SCIs for French Property – Introduction
In June 2024, the Swiss Federal Court issued its second ruling on the tax treatment of French non-trading property companies, also known as Sociétés Civiles Immobilières (SCIs).
This decision, building on a previous ruling from December 2022, challenges the longstanding tax advantages many Swiss residents have enjoyed when using SCIs to acquire and manage property in France.
The rulings bring significant implications for Swiss residents who hold or plan to hold French property through these entities.
SCIs: A Popular Tool for French Property Investment
For years, SCIs have been a favored method for Swiss residents, especially in French-speaking cantons, to invest in French real estate.
These entities offered flexibility in property management and, until recently, a relatively favorable tax treatment in Switzerland, despite variations between cantons.
However, the Federal Court’s recent rulings have raised concerns over their continued tax efficiency.
Key Judgments and Their Impact
The First Ruling: Wealth Tax Implications
The first of the two pivotal rulings, issued in December 2022 (2C_365/2021), addressed the treatment of SCIs concerning wealth tax.
The Swiss Federal Court determined that SCIs should be treated as fiscally opaque from a Swiss tax perspective, regardless of their tax status in France.
Moreover, the court ruled that the double taxation agreement (CDI CH-FR) between Switzerland and France does not prevent Switzerland from taxing SCI shares if France does not impose taxes on them.
This decision created uncertainty and raised concerns about whether these principles would apply to other tax areas, such as income tax.
The Second Ruling: Extending to Income Tax
On 5 June 2024, the Federal Court issued a second decision (9C_409/2024) that extended these principles to income tax.
The court emphasized that Swiss authorities must first evaluate the SCI under Swiss tax law and then consider whether the CDI CH-FR allows Switzerland to impose taxes.
The court reaffirmed that SCIs are fiscally opaque from a Swiss standpoint and, in the absence of taxation in France, Switzerland could exercise its taxation rights both on wealth and income tax.
Practical Issues and Taxation Concerns
While the second ruling resolved some uncertainties, it introduced new challenges for Swiss residents.
One significant issue stems from the differing treatment of SCIs in Switzerland and France.
In Switzerland, SCIs are seen as opaque, meaning their income is subject to taxation.
In France, however, SCIs are treated as translucent, meaning certain incomes, such as those from personal use of real estate, are not taxed.
This disparity could lead to situations where Swiss residents face taxation in Switzerland for benefits not taxed in France.
For instance, personal use of real estate held by an SCI in France, which is not subject to income tax there, could be taxed in Switzerland as an unrecognized rental benefit.
Since France does not impose income tax on such personal use, Switzerland is not obliged to prevent double taxation under the CDI CH-FR, leaving Swiss residents potentially liable for these taxes.
Inefficiency of SCIs Moving Forward
Given the Federal Court’s rulings, holding French real estate through an SCI could become increasingly inefficient for Swiss residents, especially in cases where properties are used for personal purposes.
The possibility of Swiss taxation on benefits not recognized by French tax authorities complicates the tax planning strategy for individuals using SCIs.
What’s Next for Swiss Residents?
Swiss residents who own French property through SCIs should reconsider their approach to property management and ownership.
These rulings suggest that the traditional advantages of SCIs could be significantly diminished, prompting a re-evaluation of whether SCIs remain the best structure for cross-border real estate holdings.
In the short term, property owners will need to assess how these rulings affect their tax filings and ensure compliance with both Swiss and French tax authorities.
SCIs for French Property – Conclusion
In conclusion, the Swiss Federal Court’s decisions from December 2022 and June 2024 mark a turning point for the use of SCIs by Swiss residents.
The evolving tax landscape will require careful navigation, and individuals should seek professional advice to avoid unexpected tax liabilities.
Final thoughts
If you have any queries on this article on SCIs for French Property, or other Swiss tax matters, then please get in touch.