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Le
‘dessous-de-table’
It
is not unheard of for purchasers of real estate property in
France
to be asked to pay some of the purchase price
unofficially under the table (known in French as a ‘dessous-de-table’).
The usual reason for this is that the vendor wishes to reduce his
or her liability to capital gains tax by receiving part of the sale
proceeds in cash or into another bank account without the amount forming
part of the sale price declared in the completion deed.
The
purpose of this issue of the week is to highlight some of the dangers of
such a transaction, especially to purchasers who are often not aware of
its full import and do not seek clarification of the implications.
How
can a ‘dessous-de-table’ be recognised?
The
practice is for there to be a separate agreement (usually not committed to
writing) providing for the payment of part of the price directly to the
vendor either in cash or by transfer to a nominated bank account, often
offshore. The first contract
will specify the price that is being officially declared.
The contract will include a condition to the effect that the price
given is the actual price and is not contradicted by any other form of
agreement. Despite this
condition, when the purchase completes only that part of the price
reflected in the contract passes through the notaire’s bank account.
Sometimes
the payment is said to be for furniture.
It is legitimate for the parties to organise separate payment for
furniture, though there must be a proper list with a valuation given in
order to protect the purchaser. If
furniture comprises too high a percentage of the purchase price (e.g. more
than 5%) then the taxation authorities may become suspicious.
If it is the case that the value of the furniture is
proportionately high then the parties can protect themselves against
investigation by having an inventory drawn up by a professional.
What
are the dangers of such a transaction?
It is against the
law
Article
1837 of the General Taxation Code governs the penalties that are
applicable to such transactions. They
can attract a criminal sanction of up to three years’ imprisonment and a
fine of up to 45,000 Euros, as well as the potential loss of civic, civil
and family rights.
The
tax that should have been paid can be claimed with penalties applied
The
taxation authority can claim the tax and apply punitive interest rates
e.t.c. which can substantially increase the amount owed.
Capital gains tax
The
capital gains tax liability will be passed on to the purchaser when it
comes to re-sale. If a
purchaser has paid a total of 100,000 Euros for a property with 10,000
Euros by way of ‘dessous-de-table’, the official purchase price of the
property would be 90,000 Euros when it comes to the calculation of the
capital gain made on any re-sale. His
or her capital gains tax liability would thus be increased by 10,000 Euros
and tax due on money which had been originally paid over that would not
otherwise by subject to this tax.
Reduced security
Money
relating to real estate property transactions is paid into a notaire’s
bank account due to the protection that this offers to both parties.
If a purchaser has paid a sum in cash or transferred money to an
offshore bank account and the sale does not then complete, it is likely to
prove impossible to recover it.
Effect
on rights of pre-emption and charges against the property
Sometimes
sales are subject to rights of pre-emption whereby another person or body
holds the right to step into the purchase in the place of a purchaser.
The notaire will notify the holder of any such right of the
transaction and the price. If
the holder of the right were to pre-empt, it would be at the officially
declared price. This would be
to the vendor’s disadvantage as he or she would not be paid the price
initially sought. The
purchaser could also be prejudiced as he or she may lose the property to a
pre-empting party that would not have been willing to pay the price that
was actually agreed.
If
charges against the property are revealed (e.g. mortgage securities) that
exceed the official purchase price but do not exceed the actual price
being paid, the purchaser could withdraw on this basis if there is a
condition covering this eventuality.
Our advice is that no party should enter into a ‘dessous-de-table’
transaction for the aforementioned reasons, be it with or without the
encouragement of ‘professionals’.
Purchasers can be told that the transaction will mean that the
notaire’s fees are reduced so saving them money but they should bear in
mind all of the possible consequences which may prove far more costly than
saving a few hundred Euros!
Purchases
of furniture are legitimate but care needs to be taken to ensure that they
do not effectively hide such a transaction by obtaining a full inventory
and, if necessary, an independent valuation where the furniture is of high
value when compared with the purchase price.
04/08/2003
- Issue of the week
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