Tax implications of a rent waiver in the context of the current sanitary crisis

In the context of the current sanitary crisis, the second Amending Finance Act for 2020 has introduced a series of measures into French tax law, one of which allows landlords to deduct the amount of their rent waivers from their taxable results.

Although these measures are most welcome to help the economy, the relative urgency in which they are taken jeopardises the robustness of their legal grounds and various questions need to be addressed with caution upon implementation.

Article 3 of the second Amending Finance Act for 2020 has rendered the conditions under which rent waivers can be deducted for income tax purposes less stringent when granted in relation to the period between 15 April and 31 December 2020. In particular, landlords would not be required to demonstrate the existence of a sound commercial rational or of the tenant’s specific financial difficulties.

Despite the incentive nature of this new measure, certain conditions are required among which the tenant (i) must be an enterprise (i.e. not a natural person), and (ii) should not be a related entity vis-à-vis the landlord. Note that contrary to the tenant, the landlord can be a natural person in which case, proof of the specific financial difficulties of the tenant would be required if it is an enterprise managed by a relative.

Provided the conditions for tax deductibility are met, the landlord would also be allowed to deduct any expenses engaged in relation to the rents waived.

As far as the tenant is concerned, the law has not gone as far as allowing the benefit of the rents waiver to be non-taxable but has only loosened the use of carry-forward tax losses by allowing them not to be capped up to the amount of the debt waivers.

If the above incentive measure is welcome, it does however raise various questions in particular for professional real estate investors often established as SIICs or OPCIs.

The second Amended Finance Act for 2020 does indeed not address specifically the position of landlords having elected for the SIIC regime or having obtained an OPCI accreditation from the French Financial Markets Authority.

Landlords having elected for the SIIC regime are exempt from Corporate Income Tax subject to various conditions, notably, to the satisfaction of certain distribution obligations. These obligations are based on a tax result computed in accordance with standard corporate income tax rules. It seems reasonable to consider that, provided the conditions of application of the new tax measure are met, the rents waived should not be taken into account to assess the distribution obligations.

Regarding OPCIs and their tax transparent subsidiaries, distribution obligations are based on an accounting result determined pursuant to the provisions of the French Monetary and Financial Code. In this respect, the amount of rents waived should therefore automatically impact the amount of net rent proceeds used for the purpose of determining their distribution obligations.

The above, together with other detailed impacts of the measure for professional landlords, would however need to be clarified and the French tax authorities’ administrative guidelines would be welcome in this respect. Until then, the practical implementation of this new tax measure should be considered with caution and on a case by case basis in order to fully secure its implications for certain taxpayers.

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Sarvi Keyhani

Sarvi Keyhani, Partner, is specialized in real estate tax. She assists international investors into complex real estate transactions. She particularly advises many international real estate funds about the structuring of […]

Soufiane Jemmar

Soufiane Jemmar, International Tax Director at Deloitte Société d’Avocats specializes in real estate tax. He advises French and international private equity funds within the framework of their inbound and outbound […]