No transaction involving a real-estate asset can be finalised without the seller's tax status being taken into account. This is particularly the case in the event of the sale of an asset held by a non-trading real-estate company (SCI – société civile immobilière), which raises questions regarding determination of the taxable capital gains on stock.
This depends in particular on the application of "Quémener" case law, whose implications are gradually becoming clearer.
A vehicle for investors wishing to organise a consortium, a tool facilitating the transmission of assets and a useful way of uniting a real-estate asset and its financing within a single structure – a partnership (société de personnes) and more specifically an SCI, which is theoretically not subject to corporation tax, remains a structure for owning real-estate assets frequently used both by professionals and individuals.
It is therefore common for a real-estate asset for sale to be owned by an SCI and for the sellers to prefer to sell the SCI rather than the building. The impact of the sale on the seller's tax liability must then be examined prior to completion of the transaction.
In this respect, determination of the tax payable by the seller on the capital gains from the sale of stock in the SCI involves application of a very specific calculation rule, resulting from the Supreme Tax Court's well-known Quémener case law (ruling dated 16 February 2000, no. 133296). This case law ruled on the method for calculating taxable capital gains in consideration of the regime of fiscal "transparency" (translucidité) applicable to partnerships (article 8 of the French General Tax Code), according to which the company's taxable earnings are determined at their specific level, but are then combined with the profits or income of the partners, who are solely liable for tax on the company's income. To avoid a partner ultimately being taxed twice on the same economic profit, or deducting the same loss twice, the Supreme Tax Court ruled that the tax basis of stock taken into account to calculate the capital gains from the sale should be increased by the partner's taxed profits and declared losses and reduced by the profits distributed to the partner and any deficits deducted, "with the exception of those originating in a provision by which the legislator intended to give taxpayers a definitive fiscal advantage".
This calculation formula, which has become enshrined in practice and accepted by the tax authorities, has nevertheless left numerous questions unanswered, to which case law and the tax authorities are gradually responding, particularly in recent years.
For instance, the question has arisen of whether this method only applies to the sale of stock or whether it concerns all situations giving rise to capital gains tax. The second option has logically prevailed. For example, the tax authorities declared that Quémener case law applied to the re-valuation by a company of the value of stock in an SCI which had re-valued its assets itself (see BOI-BICPVMV- 40-10-60-20, no. 90). A very recent ruling by the Supreme Tax Court has also confirmed that this method applies in the case of dissolution through merger (27 July 2015, no. 362025, SA MEA).
Taxpayers have also asked how far back to go in the past when assessing profits and losses taken into account to correct stock' tax basis. Since the Quémener ruling was silent on this aspect, the Administrative Court of Appeal of Versailles (ruling dated 11 December 2012 no. 11VE03314, HSBC Bank PLC Paris Branch) confirmed that there is no time limit for taking into account elements correcting the tax basis, which may raise practical difficulties.
That being the case, the most sensitive questions concern the nature of corrective elements, and more specifically the concepts of "distributed profits" (bénéfices répartis), "taxed profits" (bénéfices imposés) and "deducted deficits" (déficits déduits), which have been refined in recent years. The Administrative Court of Appeal of Nantes (17 February 2011 no. 09NT02237) included in the "distributed profits" category, reducing stock's tax basis, remuneration paid by the company to its managing partners.
The Supreme Tax Court (15 December 2010 no. 297513, Ferreira d’Oliveira) meanwhile restricted the concept of "deducted deficits", also reducing the tax basis, to "deficits effectively deducted" (déficits effectivement déduits) by the taxpayer, to the exclusion of those which may be carried over but whose use is uncertain (requirement for sufficient subsequent profits, which must also comply with certain conditions for individuals). In respect of "taxed profits", there is a specific debate over real-estate capital gains.
When an SCI owned by individuals sells a building generating exempt capital gains (e.g. the partners' main residence or a sufficiently long ownership period), can it nevertheless be used to calculate stock's tax basis?
A contrary approach could lead to indirect taxation, at the time of the sale of the units, of capital gains not normally subject to tax.
The Quémener ruling asserted that the sale of units should not provide an opportunity to revoke a "definitive tax advantage", although it only formally stated this in relation to the deduction of deficits and not the exemption of profits. A recent case gave the impression that the same principle should apply in the case of capital gains which are exempt due to the allowance based on length of ownership: the Administrative Court of Appeal of Nancy (8 December 2011, no. 10NC01337) had ruled along these lines and the Supreme Tax Court (30 December 2013, no. 356551) only annulled its decision due to errors in consideration of the facts, while confirming the reasoning in principle.
Astonishingly, on appeal the Administrative Court of Appeal Nancy (5 March 2015, no. 14NC00122) overturned its position, ruling that exempt capital gains should not increase the tax basis. This decision is particularly surprising since the tax authorities had accepted inclusion of exempt capital gains, in respect of other legal provisions (article 151 septies of the French General Tax Code: BOIBIC-PVMV-40-10-10-30, no. 40; and article 238 quindecies: BOI-BIC-PVMV-40-20-50, no. 410), and the Administrative Court of Appeal of Nantes (12 October 2009 no. 08-3112) had done the same with a capital gain posted for deferred taxation. It would therefore be desirable for the Supreme Tax Court to have an opportunity to formalise its position in this respect.
Finally, case law has not yet clearly defined how Quémener case law should be applied in an international context. Although the Administrative Court of Appeal of Paris recently handed down a Lupa Patrimoine France ruling (18 February 2014 no. 12PA03962) in relation to an international restructuring between France and Luxembourg, the Quémener mechanism only concerned French entities in that case. A question still remains concerning application of Quémener case law to the sale of a French SCI owned by a non-resident partner. Well-established Supreme Tax Court case law tells us that the SCI's earnings are taxable in France in the name of non-resident partners. It is therefore unclear what would prevent the taxed profits in respect of the non-resident partner (particularly if that partner is resident in the EU) being taken into account when calculating the sale price of the SCI's stock in the event of a sale, on condition that said partner is taxable in France (which should be the case in accordance with several tax conventions signed by France).