Professional furnished rentals: what about non-residents?

This article is intended for people who do not reside in France but receive income from a furnished rental activity.

The activity of professional furnished rental company (LMP)

To be considered “furnished“, a living space must be equipped with all the necessary furniture and equipment. Thus, it is considered that a furnished dwelling is “a decent dwelling equipped with furniture in sufficient number and quality to enable the tenant to sleep, eat and live properly with regard to the requirements of daily life”.

The list of essential furniture and equipment is established by Decree No. 2015-981 of 31 July 2015.

According to Article 2 of the Decree, the furniture of a furnished dwelling must include at least the following elements:

• bedding including duvet or blanket;
• window shading device in rooms intended for use as a bedroom;
• baking trays ;
• microwave oven or oven;
• refrigerator and freezer or, at least, a refrigerator with a compartment providing a temperature of – 6 °C or less;
• crockery necessary for meals;
• kitchen utensils;
• table and seats ;
• storage shelves ;
• luminaires ;
• household maintenance equipment adapted to the characteristics of the dwelling.Rents for furnished premises are taxed in the Industrial and Commercial Profits category.

Consequently, to be considered as a professional furnished rental company, two cumulative conditions must be met:

The annual income from the activity for the entire tax household exceeds a threshold of €23,000, which corresponds to all the rents received by the taxpayer.
These revenues exceed the other operating income of the tax household.
It should be noted that according to a decision of the Constitutional Council No. 2017-689 QPC-JO of 9 February 2018, the condition of registration in the Trade and Companies Register was deemed “unconstitutional”.

2. The advantages related to LMP’s activity

The deductibility of expenses related to the activity:

The status of professional furnished rental company allows several advantages when the landlord opts for the actual regime. This tax system allows all expenses related to the activity to be deducted.

Examples of deductible expenses

• property tax;
• insurance costs;
• management fees;
• the fees of the chartered accountant;
• maintenance and repair invoices;
• subscriptions and miscellaneous consumptions integrated into the amount of the rent but for which you are invoiced (e.g. telephone bill, internet subscription);
• depreciation, which corresponds to the impairment of an asset recognized each year as a result of its use.

Deficits related to the activity:

Deficits generated by the activity are chargeable to the overall income, without limitation.

If the total income for the recognition year does not allow this deficit to be charged, it is carried forward successively to the total income for subsequent years, up to and including the sixth year.

Tax on real estate wealth:

Professional furnished rental companies are in principle not liable to pay property tax on property used in this activity.

It should be noted that in order to be exempt from this tax, the tax authorities require that the activity of LMP be carried out on a principal basis.

In addition, “the members of the household must earn from this activity more than 50% of the income on account of which the tax household is subject to income tax in the categories of wages and salaries, industrial and commercial profits, agricultural profits, non-commercial profits, and the income of the managers and partners mentioned in Article 62 of the CGI”. According to BOFIP BOI-PAT-IFI-30-10-10-10-10-10-20180608.

Capital gains:

The professional furnished rental company is subject to the rules governing the taxation of professional capital gains. The latter may benefit from the capital gains exemption provided for in Article 151 septies of the CGI, when the activity has been carried on for at least 5 years and the annual rental income does not exceed €90,000 excluding tax.

Between €90,000 and €126,000 in revenue, the exemption is partial.

Which taxation for non-residents?

Article 155 of the General Tax Code sets out the conditions necessary to be considered a professional lessor.

As a reminder, the annual income from the activity must be higher than €23,000 and must exceed all the income from the activity of the tax household.

Thus, the question for non-residents was whether income from foreign sources was also included in the calculation.

According to a reply from the Ministry of 17 May 2018, “The preponderance of revenues is assessed by taking into account all taxpayers’ income and, more generally, the tax household, provided that such income is taxable in France pursuant to French legislation and, where applicable, international tax treaties”.

It is therefore understood that for non-residents, only taxable income in France is used to assess the LMP condition. Income that is only taxable abroad and that they otherwise receive is not withheld.

Why are tax treaties important?

If you are a non-resident but have income from a professionally furnished rental activity in France, you must refer, if it exists, to the tax treaty concluded between France and the State in which you reside.

In most cases, particularly where the agreement is drafted under the OECD model, real estate income is taxable in the State in which the property is located.

Be careful, however, to make sure you are well informed, because even if France has concluded tax treaties with many States, there are still countries for which this is not the case. You will then be taxed twice on the income you earn from your rentals, in France and in your country of residence.

Example: Mr. X resides in Denmark, which owns a property in Lyon, France, and rents it out. The income from this rental will be taxed in France, as the property is located on French territory, but also in Denmark, as it is the place of its tax residence.

On the other hand, Mrs Y resides in the United Kingdom and derives rental income from her property in Lyon. The latter will then be liable for tax in France on the income from this property, but will not be doubly taxed in the United Kingdom (through the charging of a tax credit).

What is the difference between these two examples?

The bilateral agreement signed between France and Denmark was canceled on 1 January 2009 due to a disagreement between the two countries, particularly in relation to the treatment of private pensions.