Case Reference: Court of Cassation, Commercial Chamber, 12 January 2022, No. 20-21.543
SCI and Foreign Partner: A Complex Tax Framework
The acquisition of real estate in France through a French Civil Real Estate Company (SCI) is a common practice for foreign investors. However, the taxation applicable to profits distributed to a non-resident partner raises delicate issues, particularly in the presence of an international tax treaty. The judgment handed down by the Court of Cassation on 12 January 2022 (No. 20-21.543) provides essential clarification on the treatment of income distributed by an SCI to a foreign partner and its interaction with tax treaties.
The Facts and the Decision of the Court of Cassation
Context of the Case
In this case, a French SCI owned a building and had distributed profits to its partner, a company incorporated under foreign law (established in a Member State of the European Union). The French tax authorities subjected these distributions to the withholding tax provided for in Article 119 bis of the French General Tax Code (CGI), on the grounds that the distributed profits were not taxable in the hands of the SCI (the latter being fiscally transparent). The foreign partner contested this withholding tax by invoking the applicable Franco-foreign tax treaty.
Solution Adopted
The Court of Cassation held that, in order to determine whether the withholding tax is due, the distributed income must first be classified according to the tax treaty. If the treaty allocates the right to tax this income to the partner's State of residence (and not to France), the French withholding tax is not applicable. In the present case, the Court overturned the Court of Appeal's judgment which had not verified whether the tax treaty excluded taxation in France. This decision confirms the principle of the primacy of international treaties over domestic law (Article 55 of the Constitution).
Legal and Tax Analysis
The Fiscal Transparency of the SCI
Under French law, the SCI is fiscally transparent: its profits are taxed directly in the hands of the partners, in proportion to their shares (Article 8 of the CGI). Consequently, the distributed profits are not deducted from the company's results and are considered income received by the partners. For a foreign partner, this income is subject to a withholding tax of 25% (Article 119 bis 2 of the CGI), unless a tax treaty applies.
The Impact of Tax Treaties
Tax treaties concluded by France generally provide that dividends (or similar income) distributed by a French company to a partner resident in the other State are taxable in that State, with a limited withholding tax rate (often 15% or 0% for certain shareholdings). However, the classification of SCI distributions may be disputed: are they dividends or real estate income? In its judgment, the Court of Cassation emphasises the need to classify the income according to the treaty, taking into account the nature of the company and the origin of the profits. If the treaty assimilates SCI distributions to real estate income, taxation may revert to the State where the property is situated (France).
The Scope of the Judgment of 12 January 2022
This decision serves as a reminder that the judge must verify, on a concrete basis, whether the tax treaty precludes the application of the withholding tax. It highlights the importance of treaty analysis and the classification of income. For practitioners, it underscores the necessity of correctly identifying the type of income distributed (dividends, interest, real estate income) and consulting the applicable treaty.
Practical Advice for the Foreign Partner
Before the Acquisition
- Choose the appropriate structure: The SCI is not always the most advantageous for a foreigner. A company subject to corporate income tax (IS) may sometimes offer better optimisation.
- Analyse the tax treaty: Verify the provisions of the treaty between France and the partner's country of residence concerning real estate income and dividends.
- Anticipate exit taxation: In the event of a transfer of shares or the building, capital gains may be taxable in France.
Besoin d'un conseil personnalisé ? Contactez Maître Zakine — première consultation 30 min à 45€.
During the Holding Period
- Declare the income: The foreign partner must declare their share of the profits in France, even if the treaty provides for an exemption.
- Claim the benefit of the treaty: To avoid the withholding tax, they must provide the SCI with a certificate of residence.
