Real estate civil companies (Société civile immobilière – SCIs) and Swiss residents – warning: danger!

For years, the société civile immobilière (SCI) seemed to be an ideal legal tool for Swiss residents to invest in France.

Indeed, the French-Swiss Inheritance Tax Treaty of 31 December 1953 allowed Swiss residents to avoid inheritance tax on real estate held in France through a company.

The withdrawal by France from this Treaty in 2014, which took effect on 1 January 2015, completely eliminated this advantage.

Yet thousands of SCIs belonging to Swiss residents remain. And not only do these SCIs no longer allow them to avoid the inheritance tax in France, but they also expose their owners to a number of tax disadvantages in both France and Switzerland.

In short, warning: danger.

Together, we will briefly look at three risks associated with these SCIs for Swiss residents.

1. Wealth taxation in Switzerland: when the Swiss tax authorities catch up with the French SCIs

France and Switzerland have a principle of wealth taxation.

On the French side, this is the Impôt sur le Fortune Immobilière (IFI), formerly known as the ISF.

It applies to all real estate held in France, no matter where the owner resides.

This tax applies when the (net) assets exceed €1,300,000.

Once this threshold is reached, the tax scale is as follows:

A special feature of the IFI is the difference between the threshold at which the tax is due (€1,300,000) and the amount at which the taxpayer is then taxed (€800,000).

On the Swiss side, the situation appears more complex. This is because the taxation of income and wealth falls to the cantons. As a result, there are 26 different sets of tax laws in this area.

However, some harmonisation has been achieved through the Swiss Direct Taxation Harmonisation Act (DTHA). Real estate qualifies as taxable assets (Art. 13 DTHA), subject, however, to the provisions on double taxation.

In a recent case reviewed by the Federal Supreme Court (SCD 2C_365/2021 of 13 December 2022), the Vaud administration argued that a taxpayer domiciled in this canton should include in his wealth tax base the value of the shares he held in a French SCI.

The taxpayer challenged this, arguing that the French property was already covered by the IFI. He was of the view that the Tax Treaty between France and Switzerland of 9 September 1966 (Treaty for the elimination of double taxation with respect to taxes on income and on wealth and for the prevention of fraud and tax evasion) precluded any “double taxation”.

In the aforementioned judgment of 13 December 2022, the Federal Supreme Court sided with the Vaud tax authorities, holding that the shares of SCIs were covered by the Swiss wealth tax.

Consequently, the value of the shares of an SCI may be included in the taxable assets in Switzerland.

It is worth noting in this case that the Federal Supreme Court held that there was no effective taxation in France under the IFI, as the asset had a value of less than €1,300,000.

2. Risk of double taxation as regards inheritance

At the end of 2022, the case of an estate of a Swiss deceased man taxed at more than 100% garnered many headlines in the press.

“Heirs fleeced by French and Swiss taxes” was the headline in the Tribune de Genève dated 21 October 2022. Le Progrès stated, “The 125,000 euros they received as an inheritance... cost them money”. Meanwhile, according to Le Parisien, “Two brothers inherit from their Swiss cousin and are taxed at... 115%”.

What should we make of this? And to what extent should this preposterous situation make us reflect on SCIs?

The present case concerned heirs domiciled in France who inherited bank assets from a distant cousin living in Switzerland.

Imagine the same situation with a deceased resident in Switzerland and a French SCI. Let us even imagine that the heirs reside in Switzerland. This is an example of many Swiss families having simply created an SCI for a purchase in France.

So, the only link with France lies in the SCI.

On the French side, the tax authorities apply the provisions of Article 750 ter of the French General Tax Code, which provides for the taxation in France of movable and immovable property situated in France.

Therefore, in the event of inheritance, France will tax the SCI shares.

Given the distant kinship in the above example (the heirs were cousins), France will apply a tax rate of 60%.

Generally, there are provisions to eliminate double taxation, e.g. allowing tax paid in one country to be set off against tax payable in another country.

As far as France is concerned, barring a tax treaty between France and Switzerland regarding inheritance after the termination of the previous treaty in 2014 by France, only the general provisions could provide assistance.

Article 784 A of the French General Tax Code normally provides a solution to this type of problem, since it provides:

“In the cases defined in the first and third paragraphs of Article 750 ter, the amount of gift tax paid, where applicable, outside France, shall be offset against the tax payable in France. This credit shall be limited to the tax paid on movable and immovable property situated outside France”.

However, this provision cannot be applicable to a situation where SCIs are held in France, since these are assets located in France.

No “gift” will be given by France in view of any potential taxation in Switzerland.

Now, let's look at the situation on the Swiss side.

According to the Federal Supreme Court, shares in French SCIs qualify as movable assets, and not as real estate.

However, several cantons deem movable property to be taxable at the place of residence in the event of inheritance.

For example, for the Canton of Vaud, the Act concerning the transfer tax on real estate transfers and inheritance and gift tax (LMSD) of 27 February 1963 specifies that the Vaud tax applies “to all movable property included in an estate opened in the Canton, regardless of their location”.

Furthermore, there is no system on the Swiss side for crediting the tax paid on the French side.

Consequently, each country is of the view that it has a legitimate right to tax such an inheritance, without the possibility of eliminating double taxation.

It is important to note that the problem arises only when both countries tax an inheritance.

Fortunately, in most cantons, inheritance tax is very low in a lineal inheritance (i.e. from parent to child). The problem of double taxation will thus be eliminated by the absence of taxation on the Swiss side.

3. Increasing formalities

The SCI is a legal entity that has duties and obligations.

Unfortunately, it too often seems that many basic obligations of the SCI are not fulfilled, potentially exposing the SCI and/or its managing director to penalties.

We will cite below two obligations of SCIs:

• Duty to disclose beneficial owners

Since 2018, companies must declare information about their beneficial owners to the Commercial and Companies Register.

This is a specific declaration made to the clerk of the commercial court having jurisdiction over the company, either at the time of formation of the company for companies registered since 2017, or by a specific declaration for companies registered previously.

Failure to make this declaration was initially punishable by six months’ imprisonment and a fine of €7,500.

Article L561-49 of the French Monetary and Financial Code, which provided for this sanction, was (fortunately) repealed by the order of 12 February 2020 and replaced by the option of the president of the court to order any company to comply with this duty.

• Existence of company affairs

Several texts regulate the day-to-day operations of SCIs.

For example, decisions of the company that exceed the powers of the managing director are taken by the general meeting (Article 1853 of the French Civil Code).

The managing directors must report to the shareholders at least once a year (Article 1856 of the French Civil Code).

Practically speaking, the company must normally have a bank account to carry out its day-to-day operations (payment of property tax, payment of insurance, etc.).

However, SCIs sometimes have no tangible presence: no general meeting, no record of resolutions, no book of accounts, no bank account, etc.

This raises the risk of the company being deemed fictitious. Any person (e.g. the tax authority) could then bring an action to prove the company is a facade.