company.

a) – Empowering the owner
By the nature of these companies, its official representative is an employee of the firm who created the company in the first place. Therefore, you need to get a special authorization from the company, voted at a General Meeting or a Board Meeting or something equivalent, that has been properly recorded in such a way that you have the power to sign for this major transaction.

b) – Making the documents usable under French law
These documents that prove the existence and the good standing of the company, show the authorizations, must be officially translated into French by an official translator so that the French notaire can use them.

Now comes the tricky part. You must obtain a legal opinion from a lawyer registered in two bars who can state that the documents submitted are genuine and that indeed you have the right to proceed as mentioned. Since the Isle of Mann is part of the United Kingdom, there are plenty of lawyers that fit this requirement. The bad news is that the Isle of Mann has special autonomy status and is a known haven for anonymous companies. It is considered a fiscal paradise, unlike the United Kingdom. So, I would not be surprised if you need to find a lawyer registered in both the Isle of Mann bar and the French bar. Such a lawyer might prove difficult to find.

The entire set of documents listed below are needed to prove that you have full authority to sign at the notaire’s office as the seller.

2 – THE CAPITAL GAINS TAX
a) – The notaire withholds proceeds of the sale to pay the tax owed.
The company is the seller and, therefore, will have to pay the capital gains tax. Normally the taxes for the individuals who are non French resident, are 28.10% of the capital gain (selling price minus purchase price). The cost of the renovation done after the purchase can be included in the purchase price for this calculation, but only under certain conditions.

b) – An insurance company covers the fiscal risk of a possible error.
There is also a need to secure the payment of the gains tax and guarantee that in case of an error in the calculation that there is someone who can vouch for you to pay the extra tax. There are companies that offer this service for a fee. The notaire calculates the amount of gains tax due and escrows it from the proceeds of the sale. This calculation must also be approved by the guarantor company, since they are also at risk.

You must be prepared to pay all this, which means about 7% to 8.50% of the market price to be paid in the transfer of the title, plus these extra costs mentioned above.

3 – WHAT IS THE MARKET VALUE OF THE APARTMENT?
As mentioned above, a lot depends on the market value of the apartment. How the value of the property is estimated, therefore, is crucial. Unlike a normal sale, here there is no true market price. Therefore, the temptation is to grossly underestimate its value. Keep in mind that you will have the notaire and guarantor verifying your every step to prevent being liable for more taxes once the transaction is completed. They will want to stick to the most plausible price of the property, so that they run zero risk of being called as guarantor.

How much the property is worth and how you will pay for it are two issues that must be addressed early in the process. Your notaire should be of help with this. However, because the prices of real-estate in Paris have fallen does not mean that you can exaggerate the loss. The tax office works almost exclusively with the data coming from the neighborhood and does not believe claims of excessively poor property conditions.

Concerning how the promissory note will be addressed is completely an unknown for me, and I am not really sure that the notaire will accept this kind of document without asking for numerous guaranties to make sure of its authenticity. Because there is no fiscal or legal treaty between the Isle of Mann and France, this alone should deny you the right to use the promissory note.

So based on what has been explained, I believe this transfer will be quite costly to you as well as complicated to document. The choice of an excellent notaire is therefore essential since using a fiscal paradise company to sell property is an obvious red flag for the French tax authorities, who will want to launch a tax audit on you and scrutinize the deal. This transaction must be absolutely perfect for you to proceed without a lot of hassle.

DUTY-FREE PURCHASE AND GENERAL FISCAL STATUS

QUESTION
I would like to know if an American resident holding a French carte de séjour visiteur and who does NOT stay in France for more than half the year, can benefit from the duty-free program?
According to the tax-free window at Roissy Charles de Gaulle airport, if you have a carte de séjour and have been in France for 60 days or more, you cannot recoup the sales tax. If this is true, others might want to know.
Also, is a holder of a carte de séjour visiteur required to declare their income in France and fill out the French income tax forms?

ANSWER
The duty-free program has been set up so that tourists who purchase goods in France while they are visiting are reimbursed the sales tax, or VAT-TVA (Taxe sur la Valeur Ajoutée). The idea here is that this tax is paid to fund the general good of French people and French residents who benefit from the social services of the French administration. Since tourists do not benefit from these services, they are not required to pay the tax. This is the logic behind the program.

