The legal separation between real estate asset ownership and operational management is not a recent arrangement. However, it structures an increasing share of real estate investment operations in France and Europe, driven by financing logic, risk management, and tax optimization. The HoldCo/PropCo duo appears in most institutional files, but its concrete functioning and regulatory limits remain poorly understood by some investors.
Economic Substance of the PropCo: The Overlooked Point in Arrangements
The principle seems simple: one company (PropCo) owns the buildings, another (OpCo) operates the business, and a holding company (HoldCo) oversees everything. The legal reality is more demanding.
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Since the implementation of the European anti-tax avoidance directives (ATAD 1 and 2) and their national transpositions, tax administrations are scrutinizing the real economic substance of the PropCo more closely. An empty shell that merely holds a property without its own governance, identified premises, or documented risk-taking undermines the entire arrangement.
In practice, to secure the deductibility of interest expenses and the reality of rents charged between group entities, the PropCo must demonstrate that it assumes an autonomous economic risk. General anti-abuse rules (GAAR) allow authorities to reclassify intra-group flows if the PropCo does not present sufficient substance. This tightening requires detailed documentation of governance and the risk assumed by each entity.
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To understand the HoldCo and PropCo structure in its practical implications, one must go beyond the organizational chart and delve into the details of compliance obligations.
Bank Financing and PropCo: What Lenders Really Look At
One of the most frequent arguments in favor of the PropCo arrangement relates to financing. A company that holds only real estate assets, without operational debt or operating risk, offers a more transparent credit profile for banks. Feedback from credit managers published since 2022 confirms the comparative advantage of so-called “clean” PropCos in negotiating real estate debt.
However, the rise in interest rates and the volatility of the real estate market post-2022 have changed practices. Lenders now require that intra-group leases between OpCo and PropCo be concluded on fully competitive terms. This means explicit indexing of rents, a minimum lease duration, and formalized revision clauses.
An undervalued intra-group lease or one lacking an indexing mechanism triggers warning signals during the financing file review. Bank covenants increasingly incorporate ratios calculated based on the actual rental flows of the PropCo, not on consolidated projections at the HoldCo level.
Criteria That Make a Difference in a Banking File
- The intra-group lease must reflect local market conditions for comparable assets, with indexing based on a recognized index (ILC, ILAT, or equivalent depending on the nature of the asset).
- The PropCo must present a debt ratio consistent with the market value of the asset, without excessive dependence on the OpCo’s cash flow.
- The governance of the PropCo (board of directors or separate management) must be formalized to avoid any confusion of assets in the eyes of the lender.
Tax Reality of the HoldCo/PropCo Arrangement in France
The French tax framework adds specific constraints. The deductibility of interest expenses within a group is capped by thin capitalization rules and the mechanism for limiting net financial charges. Interest paid to related entities is only deductible within certain limits, which reduces the theoretical tax advantage of the arrangement.
The issue of transfer taxes constitutes another point of friction. Transferring shares of a PropCo rather than the property itself can sometimes reduce the tax burden of the transaction. Available data do not allow for a conclusion that this optimization remains sustainable: the French tax administration has strengthened its controls over the transfer of shares in real estate-dominant companies.
Intra-group Rents and Transfer Pricing
The rent charged by the PropCo to the OpCo must correspond to a demonstrable market value. A significant discrepancy exposes the group to an adjustment under transfer pricing. The burden of proof lies with the taxpayer, who must provide relevant rental comparables.
This requirement for full competition aligns with that of bank lenders. A poorly calibrated intra-group rent undermines both the financing and the tax position of the arrangement.
Governance and Operational Risks of a Multi-Entity Scheme
Multiplying legal entities generates significant management costs: separate accounting, statutory auditing, compliance obligations specific to each company, legal secretarial fees. For a private investor or a small business, these fixed costs can absorb part of the expected tax gain.
The risk of asset confusion also exists. If the PropCo and the OpCo share the same executives, premises, and bank accounts, a court may pierce the corporate veil in the event of a dispute. Legal separation only protects if it results in a real separation in daily management.
- Each entity must have distinct bank accounts and independent accounting.
- Decisions regarding real estate assets (works, sales, refinancing) must be made and documented at the PropCo level, not at the HoldCo level.
- Regulated agreements between group entities must be approved according to the legal procedures applicable to each corporate form.
Field feedback varies on the asset threshold at which the HoldCo/PropCo arrangement becomes truly relevant. For a single modest-sized asset, the structural costs may exceed the savings achieved. The decision depends on the number of assets, their unit value, and the medium-term divestment strategy envisioned.
The HoldCo/PropCo arrangement remains a powerful structuring tool for significant real estate portfolios, provided that each entity has verifiable economic substance. The strengthening of European tax controls and the increased demands from lenders since 2022 reduce the leeway for purely artificial schemes. Before creating a PropCo, the question to ask is not “how much will I save” but “can I justify the economic reality of each company in the group”.