While to date the indirect holding – i.e. through the French mechanism of the Société Civile Immobilière (property investment company, hereinafter “SCI”) – of real estate in France by Swiss tax residents was frequently recommended and used, due to the freedom of management and organisation it provides, as well as the ease of transfer, especially by inheritance, its appropriateness has been fundamentally called into question by a recent decision of the Federal Court delivered on 13 December 2022.
In essence, the Federal Court had to rule on the situation of a Swiss tax resident, domiciled in the Canton of Vaud and the holder of almost all the shares of an SCI owning French real estate with a total estimated value of CHF 1,000,000.00.
In France, this property was taxed transparently and the SCI was therefore subject to income tax. Provided the value of the indirectly held property was lower than the tax-free allowance of EUR 1,300,000.00, the holder of the property was not subject to the tax on real estate assets.
In Switzerland, Swiss taxpayers and tax residents are subject to unlimited taxation and are therefore taxed on all of their income and wealth worldwide. This principle has one exception: property, permanent establishments and companies located abroad are not subject to Swiss tax but they form part of an overall rate, i.e. they are taken into account when determining the tax rate.
As the Swiss legal system does not recognise institutions such as the SCI, the “Swiss-French double taxation convention for income and wealth taxes and to prevent fraud and tax evasion” (hereinafter “CDI”) must be applied. This convention grants the right to tax the shares of an SCI in the State where the real estate assets are located, in application of the legal precepts of that State.
Thus the interested party – like many other taxpayers before him – argued before the tax authorities and in application of the principles of transparency of the French law on SCIs (by reference to the CDI), that his shares in the SCI in actual fact constituted a portion of his real estate assets located abroad. Based on this argument, the SCI shares could not be taxed in Switzerland but could only be taken into account in the global rate, while in France, since the value of the assets was less than EUR 1,300,000.00, no real estate wealth tax could be levied.
The taxpayer brought this case before the Federal Court following a decision delivered against him by the Vaud tax authorities and the Court applied the provision of effective liability enshrined in Article 25 B. CDI, which essentially provides that the wealth tax exemption in Switzerland is only effective in this context if the wealth has already been taxed in France. On the basis of this article, and in total contradiction with the principles of state sovereignty in matters of tax classification enshrined in the CID, the Federal Court considered the taxpayer’s SCI shares as forming part of his movable assets subject to wealth tax (cantonal and communal) in Switzerland.
This case law, highly questionable in that it would seem that Swiss law classifies the same shares in an SCI differently depending on whether or not they have been taxed abroad (and in the case in point this was dependent on the value of the assets), raises much deeper questions on the principle of territoriality and state sovereignty.
Moreover, even if it is a matter of Federal Court case law, we consider – and hope – that it is above all a cantonal case. Since this case law has not been published in the main judgments of the Federal Court and has not been translated into the country’s other official languages, it does not seem that it is intended for immediate application in all the Swiss cantons, but it opens a door that we would have preferred to see left firmly shut.
Quentin Bärtschi and Philippe Frésard, Kellerhals-Carrard Berne – Switzerland