Imagine that we’re in 2017. For taxation purposes, a couple from Mamer declare that they held shares in two property holding companies (société civile immobilière, or SCIs)--which themselves own property--and pay over €25,000 in tax. A year later, on the strength of the tax treaty between France and Luxembourg dated 1 April 1958--which they believed provided for the taxation of these assets in Luxembourg--they point out what they believe to be an error in their tax return and claim a tax reduction.
A few years later, the Cour de Cassation in France--in a ruling issued on 2 April 2025--dismissed their claim. In its ruling, the court said: “As far as taxes on capital are concerned, if the capital consists of immovable property and fixtures and fittings, the tax may be levied only in the contracting state which is authorised to tax the income from that property.” The institution points out that “under article 3.4 (of the treaty), the gains of an entity more than 50% of whose assets consist of immovable property situated in a contracting state may be taxed only in that state. It follows that the shares of SCIs having their registered office in France and owning immovable property situated in France must be regarded as immovable property.”
The court also states, on the basis of article 3.3 of the convention between the two countries, that “gains derived from the operation or alienation of immovable property realised through companies which, whatever their legal form, do not have a personality distinct from that of their members for the application of the taxes referred to in the convention, shall be taxable only in the state in which such property is situated.”
Same thing, says the court, for “gains from the alienation of shares, units or other rights in a company, trust or any other institution or entity, the assets or property of which consist for more than fifty per cent of their value, or derive more than fifty per cent of their value, directly or indirectly through one or more other companies, trusts, institutions or entities, from immovable property situated in a contracting state or from rights relating to such property, shall be taxable only in that state.”
An economic approach
“Until now, a civil law interpretation allowed taxpayers to escape the IFI [impôt sur la fortune immobilière, or tax on real estate wealth] by interposing companies. Now, the high court is adopting an economic approach, in line with the position of the French Conseil d’Etat and the tax authorities,” writes a French lawyer, Stéphane Broquet, on Linkedin.
In a blog post, lawyer Philippe Laurens, one of the first to comment on this ruling, explains that “historically, company shares were classified as movable property in both domestic and treaty law by the Court of Cassation. The Court of Cassation is making a U-turn that will require a precise analysis of existing international property holding schemes through rigorous legal support.”
This new interpretation “raises, from a legal point of view, various major difficulties with regard to legal certainty. What would happen to an SCI that had opted for wealth tax? And for an SCI whose intermediary partner between it and the Luxembourg resident would be liable for income tax?” The lawyer adds that real estate funds such as real estate investment schemes (organisme de placement collectif immobilier, or OPCI), real estate investment companies (société civile de placement immobilier, or SCPI) or real estate account units in life insurance contracts, trusts--often considered as financial investments--will fall within the scope of the wealth tax, which will not only affect Luxembourg tax residents.
Soparfi also potentially affected
It’s a change that could also affect Soparfis (holding companies) who hold SCIs, adds the lawyer. Whilst in Luxembourg, shares in companies are not considered as real estate (even if these companies own buildings), in France they can be considered as real estate rights, especially if the majority of the company’s assets are made up of buildings. To remain under the Luxembourg regime, in his view, the Luxembourg company must have real substance (real activities, premises, staff...), and the setup must not be purely artificial to avoid tax in France.
For the French law firm Prax, “only the fraction representing real estate assets located in France is taxable, implying a rigorous methodology for determining and justifying the declared value,” it says in an analysis. “Difficulties in accessing detailed information can lead to tax reassessments if the valuation cannot be supported with precision… Rights arising from property leasing contracts are also subject to property wealth tax: the lessee must declare the real property right represented by the contract at its actual market value, making the declaration obligations even more complex.” The French firm also points to questions about deductible debts, “a reporting headache.” “Any weakness on this point constitutes a non-negligible risk of reassessment during any tax audits.”
A final point, according to Laurens: property securitisation arrangements (via bonds) escape this reclassification, as investors do not directly hold shares or units, but only financial bonds, which clearly remain movable property.
Others wonder, without wishing to be named, about the consequence of the sale of the shares in the Luxembourg company: could what was considered to be a capital gain on movable property, taxable in Luxembourg (and often untaxed), be requalified as an indirect sale of real estate located in France and its capital gain taxed under French droit de regard?
This article was originally published in .