As already stated in our previous article mentioned, France and Belgium reached an agreement late last year on the provisions of a new double taxation treaty (DTC). This is scheduled to enter into force on January 1, 2023 at the earliest. Since a number of clauses in the new treaty make profound changes to the tax environment, it may be appropriate to already analyze the future impact of this and act proactively to limit the tax consequences. In this article, we will focus on one of the three aspects impacted by the new DTC, namely the consequences of the sale of French real estate.
What is an SCI again?
A French Société Civile Immobilère (SCI) is a very well-known and commonly used vehicle in France to purchase French real estate. The main advantage of such an SCI lies in the fact that you can separate the ownership of the real estate from the management of the real estate. Something that makes it very popular as a tool for estate and inheritance planning.
What is the problem?
Although it is a corporation, in France an SCI is almost always considered for tax purposes to be "translucid ". This means that although the revenues and costs are considered to have been earned/ borne by the SCI, they are taxed on the shareholders in proportion to their holdings in the company. It is therefore the shareholder who must effectively pay the tax (and not SCI itself).
The problem is mainly situated in the case of a sale of the French real estate by the SCI where a large capital gain is realized. Suppose a Belgian family owns shares in an SCI with a second residence on the Côte d'Azur. After 5 years they decide to sell the real estate and realize a capital gain of 250.000 EUR.
- In France itself, the capital gain is taxed on the shareholders according to the rules as they apply to natural persons (as the SCI is a "translucide" vehicle). For non-residents of France, a capital gains tax of 26.5% applies. Consequently, the family pays a capital gains tax in France of EUR 66,250. They then liquidate the SCI and the initial capital and net capital gain of 183,750 EUR is transferred to a Belgian bank account.
- In Belgium, it is called "translucid" character of an SCI, however, is not accepted. According to Belgian law, an SCI is a company like a BV or a nv. This means that any distribution of money from a company to its shareholders is considered a repayment of capital or a dividend. The initial capital that was contributed to the company is exempt from tax. The dividend, in the previous case the net capital gain of 183.750 EUR, will be taxed at 30% withholding tax according to Belgian rules. As a result, the same capital gain is taxed again, this time in Belgium, for an amount of 55.125 EUR.
Thus, in the case of a sale of a French property by an SCI, followed by a distribution of the net capital gain, as a Belgian shareholder you will be taxed twice.
To avoid previous double taxation, not the property itself had to be sold, but rather the shares of SCI. The tax treatment of the sale in France remains the same. Due to the translucid character, the real estate itself is deemed to have been sold instead of the shares of SCI.
In Belgium, however, such a situation involves a sale of shares. Under current regulations, a realized capital gain on shares is exempt from tax, barring speculation.
So what changes in the new treaty?
The translucid nature of an SCI, combined with the cross-border nature of this vehicle caused many questions and ambiguities in recent years. Although the new treaty on the treatment of the SCI was awaited with great expectations, we have returned from a barren journey. The new treaty implicitly stipulates that funds distributed from an SCI to its Belgian shareholders can be taxed according to Belgian rules. This means that the old problems and solution remain and must be applied.
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