The shares of a French non-commercial real estate company could be subject to Swiss Wealth tax

Thu 30 Nov 2023

The proximity between Switzerland and France often leads to Swiss residents acquiring French real estate. The use of holding structures like French Non-Commercial Real Estate Companies (“Société Civile Immobilière – “SCI”) and their tax treatment under Swiss law have always been a delicate matter, particularly with regard to the classification of such shareholdings as securities or real estate for the application of double tax treaties. This classification is crucial, especially for wealth tax purposes.

On December 13th, 2022, the Federal Court of Switzerland issued a decision related to Swiss tax residents owning a French real estate property through a French SCI with regards to the Swiss Wealth tax.

The decision of the Court

In accordance with Swiss tax provisions, a taxpayer domiciled in the canton of Vaud (Switzerland) holding 99% of the shares of a French SCI had reported in his Swiss tax return the value of the SCI’s shares in the amount of one million Swiss francs solely for the purpose of calculating the tax rate applicable on his other taxable assets, as the Swiss domestic tax law excludes from the taxable basis for wealth tax, real estate assets located outside Swiss territory (“exemption with progression” method). This practice was not new, and the Vaud tax authority had never questioned this tax treatment until now.

Contrary to all expectations, the Vaud cantonal tax administration corrected the classification of the shares of the SCI, considering that they were to be seen as securities and not real estate. Thus, Switzerland is entitled to tax the shares of the SCI as the “exemption with progression” rule only applies to real estate held directly by a taxpayer.

The taxpayer contested this decision. The cantonal tax administration of the canton of Vaud upheld its decision based on the provisions of article 25 of the tax treaty of September 9, 1966 concluded between France and Switzerland for the elimination of double taxation in matters of income and wealth tax (hereafter, the FR-CH DTA). The canton of Vaud founded its right to tax these shares as movable assets, insofar as the value of the shares of the SCI was not effectively subject to real estate wealth tax in France because their value was below the tax liability threshold (€1.3M) in France.

The taxpayer appealed this decision to the Vaud Cantonal Court, which upheld the decision of the Cantonal Administration.

This decision was confirmed by a decision of the Federal Court (2c_365/2021 of 13 December 2022).

French wealth tax on real estate properties

In France, since January 1st, 2018, the former “Impôt de Solidarité sur la Fortune” was replaced by the “Impôt sur la Fortune Immobilière” (“IFI”). The purpose of the IFI is to tax only real estate assets held directly or indirectly by individuals.

Individuals who own real estate assets with a net value of more than €1.3 million are liable to pay the IFI.

While French tax residents are taxable on their worldwide real estate assets, non-French tax residents are only liable to the IFI on properties located in France, held directly or indirectly (subject to tax treaties) (progressive rates, between 0.5% and 1.5%). In practice, indirect ownership, via a company, can be a source of difficulties.

Indeed, shares in companies do not – from a legal point of view – constitute real estate but are securities, irrespective of the companies’ assets (such as real estate for SCI). However, French tax law provides that indirectly held real estates are also subject to the IFI.

Therefore, shares in companies (SCI / SàRL / SAS / …) are taxable under the IFI in France to the extent of the value of the shares representing the real estate held. This applies only with respect to the potential applicable double tax treaty provisions.

Double tax treaty between France and Switzerland

The FR-CH DTA expressly provides in Article 24 that the shares of a company, which assets are mainly composed of real estate assets located in France, regardless of the tax regime of the company concerned (subject to corporate income tax or tax transparent) are taxable in France.

Thus, with regard to shares of French real estate companies, the exclusive right of taxation is in principle attributed to France, and Switzerland applies the exemption of these assets only on condition that the taxpayer can prove that “these assets are taxed in France” (Article 25 B§1) – instead of the exemption with progression rule applicable for foreign real estate assets directly held. 

In the present case, in the absence of an effective taxation in France (the value of the SCI shares being lower than the €1.3 million threshold), Switzerland does not apply an exemption and applies its right to tax according to its domestic tax law.

Prior to this decision, Switzerland applied a look-through approach and considered that real estate held through a SCI subject to personal income tax (tax transparent) could be treated as held directly by the taxpayer. Thus, the exemption with progression rule applied without any need to justify the effective payment of wealth tax in France.

By qualifying SCI shares as securities, the Swiss Court recognizes that the taxpayer is not considered as directly holding the real estate and then denies to the taxpayer the benefit of the full exemption with progression rule. Thus, the Court conditions the applicability of the exemption with progression rule to an effective submission to taxation in France.

In fine, although debatable, this decision results in avoiding double non-taxation.

This new practice established by the highest court in Switzerland will be a landmark and raise the question of the relevance of such holding schemes, at least for a net real estate wealth of less than €1.3 million. Future acquisitions by Swiss tax residents of French real estate should now be analyzed in the light of this new decision.