News on the IHT treatment of shares in a SCI
The much anticipated decision of the Supreme Court (Cour de Cassation) as to the tax treatment of shares in a civil company that holds French real estate was given on 2nd October 2015.
The question before the court was to establish the tax treatment of shares in a Monaco civil company, ‘société civile particulière monégasque’ (‘SCP’), where its assets are mainly French real estate; commonly called a predominantly real estate civil company, ‘société civile à prépondérance immobilière’.
Two options were considered by the court as to the tax treatment of shares in such a Monaco civil companies holding property in France:
• Either treat the shares as buildings/property rights taxable in France under Article 2 of the French-Monaco Convention of 1 April 1950, or
• Treat the shares as securities within the scope of Article 6 of the agreement between France and Monaco and, therefore, taxable in the Principality.
The Supreme Court decided that where French property is held through a translucent Monaco SCP, it is not within the scope of French inheritance tax, but is the exclusive jurisdiction of the Principality of Monaco on succession under Article 6 of the French-Monaco Convention.
To understand decision, it is worth examining the legal reasoning and history behind it.
Article 2 of the Convention states:
‘1. Buildings and immovable property rights forming part of the estate of a national of one of the contracting States shall only be subject to inheritance taxes in the State where they are located.
2. The question whether an asset or a right is real estate will be resolved according to the law of the State where the property is located or the property over which the right is given.’
And, secondly, Article 6 provides that:
‘The stocks or shares, ... .. and other property left by a national of one of the two States, to which articles 2 to 5 do not apply, will be subject to the following provisions:
a) If the deceased was domiciled at the time of his death in one of two States, the said property shall only be subject to inheritance tax in that State; (...)‘
The French tax authorities have long refused to recognize the translucent shares of Monaco SCI’s predominantly holdings French real estate, as moveable property under Article 6 of the Convention, and, consequently, subject to exclusive taxation in the place of the last domicile of the deceased shareholder.
However, the Court of Grande Instance de Nice on 25th March 2010 and the Court of Appeal of Aix en Provence on 3rd May 2011, considered that the shares of such an SCI, held by a Moroccan national who was tax resident in Monaco, was intangible personal property subject to the exclusive competence of Monaco for taxation, when the deceased shareholder was domiciled in Monaco at the of time death.
However, in a decision of 9th October 2012, the Supreme Court provided a different interpretation. It equated the shares of a translucent Monaco SCI (a traditional SCI letting, managed by partners who did not directly own the company assets but owned the company shares) to shares of a transparent SCI (an SCI by allocation (SCI d’attribution)- whose partners are considered as the personal owners of the SCI’s assets in proportion to their shareholding).
Based on the exchange of letters between the two countries (see footnote 1) the court considered that the SCI shares were taxable in France as immoveable property (Article 2 of the Convention) without distinguishing between the shares of transparent and translucent civil companies.
This decision was strongly criticised as it was unequivocal inn stating that the exchange of letters extended the scope of Article 2 of the Convention to SCI’s d’attribution (which are tax transparent) and not to translucent SCI’s.
Following the judgment, which overrules the decision of the Court of Appeal in Aix en Provence, the case was referred back to court.
In the 2nd October 2015 decision the Supreme Court's plenary session, follows the reasoning of the High Court in Nice and the Court of Appeal of Aix en Provence.
The decision of the Supreme Court last month, confirms our analysis that Monaco has the exclusive right of taxation of shares in a Monaco civil company owning real estate in France, in accordance with succession rights in the French-Monaco Convention.
It is important to note the scope of the French –Monaco Convention in matters of succession. The Convention is only applicable to French and Monaco nationals. Can the benefits of the Convention be extended and the scope of the decision to nationals of other states?
The decision in Biso (Council of State 11th June 2003 concerning the tax of three times a property’s rental value) had for the first time permitted the application to a resident of a third State (Monaco) the benefit of a non-discrimination clause contained in the convention between France and the third State. ….The benefit of this clause to persons who are resident in neither of the signatory States is subject to certain conditions and requires analysis of each convention.
In cases where a Monaco resident, who is a partner in an SCI that owns French property, has the benefit of a non-discrimination clause in a tax convention between France and his State, can request the application of French Monaco Convention on inheritance and seek the benefit of this judgment.
The decision is important for individuals who are not French tax resident.
If the deceased was Monaco resident for at least five years before his death, the shares in the Monaco SCI will be subject to Monaco inheritance law; not French, notwithstanding the heir(s)place of residence.
The French inheritance tax rates in direct line from parents to their children, after deduction of the allowance of 100,000 Euros for each beneficiary:
Taxable amount after deduction/Rate
Less than € 8,072 = 5%
Between € 8,072 and € 12,109 = 10%
Between € 12,109 and € 15,932 = 15%
Between € 15,932 and € 552,324 = 20%
Between € 552,324 and € 902,838 = 30%
Between € 902,838 and € 1,805,677 = 40%
Greater than € 1,805,677 = 45%
Monaco does not tax inheritance to the direct line. The maximum tax rate is 16% between non-relatives.
Before a Monaco resident or future resident, buys property in France, it is imperative to analyze whether it is possible to benefit from the inheritance tax exemption and to review any tax treaty between France and the state of nationality.
It should be noted, that Russian nationals resident in the Principality benefit from the exemption because the Franco-Russian agreement permits the application of the non-discrimination clause to Russians resident in a third State.
Those who are not protected by an advantageous tax treaty can only benefit from the October decision of the Supreme Court. It is nevertheless advantageous to hold French property through a Monegasque SCP instead of a French SCI.
Moreover, on the death, a shareholder’s current account in the SCP is not subject to tax in France. An SCP can also hold other assets, including bank accounts, art works, real estate in the Principality, etc. without being subject to French tax.
It is important to remember the benefits offered by a Monaco SCP when compared to a French SCI.
Other structures such as holding companies, certain Luxembourg funds, Lebanese holdings or Belgian structures equally permit interesting optimisation of French real estate.
Nevertheless, the Monegasque structure is flexible, simple and effective to organise the transmission of family wealth and permits Monaco residents to establish substance in the Principality.
Note 1: Letters exchanged between France and Monaco of 16 July 1979 on the French-Monaco Convention 1 April 1950: "For the application of paragraph 1 of Article 2 of the above convention, buildings and property rights represented by stocks and shares of companies with the object to construct or acquire buildings for their division into fractions for allocation to the shareholders as owners or in possession are only subject to Inheritance tax in the State where they are located.’
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This article is published in MONACO БИЗНЕС (Monaco Business) Magazine - http://www.monacobusinessmagazine.com/