Taxation of Shares Held in a French Civil Real Estate Company – Swiss Federal Supreme Court Decision of 13 December 2022 (2C_365/2021)
In a decision rendered on December 13, 2022, the Swiss Federal Supreme Court confirmed the controversial decision of the previous instance, the Vaud Cantonal Court. Therefore, it has confirmed that Switzerland has the right to tax shares held by a Swiss tax resident in a French civil real estate company (société civile immobilière in French; hereinafter, SCI) as movable assets even though these companies are treated as transparent and thus taxed as real estate assets in France.
It should be recalled that on April 1, 2021, the Vaud Cantonal Court dismissed the appeal against the decision rendered by the Vaud Cantonal Tax Administration. The court ruled that, despite the fact that the SCI is transparent, and the shares held by a taxpayer are treated as real estate assets under French law, the SCI should be considered a legal entity under Swiss law. As such, Switzerland should have the right to tax the SCI shares held by Swiss taxpayers as movable assets, like any other shares.
The Federal Supreme Court Decision:
By case law, it is established that the SCI constituted under French law is considered as a legal entity under Swiss law (decisions 2C_729/2019; 4A_454/2016). Accordingly, the appellant's shares in the SCI constitute movable assets under Swiss law. It is not disputed that Swiss law has a legal basis for taxing the taxpayer's movable assets.
It is also established that the shares held in a SCI are, in France, taxed transparently and are therefore subject to the real estate wealth tax. However, since wealth tax is only levied in France when the value of the assets subject to it exceeds EUR 1.3 million, the appellant did not actually pay wealth tax on the value of the real estate held by the SCI in France, since its value was below the threshold. As, in theory, both States in question have the right to tax the property under their domestic law, it is necessary to examine whether these taxation rights are limited by a provision in the Double Taxation Agreement (hereinafter, the Agreement) between Switzerland and France meant to restrict or eliminate possible double taxation. According to the Agreement, Switzerland will only exempt items taxable in France after it has been proven that the income or assets actually were taxed in France. Since the tax was not actually levied in France in this case, Switzerland was not limited by the Convention. The right to tax the shares the appellant holds in the SCI thus belongs to the canton of Vaud, and it may therefore tax the shares of the SCI as movable assets.
Conclusion and Practical Implications:
This decision is unfavorable to Swiss residents who hold their real estate in France through an SCI. Indeed, it is likely that the practices of the cantonal administrations will quickly be aligned with this federal decision, implying that real estate held in an SCI will be taxable in Switzerland as part of the taxpayer's movable assets, unlike real estate held directly by its owner, which is taxable in the country it is located in and thus exempted from taxation in Switzerland. As such, this decision settles the question of how these shares should be treated in terms of Swiss wealth tax.
However, this decision does not settle the question of how income earned via transparent SCIs should be treated. From the point of view of French law, this is real estate income that is taxable in France. From the point of view of Swiss law, since the Federal Court considers that it is income from a legal entity, the income earned via an SCI is in principle subject to income tax (as dividend, with a partial taxation deduction if applicable). In a recent Franco-Belgian case, it was established that Belgium was not entitled to tax this income; however, based on its recent jurisprudence of, it is more than doubtful that the Swiss Federal Supreme Court will follow this approach. We therefore advise anyone who may be concerned by this decision to immediately consult an expert to review their Franco-Swiss wealth structure, thus avoiding unpleasant surprises that will probably already arise for the 2022 tax period. There are indeed various ways to counteract the negative effects of this decision that we would be pleased to discuss with you.