A taxing proposal

Recent case law from the French Administrative Supreme Court (Conseil d’État, the Court), interpreting the France‑Belgium income tax treaty, allows the French tax authorities to tax Belgium residents on gains they derive from the disposal of shares in a real estate company. This interpretation could be extended for the application of other double tax treaties France is party to.

According to French tax law, a foreign resident selling shares in a foreign or French company, the assets of which mainly consist of real estate assets or rights located in France and/or shares in another real estate company, is subject to tax on the resulting capital gains in a similar way to the direct sale of immovable property.[1] The application of this domestic tax treatment is subject to the relevant double tax treaties.

France‑Belgium tax treaty

The France‑Belgium income tax treaty of 10 March 1964 (the Treaty) does not provide for a specific treatment regarding gains on sales of company shares,[2] even in the case of a real estate company. Article 3(1) of the Treaty states that income derived from immovable property shall be taxable only in the contracting state in which the property is located, but does not set out what includes immovable property in this respect. As a result, the notion of immovable property is defined in accordance with the law of the contracting state in which the property in question is located. In the final protocol attached to the Treaty, it is specified that France may consider French transparent co‑ownership companies as immovable assets located in France.[3]

In their official 1966 commentary on the Treaty (the Commentary), the French tax authorities stated that this provision of the final protocol can be extended to standard French civil real estate companies even if they are not subject to the specific transparent tax treatment of co‑ownership companies.[4]

However, despite the Commentary, until now practitioners usually considered that the current version of the Treaty does not entitle France to tax Belgium residents selling shares in French real estate companies, because there is no specific provision addressing the treatment of company shares. Further, according to French civil law and French tax law, company shares never qualify as immovable property. For these obvious reasons, the Treaty indicates that only Belgium, as the state of residency, has capacity to tax the potential capital gains resulting from sales of shares. Accordingly, it was commonly admitted that the Commentary overrides the meaning of the Treaty and this broad interpretation was generally not applied by administrative tax audit services. In addition, France has tried to renegotiate the Treaty with Belgium in order to amend the wording of art.3 to assimilate shares in French real estate companies to immovable property, as was previously done with Luxembourg.[5]

Based on this rationale, a taxpayer (Mr Baartmans) challenged before the Court the legality (compliance with the Treaty) of the Commentary interpreting the final protocol provision referring to transparent co‑ownership companies as applicable to standard French civil real estate companies and requested the cancellation of this official guideline.

Case law

Surprisingly, in a February 2020 decision,[6] the said Baartmans case law, the Court rejected the taxpayer request and confirmed the validity of the disputed French tax authorities’ guideline. The reasoning of the Court was that, because under French law the tax treatment of capital gains realised by a foreign resident is similar both for the disposal of French real estate assets and shares in a French real estate company, this tax treatment must be duplicated for determining the nature of ‘immovable property’, which is not specifically defined by art.3 of the Treaty. According to the Court, capital gains upon the sale of shares in a real estate company in France must be treated like capital gains on French real estate assets, for the purpose of the Treaty.

Based on this case, under art.3 of the Treaty, the French tax authorities are entitled to subject a Belgium tax resident to the French capital gains levy when transferring shares of a French or foreign company qualified as a real estate company, according to the French domestic tax law definition regarding real estate capital gains.

The rationale followed by the Court is disputable, because the wording of the Treaty refers to the definition of an immovable asset (i.e., the nature) and not to the tax treatment according to the law of a contracting state. As previously indicated, no provision of French civil law or tax law assimilates company shares into immovable property with respect to the nature. Further, in a 2015 case, the French Civil Supreme Court (Cour de Cassation, the Civil Court) adopted an adverse view with respect to the treatment of shares of a real estate company for the interpretation of the French‑Monaco Convention of 1 April 1950 addressing inheritance tax (IHT).[7] The wording of this treaty is quite similar to that of the Treaty because it does not refer to company shares and refers to the law of the contracting states to define immovable assets. In the 2015 case, the Civil Court considered that shares of a French civil real estate company cannot qualify as immovable property with respect to the treaty addressing IHT.

Conclusion

The Baartmans case strengthens the position of the French tax authorities, which now consider that they are legally entitled to subject Belgium residents to tax in France on capital gains upon sales of shares in a real estate company. As a result, it seems that numerous tax audits and tax adjustment procedures have been initiated since 2020 against Belgium residents who did not declare such sale gains in France, with the understanding that the capital gain resulting from the sale of real estate company shares was not taxable in France.

In addition, it is likely that the French tax authorities could use this reasoning for the application of other tax treaties concluded by France, including provisions concerning immovable assets similar to the Treaty. For instance, the France‑Netherlands tax treaty is in the loop regarding parent company indirectly holding real estate assets in France.[8] The French tax authorities could duplicate the Baartmans case solution in these situations in order to tax in France the gain at hand.