Tax Abuse of Law: When Transfer of Buildings to a SCI is Recharacterised

Imagine: you own a building in Le Mans, and you decide to transfer it to a SCI you have just created. This SCI is to carry out works, then let the premises. The aim? To benefit from a tax advantage. But the tax authorities challenge the transaction, considering it to be fictitious. This is exactly what happened in the case decided by the Court of Cassation on 3 April 2007.

The question every property owner asks: how far can one optimise one's tax position without falling into abuse of law? Decision No. 06-10.702 provides a clear answer: when transfers of buildings to SCIs lack any economic justification and have only a tax purpose, the judges can recharacterise them. A decision that shakes up overly aggressive arrangements.

In this article, we analyse this case law for you, owners, landlords or developers, in Le Mans, Le Lude or elsewhere. You will know which pitfalls to avoid and how to structure your property transactions without risking a tax reassessment.

The Facts: A Story Like Many Others

The company Portimmo, specialising in property letting, held several buildings. In 1993 and 1994, it transferred these properties to two newly created SCIs: SCI Portimserviez and SCI Duplaa. The stated objective? These SCIs were to carry out renovation works, then let the buildings. But in reality, the tax authorities considered these transfers to be fictitious: the SCIs had no real activity after the sales, and the transactions pursued only a tax purpose.

Mr X, a property owner in Le Mans, might have been tempted by a similar arrangement: selling a building to a family SCI to reduce capital gains tax. But here, the company Portimmo was reassessed by the tax authorities, who applied the abuse of law procedure (Article L. 64 of the Tax Procedures Code). The company challenged this before the court, then the court of appeal, and finally the Court of Cassation.

The twist? The court of appeal upheld the tax authorities. It noted that Portimmo could itself carry out the works and let the buildings without going through the SCIs. The transfers were therefore unnecessary, except to create a tax screen. Portimmo appealed to the Court of Cassation, arguing that the judges had not considered whether the transfers were truly fictitious or merely motivated by tax reasons. But the Court of Cassation dismissed the appeal, upholding the appeal court's decision.

The Court's Reasoning — Analysed

The judges' reasoning rests on a fundamental principle: abuse of law. In tax law, the authorities can disregard an act that has no real economic substance and whose sole purpose is to avoid tax. Here, the appeal court noted two key elements:

• The uselessness of the transfers: Portimmo, by its objects, could itself carry out the works and let the buildings. Why create SCIs? No valid economic reason, only a tax one.
• The lack of real activity of the SCIs: after the sales, the SCIs did not carry out any letting activity. They were empty shells.

The legal basis is Article L. 64 of the Tax Procedures Code (which allows the authorities to recharacterise fictitious acts or those lacking substance). The Court of Cassation, in its judgment of 3 April 2007, validates this reasoning: the lower court judges sufficiently justified their decision by noting these facts. There is no need to consider whether the transfers were fictitious in a civil law sense: it is enough that they were exclusively tax-driven.

This decision confirms consistent case law: purely tax arrangements are penalised. It does not create a change of approach, but it clarifies that the lack of activity of the SCIs after the transfer is a strong indicator of abuse. Portimmo's arguments (that the transfers were real and the SCIs had a letting activity) were dismissed as unproven.

What This Means for You — In Practice

For landlords, this decision means that it is not enough to create a SCI and transfer properties to it to benefit from a favourable tax regime. If the SCI has no real activity (actual letting, significant works), the authorities can recharacterise the transaction. Example: if you transfer a building in Le Lude to a SCI that never lets, expect a reassessment.

For property developers, the message is clear: every arrangement must have an economic justification. If you create intermediate structures solely to reduce corporation tax or capital gains tax, you risk abuse of law. A client from Le Mans recently asked me whether he could transfer a building to a SCI to avoid corporation tax on the gain. The answer is no, without real activity.

For purchasers and co-owners, the decision reminds that transactions between related companies are scrutinised. If you buy a property from a SCI that has no activity, you could be involved in a tax dispute. It is better to check the existence of real activity.

If you are in this situation, you must keep evidence of the SCI's activity: signed leases, invoices for works, property income returns. Without this, the tax authorities can recharacterise the transaction and claim the avoided taxes, plus penalties (40% in case of abuse of law).

Four Tips to Avoid This Type of Dispute

• Justify every transaction economically: before transferring a building to a SCI, ask yourself: why not do it directly? If the answer is only tax-related, abandon the idea or add real added value (contribution of expertise, financing, actual management).
• Keep your SCIs active: a SCI must have real and continuous activity. This means actual lettings, works, general meetings, accounts. A 'dormant' SCI is an ideal target for the tax authorities.
• Keep all evidence: leases, rent receipts, invoices for works, bank statements. In case of an audit, you will need to demonstrate that the transactions are not fictitious.
• Consult a specialist lawyer before setting up an arrangement: a preliminary tax audit can save you from a reassessment. In Le Mans, Maître Zakine can advise you in 30 minutes for €45.

Further Analysis: Related Case Law and Developments

This decision is part of a line of cases on tax abuse of law. For example, the decision SCI de La Pierre (Cass. com., 1999) recharacterised contributions of buildings to a SCI followed by lettings, due to lack of real activity. More recently, the decision SARL Gestion Immobilière (2015) penalised a similar arrangement where the SCIs had no premises or staff.

The trend of the courts is clear: they require real economic substance. Purely tax arrangements, even if legally formalised, are recharacterised. For the future, property owners will need to be even more careful: the tax authorities have increasingly powerful tools (notably the abuse of law procedure expanded in 2008).

Summary and Next Steps

FAQ: Questions You May Have

• Can I transfer a building to a SCI to reduce capital gains tax? Yes, if the SCI has a real activity (actual letting, works). Otherwise, it is an abuse of law.
• What should I do if the tax authorities notify me of an abuse of law? You can challenge this before the court. But prevention is better: consult a lawyer as soon as you receive the audit notice.
• What are the time limits for challenging? You have 30 days to respond to the proposed adjustment, then 2 months to take the matter to court.
• What is the financial risk? The avoided taxes, plus 40% (abuse of law) or 80% (if bad faith). Plus late payment interest.
• Can I regularise after the transfer? Yes, if you demonstrate real activity afterwards. But this is risky. Better to plan ahead.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →