In which country will the income and wealth arising from shares held in a SCI, if treated transparently in France, be taxed when the holder of the shares is a Swiss resident and the property is located in France?
This decision of the Vaud Court reminds us that in France, the SCI is treated transparently by default, but the holder of the shares of the SCI has the possibility to opt for corporate taxation. In the first case, which is that of interest in this analysis, French tax law attributes the shares to real estate assets. The holder of the shares will then be taxable in France on the income and wealth from the said real estate. It should be noted that, for individuals not having their tax residence in France, the solidarity tax on wealth (ISF), now replaced by a tax on real estate wealth, is only due if the value of the assets is greater than EUR 1,300,000.
In Switzerland, the situation differs from the French situation in the sense that shares are attributed to movable assets. It should be reminded that a Swiss resident is subject to taxation on his income and wealth worldwide, with the exception of permanent establishments, buildings and businesses located abroad. According to the above, the shareholder of a SCI will therefore be taxable in Switzerland. Therefore, international double taxation could arise due to a conflict of qualification between Switzerland and France.
In order to define which state will ultimately be competent to tax the income and wealth arising from a SCI seen in transparency, the Double Taxation Agreements between Switzerland and France (CDI CH-FR) lays down the principle by which income and wealth are taxable in the contracting state where the assets are located, in this case, France. It is specified that if the income and assets are taxable in France, then Switzerland must exempt them from taxation, but may take them into account for the determination of tax rates. The impact when determining the tax rates applies irrespective of whether the right to tax is actually exercised by the state in which the property is located.
The specificity of the CDI CH-FR is that, in order to avoid double non-taxation, the state of residence may still tax certain items of income and capital if no taxation on such items is prescribed in the source state, or if the tax is not effectively levied for particular reasons (e.g. the capital tax threshold of EUR 1,300,000 is not reached).
By way of illustration, in the case FI.2020.0109 the Swiss resident owned shares in a SCI holding two buildings located in France. As the SCI was treated transparently, the resident was therefore taxable in France on the income and wealth arising from her share. However, as the wealth tax threshold was not reached, the appellant was not effectively taxed in France on her share of the net property assets held through the SCI. It was therefore because of this non-taxation that the Swiss tax authorities were able to tax such real estate assets by way of wealth tax as taxable movable assets in Switzerland, with authority on both the taxable wealth basis and on the wealth tax rate.
This decision of the Vaud Cantonal Court raises some questions, in particular regarding the consideration of the net real estate income of the SCI when determining the income tax rate in Switzerland. Indeed, if the effective non-taxation in France allows Switzerland to apply its domestic law, i.e. to tax the SCI as movable assets, no income determining the rate should be retained in relation to the shares of the SCI. Moreover, in case of losses carried forward in France and thus non-taxation, the right to derogate from the absolute obligation of the State of residence (Switzerland) to grant an exemption remains open according to this decision.
As this judgment leaves many questions open as to the tax treatment of SCIs, it will be interesting to see whether the appellant will go all the way to the Federal Court on this issue.