Swiss court calls into question SCIs used to acquire French property: what will be the impact for Swiss residents?

Swiss court calls into question SCIs used to acquire French property: what will be the impact for Swiss residents?

In June 2024, the Swiss Federal Court made the second of two rulings calling into question the tax treatment, particularly for personal use, of French non-trading property companies known as Sociétés Civiles Immobilières (SCIs), which are legal entities used to manage and own properties.

Considered an efficient way of investing in property in France, SCIs were used by many Swiss residents as instruments to acquire property in France. Historically, the tax treatment of SCIs could vary from one Swiss canton to another, but was generally favourable, especially in French-speaking cantons. As a result, however, of the two Federal Court rulings (in December 2022 and June 2024), Swiss residents should carefully explore tax implications before deciding to use SCIs to hold property.

In the Swiss court’s first judgment (2C_365/2021) issued on 13 December 2022, the decision concerned the treatment of a French SCI from the perspective of the wealth tax. This ruling generated significant discussion and, as a result, the High Court decided that SCIs should be treated as being fiscally opaque from a Swiss perspective, regardless of their tax treatment in France. It also decided that in the absence of taxation in France, the double taxation agreement between Switzerland and France (CDI CH-FR) does not prevent the taxation of SCI shares in Switzerland.

This decision created some uncertainty regarding the Swiss tax treatment of SCIs. Several analysts have expressed views on the matter in articles, and certain administrations have taken the position that the principles established by the Federal Court are not applicable to income tax.

On 5 June 2024, the Swiss Federal Court issued a second decision (9C_409/2024) that clarified these questions. The judgment concerned an agricultural land grouping (GAF), which also applied to French SCIs. In the ruling, the court reiterated the principles established in the December 2022 judgment and applied them to income tax, concluding that a two-step examination is necessary:

·         first, the tax treatment of the SCI must be determined according to Swiss internal law; and

·         second, it must be verified whether the CDI CH-FR allows Switzerland to exercise any possible taxation rights.

Based on this analysis, the Federal Court concluded that French SCIs are fiscally opaque from a Swiss perspective, regardless of their tax treatment in France. It then noted that in the absence of proof of effective taxation in France, Switzerland can exercise its internal right of taxation, both in terms of wealth tax and income tax.

This judgment resolves the uncertainties regarding the tax treatment of French SCIs vis-à-vis income tax but raises numerous practical problems. These difficulties are primarily related to the different classification of SCIs in Switzerland (which are opaque) and in France (which are translucent) and to the fact that the double taxation agreement only prevents double taxation in the case of effective taxation in France.

For example, the question arises as to how to treat translucent SCIs that hold real estate for personal use. In France, personal use is not taxed and does not pose problems. If we follow the logic of the Federal Court, however, Switzerland could recognise the existence of an insufficient rent. This constitutes a monetary benefit from the SCI to its partners. Such a benefit is taxable for partners residing in Switzerland. The CDI FR-CH should not prevent the taxation of this income since, according to the agreement, Switzerland is only obliged to avoid double taxation if the income in question has been taxed in France. This is not the case, however, because France does not tax personal use for income tax purposes. The housing tax levied on second homes is not covered by the CDI CH-FR and will likely not be considered an "income" tax. Furthermore, its collection will likely not be sufficient to prevent taxation in Switzerland.

Hence, in such a case, the use of an SCI is extremely inefficient.

The Federal Court's judgments of December 2022 and June 2024 should lead to a thorough rethinking of holding certain real estate through SCIs. In the immediate future, these rulings also raise the question of how to treat these properties in tax declarations.

For more information on these rulings and tax issues in Switzerland and France, contact your CMS client partner or these CMS experts.