A recent court ruling by the Supreme tax Court (10 April 2015, no. 367015) provides a reminder that private individuals who sell shares in real-estate companies not subject to corporation tax may sometimes benefit from exemptions applicable to real-estate sales.
This is particularly the case when a real-estate company holds their main residence which they occupy free of charge. The situation examined on 10 April is uncommon, of partners in a totally fiscally "transparent" company. In this case, the shares sold allowed statutorily them to possess or to enjoy the use of the company's building, which was also their main residence, under conditions which made the partners the fiscal "owners" of the building.
But more often, private individuals are ordinary partners of a real-estate partnership (SCI) not subject to corporation tax, but whose corporate object allows them to occupy the home free of charge, particularly as a main residence.
In these various situations, the equity holders selling shares must demonstrate that they fulfil the conditions giving them exemption as if the sale had legally related to the building used as their main residence.
Indeed, the care taken by the court ruling dated 10 April 2015 to list the documents required to validly prove that the company's building was occupied free of charge and constituted the sellers' main residence, implicitly reveals the difficulties faced by taxpayers in producing, 15 years after the sale of their shares, bills and documents establishing their residence, and accounting documents proving that their payments were equity holders' current account advances, rather than rent.
Similarly, another exemption (French General Tax Code, article 150 U II, 2), which could be invoked by a non-resident taxpayer selling a house owned in France, would oblige the seller to demonstrate that he/she was "fiscally domiciled in France continuously for at least two years at any time prior to the sale". In this case, such proof could date back several decades prior to the sale…
Finally, this time last year (Real-Estate Newsletter, September 2014, page 10), we feared that the SCI du Forum would be unable to demonstrate that 15 years previously, in 2000, it had abandoned any intention of selling a company building acquired in 1996 and still owned in 2015. On 25 January 2015, a definitive ruling (Administrative Court of Appeal of Nancy, no. 14NC00830) confirmed this taxpayer's inability, so long after the event, to demonstrate its former change of intention.
In taxation, to exempt gains means to plan ahead. It is when forming a real-estate company or acquiring shares that equity holders must identify the conditions for exemption of a future sale, make their legal, financial and accounting choices in accordance with that exemption and prepare all the necessary justifications, complying with the required conditions. And, of course, also monitor any subsequent legislative changes.
In doing so, equity holders could take advantage of the two case law we have mentioned: the SCI du Forum ruling, authorising the production of any original evidence, even if not resulting from corporate books and documents, and the ruling dated 10 April 2015, obliging the tax authorities and the tax courts to justify, document by document, any refusal by them to accept the probative value of documents.