In response to the Covid-19 crisis, at the beginning of the confinement period the French government called on owners of commercial lease properties to forgo rent collection to allow commercial lessees to save their cash or limit their debt.
To encourage lessors to forgive or forego rent from 15 April 2020 to 31 December 2020, the legislative authority set up a special temporary tax scheme (Amended Finance Act for 2020 of 25 April 2020).
The rules vary according to the lessor’s tax scheme.
1. Lessor taxed in the property income or non-commercial profits category
The Amended Finance Act states first and foremost that a lessor, taxed in the property income category (individuals or non-trading companies) or in the non-commercial profits category, is not liable for tax on rent and ancillary income that it elected not to receive.
Furthermore, the lessor may continue deducting the property expenses corresponding to income items that were forgiven or foregone (property ownership expenses, interest on property loans, insurance, etc.).
To qualify for these provisions, the commercial lessee shall be independent from the lessor. Two companies are deemed to be independent where neither company holds, either directly or via an intermediary, the majority of the other company’s share capital or exercises decision-making authority over the other company, or where the two companies are not controlled by a single third-party entity.
Furthermore, for lessors taxed in the property income category, the Amended Finance Act states that if the commercial lessee is operated by an ascendant, a descendant or a member of the lessor’s tax household, the lessor shall provide justification, by any means, of the commercial lessee’s cash hardships in order to qualify for these provisions.
2. Lessor taxed in the industrial and commercial profits category or liable for corporate tax
The forgiveness of rent and ancillary income by a lessor taxed in the industrial and commercial profits category or liable for corporate tax constitutes an expense that can be deducted from its taxable income, without requiring justification of the lessor’s interest in doing so, provided that the commercial lessee is independent from the lessor.
Rent forgiveness is thus a deductible expense that offsets the income recognised in the amount of the rent.
However, where the commercial lessee is not independent from the lessor, the rules of common law are applicable and debt forgiveness is only considered as a deductible expense if is commercial in nature and subject to standard management.
Recognition of debt forgiveness as an expense by the lessor implies recognition of taxable profit by the commercial lessee.