In the context of the Covid-19 crisis, the government has called on landlords to write-off rents to help tenants experiencing cash-flow difficulties at the current time. These write-offs give rise to two types of difficulty in relation to tax: for landlords, they raise the question of whether they are deductible charges, while tenants subject to corporation tax rules need to determine whether they are taxable income under ordinary conditions.
The second amending finance law for 2020, adopted on 23 April 2020, secured the tax treatment of these operations by introducing derogations from ordinary law for both landlords and tenants.
1. How does the new tax system work for landlords?
- For landlords that are commercial companies: companies that agree to write off rental receivables may deduct those debt write-offs from their taxable profit, without it being necessary to justify the normal nature of such a write-off. In fact they will count as a charge whose deduction is explicitly provided for by law, as already exists for debt write-offs in favour of companies in difficulty. In practice, this charge will offset the income recognised in the accounts in respect of the rental receivable.
For example, if a company that owns a shopping centre premises agrees to write off the rents owed by the operators of the retail space, that debt write-off will be deductible from its taxable profit without the need to justify the normal nature of the transaction.
- For individuals: waivers of future rents and rent write-offs will not be considered as taxable real-estate income.
2. Which rents are affected?
- Only rents relating to leases taken out by companies and ancillary charges (i.e. charges corresponding to the waived rents) are affected.
- The system is temporary: it relates to debt write-offs and rent waivers granted between 15 April 2020 and 31 December 2020.
3. Who can benefit? What are the limits?
- All landlords can benefit from it: individuals who receive real-estate income, commercial companies, landlords of furnished premises, landlords that sublet premises, etc.
- If the tenant company is operated by an ascendant or descendant of the landlord or a member of the landlord's taxable household, the landlord must be able to justify the company’s cash-flow difficulties.
- If the landlord is a commercial company, there must not be any relationship of dependency with the tenant company, notably excluding any intra-group leases.
In reality, the new measures offer legal certainty for landlords since they guarantee commercial companies that the write-off of rental receivables can be deducted from their result without any possible subsequent challenge from the authorities.
The same is true for private landlords who waive collection of future rents or write off their recovery: those waivers and write-offs will not be qualified as gifts to be included in taxable income.
4. The new rule for tenants
For tenant companies, the debt write-off will constitute taxable income which will offset the corresponding rental charge.
However, we know that Article 209 of the French Tax Code stipulates that in the event of a deficit recorded during a financial year, that deficit is considered as an expense for the following financial year and deducted from the profit made during that financial year, up to a limit of €1 million plus 50% of the taxable profit for that financial year over and above that first amount.
In order not to penalise tenant companies, the second amending finance law for 2020 stipulates that the debt write-off will increase the ceiling of €1 million for the allocation of previous deficits.
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