What is an SCI?
A French Société Civil Immobilière (SCI) is set up primarily with a view to acquiring, holding and managing French immovable property. It (usually) has full legal personality and is therefore deemed to own the immovable property it holds. This makes the SCI a frequently used asset and inheritance planning tool. The income from the immovable property accrues to the underlying shareholders, while the actual control and supervision of the SCI, and therefore of the immovable property held, are entrusted to a manager. An SCI can therefore, with the exception of its legal personality, be compared to our Belgian partnership.
In the past there was a lot of discussion about the tax treatment of the income from an SCI for Belgian shareholders. The SCI, which does not opt for the French tax regime for capital companies and is therefore not subject to French corporation tax, acquires a semi-transparent character in France. On the one hand, the income from the immovable property is taxed in respect of the underlying shareholders as if they were themselves directly holding or receiving it, regardless of whether it is actually distributed (transparency). On the other hand, an SCI submits an individual tax return in France because of its full legal personality (no transparency). It is this legal personality that the Belgian Court of Cassation has had problems with several times in the past and therefore refused to recognise the French SCI as a transparent legal entity.
Position of the Belgian Court of Cassation
The Belgian Court of Cassation considers an SCI to be the owner of the immovable property held and therefore also the owner of the realised income from this immovable property. This remains so until it is decided to make a (dividend) distribution to the underlying shareholders. In addition, for the application of the double taxation convention between Belgium and France, according to Cassation, the shares in an SCI cannot be considered as 'real estate' and therefore the income from these corporate rights (dividends on shares) when effectively distributed to the Belgian residents-shareholders cannot be classed as income from immovable property in Belgium.
Double taxation of income
Article 3 of the same Double Taxation Convention provides that the taxing rights inrespect of income from immovable property accrue exclusively to the State in which the property is situated, in this case France.
Since Belgium does not consider the shares in an SCI to be 'immovable property', it does have the right to tax the income actually distributed to Belgian residents-shareholders on the basis of Article 18 of the double taxation convention. That article deals with the residual category, i.e. the income that cannot be brought under any other convention article for the purpose of determining the taxing rights of Belgium or France.
Article 18 provides that the taxing right accrues to the State of residence, that is the State of which the person who receives the income is a resident, in this case Belgium. Belgium may then assess the income according to its domestic law, resulting in a classification as dividend subject to 30% withholding tax.
Taxed twice on the income from an SCI in short
Belgian residents-shareholders are taxed twice on their income from the French SCI: once in France as income from immovable property and once in Belgium when the income is effectively distributed as dividend and therefore income from movable property.
Discussion of taxability of capital gains
The taxability of capital gains on shares held in a French SCI by Belgian residents has also provoked a great deal of debate.
French companies, more than 50% of whose assets consist of immovable property, are considered as immovable property by the French tax administration for the purposes of French capital gains tax and inheritance tax. Because of the transparent nature of a French SCI, the immovable property is considered for tax purposes to be held directly by the underlying shareholders.
On the basis of this insight, the French tax authorities considered in 2015 (when the French inheritance tax was at issue) that the shares in a French SCI, held by a Monegasque resident, should be regarded as French immovable property and therefore subject to French inheritance tax. However, the French Court of Cassation (Decision of 2 October 2015, n° 14-14.256) criticised the French tax administration: the shares are still shares of a company, owner of the immovable property. However, these shares have a movable character.
Extending this line of reasoning of the French Court of Cassation to a Belgian-French situation, i.e. the capital gains realised on shares of a French SCI held by a Belgian resident shareholder, this would mean that the taxing right based on Article 18 of the French-Belgian Double Taxation Convention (the residual category referred to above) would accrue to Belgium (State of residence). However, there is a risk that the shareholders would not pay any tax in Belgium either, because Belgian domestic law only provides for taxation of capital gains on shares in the event of abnormal management of private assets. This will always be a matter of fact.
Nevertheless, the French Tribunal administratif de Montreuil ruled in two subsequent decisions (17 April 2017 n°1701414 and 26 June 2018 n° 1703431) that the capital gains realised by a Belgian resident shareholder when selling his shares in a French SCI should in any case be considered as a capital gain on immovable property. On the basis of Article 3 of the Franco-Belgian Double Taxation Convention, the taxing right for capital gains on immovable property accrues to the treaty state where the property is located, i.e. France. These decisions are now supported by the judgment of the French Council of State of 24 February 2020.
Taxed twice in short
Capital gains on shares of a French SCI held by a Belgian resident shareholder are considered as a capital gain on French immovable property. On the basis of the double taxation convention between France and Belgium, the taxing right accrues to France.
In this way, double taxation may arise again, since Belgium regards it as capital gains on shares where, in accordance with the Belgian-French double taxation convention, the taxing right accrues to Belgium (as the state of residence).
Assistance and advice is necessary
It is clear from the above that France has every interest in consistently classifying the shares in a French SCI held by a Belgian resident as immovable property. As a result, under the double taxation convention between Belgium and France, it will always have the right to tax the income from this immovable property.
This recent ruling is also likely to have consequences in terms of capital gains realised on the shares of a French SCI that have not yet matured. In the future, it will be important for Belgian residents-shareholders to be properly assisted and advised.
A more up-to-date version of the Franco-Belgian double taxation convention is also welcome.
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