Now, a holder of a carte de séjour visiteur is considered a French immigrant having immigration status. But the very definition of an IMMIGRANT is that the person is not a tourist. So there seems to be a contradiction. The sign that you saw at the airport seems to make sense.

Following the same logic, an immigrant is assumed to be living in the new country of residence and, therefore, must comply with all the existing laws. This includes the obligation of declaring their worldwide income to the French government. After that, the various international fiscal treaties are applied to avoid double taxation wherever possible. Moreover, staying more than 183 days per calendar year in France is one of the four criteria that defines a French fiscal resident. The other three situations are:

1 – Having immediate family members who reside in France (a spouse and/or children),

2 – Having a French employer,

3 – Operating a French business.

The legal assumption underlying income declaration is that your primary residence is where you spend the majority of your time in a given year.

Therefore, it is possible that the holder of a carte de séjour visiteur who a) stays less than 183 days in France, b) is single, and c) does not work for either a French employer or in France, does not have to fill out an income tax declaration form. Now two additional comments about this.

1 - If the person does stay more than half a year and does not declare their income, that person violates the law and risks penalties and fines on the owed tax plus a fine of about 15 euros. Considering the terms of the Franco-American treaty, it is extremely unlikely that the person who holds a carte de séjour (which forbids them working in France) could owe any income tax to the French government. Therefore, the financial risk is only the fine mentioned above.

2 - Declaring your income to the French administration is almost the only way to prove your level of income. Since a lot of government aid is based on your level of income, not declaring your income because there is no tax to pay, can be to your detriment since it prevents you from benefiting from this aid. In short, it pays to declare.

CORRECTING THE WORK OF A CONTRACTOR

QUESTION
The water heater in my Paris apartment died a few weeks ago, so I contracted with a company that services these appliances to install a new one. They proposed a new model of the same manufacturer, and I signed the estimate. They did the work and now my new water heater does not properly fit in my kitchen because it is too deep by about an inch. The contractor is reluctant to do anything about this, saying they did the job I requested them to do and the appliance is not defective.
Can I get some customer satisfaction here, since they chose the appliance and not me?

ANSWER
For the longest time, saying you lived in France was synonymous with getting little customer satisfaction. At least this was the viewpoint of Americans staying in France. For many reasons, I steer away from comparing the French and American approaches to customer service, including the end result delivered to the client.

According to the legal regulations, in signing the job estimate you authorized the purchase and the installation of this water heater mentioned in the document. Therefore, when they claim:

“they just did the job I asked them to do and the appliance is not defective.”

Their statement is in fact the precise legal obligation of the contractor. You are guilty of not verifying the size of the appliance and checking whether this appliance was compatible with your needs. Remember, only you know what those needs are. Granted, I would also call this bad faith on the part of the contractor, but law must prevail.

As an aside, the frequent occurrence of these situations explains why French professionals have such a poor reputation.

Since a pure legal approach to your problem is not going to get you anywhere, you should try carefully tailoring your request to the contractor. I advise this approach, hoping that your first discussion has not poisoned the chances of its success.

You should contact the contractor and acknowledge that you indeed signed the estimate but without checking the specifications of the appliance, and that this was your mistake. That said, the technician from the company who prepared the estimate as well as those who installed the water heater were also at fault for not taking into consideration that the appliance did not fit the space in your kitchen.

Then you should ask the contractor if it would be possible for them to find another appliance of similar quality with smaller dimensions, and that you would accept this exchange without asking anything further and even offer to pay the difference in the purchase price.

The choice of the contractor is between an exchange that will not cost much and claiming that the employee who mounted the appliance was clearly incompetent for the job in terms of common sense. At that point, it starts to make financial sense to the contractor to satisfy you and find a reasonable solution for both sides. The chances of getting what you want will be much better, provided you continue to act according to French guidelines. Above all, do not take the approach: “I am the client and I have the right to get excellent service, regardless”. This could derail your chance of success. Keep in mind that in France there is no Better Business Bureau to contact and obtain effective help. Rather, you are totally dependent on the contractor’s good will to give you satisfaction. My advice is to cut your losses by doing what you need to do to get the right appliance and the right service.