Real estate companies and the Franco-Belgian tax treaty: Council of State revises its jurisprudence!
In the context of an appeal against an abuse of power (ultra vires action), a taxpayer asked the Council of State to overturn the French administrative guidelines whereby, under the Franco-Belgian tax treaty, an SCI (French non-trading real estate company) could be counted as real estate for the purposes of capital gains tax, which would mean France had the right to tax said taxpayer – a resident of Belgium – on the sale of his shares in said SCI, which in turn held real estate located in France.
To general surprise, the Council of State ruled against the taxpayer and validated the above-mentioned administrative guidelines on the following grounds:
- capital gains on real estate are taxable in the state in which the property is located (Article 3 of the treaty);
- all undefined terms must be analysed according to the tax legislation of each of the states involved (Article 22 of the treaty): this provision must apply to the concept of real estate mentioned in Article 3, even though said article expressly refers to the laws of the contracting state for a definition of real estate (without reference to tax law);
- shares in companies known as sociétés d’attribution may be counted as real estate by France (§2 of the final protocol to the treaty);
What is surprising about the Council of State’s decision is that:
- on the one hand, it departs from the letter of the treaty, which refers to French law in general for the definition of real estate and, in particular,
- on the other, while under French law the capital gains regime governing real estate is in fact applicable in certain cases to disposals of shares in companies investing predominantly in real estate (namely companies that mainly hold real estate assets), the shares in these companies are not counted as being the same as the real estate itself. This is in particular highlighted by the fact that:
- the concept of real estate company is subject to at least six different definitions depending on the circumstances and the taxes concerned, with the definition used for non-residents differing from that used for domestic investors;
- the disposal of shares in a so-called real estate company may be taxed differently according to case. For example, disposals of shares in a company trading mainly in real estate by a natural person may be subject to the capital gains regime for real estate if the company is not subject to corporation tax, or to the single flat-rate tax (prélèvement forfaitaire unique – PFU) if the company is subject to CT.
In making its decision, the Council of State has therefore shifted from the letter of the treaty (and from the additional protocol, the benefit of which is hard to understand if it is not intended to count – in explicit but restrictive form – shares in sociétés d’attribution as real estate assets), drawing instead upon the regime applicable to capital gains arising on shares in real estate companies.
The Council holds that as, in French domestic law, Article 244 bis A of the General Tax Code (governing capital gains on real estate realised by non-residents) applies the same regime both to capital gains realised on real estate and to shares in companies investing predominantly in real estate, the same rule must apply to the Franco-Belgian tax treaty on account of the interpretation clause (Article 22).
- This therefore validates the position of the French tax authorities that a resident of Belgium disposing of shares in a French SCI is taxable in France under the regime governing capital gains arising on real estate.
Aside from overturning the precedent involved, the decision will vary in its scope:
- Almost all modern tax treaties explicitly provide identical tax rules for capital gains made on real estate and on shares or securities in companies investing predominantly in real estate; the Council of State’s decision will therefore have no bearing on these treaties.
- Only certain old treaties do not specifically address capital gains arising on shares in companies investing predominantly in real estate, for example the treaty concluded between France and Ireland (whereby the article on real estate (income and capital gains) refers to domestic law for the definition of real estate, without however making any reference to tax law).
- Finally, the full application of this decision may lead to discrimination between residents and non-residents: if for example a person resident in France for tax purposes disposes of shares in an SCI that is subject to CT, such person will be subject to the PFU at 30%. If the shares in this same SCI are sold by a natural person who is a resident of Belgium, such person will be subject to the capital gains regime on real estate under Article 244 bis A of the General Tax Code, involving:
- the method for determining private capital gains realised on real estate, with allowances that may reduce the tax base but also
- the application of a surcharge of 2 to 6% on gains made on real estate.
Consequently, depending on the circumstances, the Belgian tax resident may or may not be treated better than a French tax resident as regards the same transaction, with such a situation probably contrary to the principles of freedom of establishment and movement of capital…
- He may therefore submit an appeal so as to enjoy the best of both worlds.
Pierre Appremont & Paméla Le Jeune
Link to the Council of State's jurisprudence:
 These companies are covered by Article 1655 ter of the French General Tax Code. They are characterised by the fact that share ownership grants each partner a direct right to a predefined real estate asset belonging to said company. In particular, the partner has enjoyment of said property, which may be attributed in full ownership if the partner so desires. These companies are for example used within the framework of timeshare operations, allowing the partners in a company to enjoy use of an apartment for a given period during the year. French tax law regards shares in these companies as the same as the underlying real estate so that, where the real estate asset is allocated instead of the shares, no taxation is applicable.