How can capital gains deferral and reinvestment in boutique or traditional hotels be efficiently reconciled in France?
By Christopher Boinet, Lawyer at the Paris Bar and Partner at In Extenso Avocats and Anne Epinat, Partner In Extenso Avocats
The recent Covid crisis has highlighted the resilience of the hotel sector in France. An investment in a hotel (as in a boutique hotel) should also be regarded by investors as a “pleasure asset”. When benefiting from the French favourable tax reinvestment regime, what should investors be looking at if they wish to make the switch to hospitality?
Suggested course of actions to be followed by the investor
First, the future investor must successfully dispose of the shares of their former company, and one of the common obstacles to the disposal of these shares for the seller/future hotel investor is capital gains tax (taxed at 30%). It should be noted that in most cases, capital gains (equal to the difference between the sales price of the shares and the subscription or acquisition price of the same shares) are significant.
To avoid being taxed, the prospective seller can transfer the shares of the company he wishes to sell to a personal holding company. The capital gains on these shares will then be subject to tax deferral for the contributor, and the capital gains on the sale of these shares by the holding company will hypothetically be null or negligible: as the sales price is equal to the contribution value, the two operations will not therefore be subject to taxation if the deferral is maintained.
In principle, the contributor’s tax deferral ceases in the case of resale of the transferred shares by the holding company within three years, unless the holding company reinvests at least 60% of the proceeds of the sale in an economic activity within two years of the sale.
It should be remembered that in France the management of personal property or personal real estate (furnished or unfurnished property rental activity) does not benefit from this exemption. The maintenance of the deferral is conditional on the reinvestment of the capital gains generated by the sale in the financing of permanent operating resources allocated to an economic activity, and by the operational management of the investor. The operational nature of the investor’s involvement in the management should be studied in detail, particularly if a hotel management contract is proposed.
With this in mind, if the investor chooses to reinvest in a real estate asset dedicated to hotel or hotel-residence use (and thus of an economic nature), the conditions for deferral are met.
Precautions in the event of works on the hotel should also be considered, as the investor must often take into account hotel renovation or extension works. This phase may significantly delay the hotel’s opening and thus weaken eligibility under Article 150-0 B TER of the French General Tax Code.
The latest major investments made in the hotel industry, particularly in the thalassotherapy sector and in hotel programmes in Paris, show that these investments are eligible for tax reinvestment. This must nevertheless be examined on a case-by-case basis.
Beyond the substantial tax aspects, investors are advised to ensure that their hotel investment is a pertinent investment in its market segment (including works), particularly with a view to a resale in the medium term.
Good tax advice is valuable for confirming the eligibility of a hotel reinvestment, since the economic nature of the reinvestment may subsequently be called into question by the French tax authorities, with immediate taxation of the capital gains. For example, even though an investment in a company holding the real estate and the business is, in principle, economic in nature, this is not the case for the acquisition of one company holding the real estate and another company holding the business, one of which has granted a commercial lease to the other.
In this case, the French tax authorities tend to consider that the reinvestment in the company holding the real estate is not eligible, as it is a property rental activity (that is excluded). A ministerial response regarding this issue has not yet been issued (Question N° 40906 from Mr. Joan Bachelier, 7 September 2021).
The final stage is the actual hotel acquisition. This phase starts with buy-side due diligence covering accounting, technical and tax aspects – all essential for making an informed decision on whether to go ahead or not. To respect the short timeframe for reinvestment, the investor will seek to negotiate rapidly with the seller to close the deal in time, i.e.:
- negotiating on acquiring control of the company that owns the hotel business and real estate and the change of management,
- the whole accompanied by an efficiently negotiated asset and liability guarantee regarding accounting, legal and tax aspects to protect against any unpleasant surprises.
Failing this, the entire hospitality reinvestment project will be undermined.
In conclusion, “all small obstacles become big if they are not addressed.” Quote from Henri-Frédéric Amiel’s diary, 23 January 1869.
By Christopher Boinet, Lawyer at the Paris Bar and Partner at In Extenso Avocats and Anne Epinat, Partner In Extenso Avocats and Olivier Charpentier-Stoloff and Roman Kowalik partners and tax specialists in Extenso Avocats ,