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Capitals gains earned by Belgian residents on non-trading real estate companies (SCI): the French administrative supreme court alerts.

Capitals gains earned by Belgian residents on non-trading real estate companies (SCI): the French administrative supreme court alerts.

Published on : 13/07/2020 13 July Jul 07 2020
Advice to individuals

The administrative supreme court in France (Conseil d’État) released an unprecedented and stunning decision. It rules that gains on capitals deriving from the sale of a French non-trading real estate company (société civile immobilière – SCI) by a Belgian resident are liable to French income tax on capital gains[1]. The real estate vehicles which are concerned with the case at hands, are those which balance sheet’s assets comprise mainly real estates.
This ruling deals only with the hypothesis when the SCI does not opt for corporation tax.

Drawbacks
The case at hands was quite simple. A Belgian resident sells the shares of his SCI. He did not file the tax return appropriate to capital gains on immovable property. French tax authorities serve him a tax reassessment. French tax authorities claim, but the Belgian resident denies, that the capital gains earned are liable to French tax.
Besides domestic law, the tax authorities’ grounds are, on the one hand, the article 3 of the double tax convention between France and Belgium, and, on the other hand, the final protocol of that convention.
The article 3 of the convention deals with immovable property. It states, as often happens, that income deriving from an immovable property are taxed only in the country in which they are situated. The second paragraph of the article 3 states, as often happens, that immovable property shall have the meaning  which it has under the law of the State in which it is situated, that is to say, in France in the case at hands.
The final protocol specifies that the convention does not prevent France from classifying as immovable property, shares of companies listed in article 1655 ter of the French tax code: the real estate condominium companies.
According to French tax authorities, that clarification is not accurate! That is not quite clear. Some points are expressed, others are implied.
French tax authorities refer to the interpretation they gave about the convention. That interpretation states that the final protocol has not limited the immovable property to the real estate condominium property[2]. Therefore, a French company which balance sheet’s asset comprises mainly immovable property may fall upon the scope of the article 3 of the convention between France and Belgium. What on earth, the protocol was it aimed at?

The Belgian resident sue the tax authorities before the administrative supreme court to remove that interpretation which, illegally, extends the scope of the convention.

The legal issue
The legal issue was to determine whether the shares of the French SCI are an immovable property or not. 

Position of the administrative supreme court
According to the administrative court, yes, French tax law (article 244 bis A of the French tax code) deems as immovable property the shares on SCI. Thus, the capital gains on the sale of that shares are taxed in France.

Critics 
This decision of the administrative supreme court is questionable.
The article 244 bis A of the French tax code does not provide any definition of an immovable property. It merely provides rules for the taxation of those shares.
Moreover, this ruling goes against the trend of the judicial supreme court and even the constitutional court.
In 2015, the judicial supreme court (Cour de cassation) reminded that the shares of a SCI established in Monaco should be considered as movable property. Thus, they are not liable to French inheritance tax (Cass. Ass. plén., 2 octobre 2015, n° 14-14.256).
Recently, the constitutional court ruled that, unlike to shares on real estate condominium property, shares of an SCI are not eligible to the tax allowance that an individual can benefit from for wealth tax purposes. The constitutional court rejected the request of the applicant. It stated that the shares of a SCI are, from a legal standpoint, different from the immovable property held by the SCI itself (DC 17 janvier 2020, n° 2019-820 QPC, Époux K.).
In light of the above considerations, it is surprising that the administrative supreme court rules that the shares of an SCI must be considered as an immovable property.

Perspectives
No matter how questionable the administrative supreme court’s decision may be, it sounds a warning for Belgian residents holding an SCI or planning to purchase real estate through an SCI.
We can only draw the attention of those Belgian residents that they need not to throw caution to the wind, but rather to put on the table their investment project, to determine their aims.
  • Buying and selling immediately
  • Selling later (which can influence the tax allowance and eventually the burden of tax on those capital gains)
  • Transferring through donation or inheritance.

Malick DIOUF law firm provides advice and assistance for those investments and related matters.
 
[1] CE 8e-3e ch. 24-2-2020, n° 436392
[2] BOI-INT-CBV-BEL-10-10, §130
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