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RICHARD FRIMSTON and R A D URQUHART look at French sociétés civiles immobilières and their tax treatment in the United Kingdom.
RICHARD FRIMSTON and R A D URQUHART look at French sociétés civiles immobilières and their tax treatment in the United Kingdom.
CHANGES HAVE BEEN afoot in the way that the Inland Revenue treats sociétés civiles immobilières and their members who own residential properties in France. The Revenue has suggested that it considers a société civile immobilière as equivalent to a company for United Kingdom tax purposes on the basis that it is a legal entity separate from its members and one whose profits accrue to the entity itself rather than to the members. Recent cases, particularly R v Allen [2001] STC 1537, give concern as to the consequences of this view. What is a société civile immobilière?
French sociétés civiles immobilières are often used to acquire and hold residential properties in France. This gives a form of corporate ownership with minimal French tax consequences and allows owners of properties in France to organise their property holdings effectively and carry out some estate planning by turning French immovable property subject to French succession law into movable property subject to the law of the individual's domicile.
French sociétés are different from English companies. The word 'société' can be used to describe either what we, in England, would call a company, firm, or partnership. French sociétés are divided into the following general categories:
société commerciale - a company that is formed for the purposes of trade;
société civile - an entity (company or partnership) that does not primarily trade;
société de capitaux - a company with limited liability and where subscribers or shareholders provide its capital;
société de personnes - an entity with unlimited liability which groups persons together rather than capital.
A French société is subject either to impôt sur les sociétés (corporation tax) or it is fiscalement transparente which means that the société itself is not taxed collectively in any way (either for corporation tax or for capital gains tax), but each member is directly taxed on profits or gains made (as in an English partnership). In the United Kingdom, this is sometimes referred to as a 'see through' entity, and by the United Kingdom Revenue as transparent. In some types of sociétés, an option can be exercised by the members either for it to be assessed for impôt sur les sociétés or transparence fiscale.
Two main types of société civile (there are various other types) are:
société civile immobilière - civil property holding entity;
société civile professionnelle - civil professional partnership (used for law firms, etc.).
This article comments only on the société civile immobilière.
From the legal point of view, sociétés civiles immobilières are subject to the general laws governing sociétés civiles contained in the French Civil Code, although certain types of investment vehicles known as sociétés civiles de placement immobilier or sociétés civiles constituted for the purpose of building properties with a view to resale (construction vente) or sociétés civiles d'attribution en jouissance à temps partagé (timeshare companies) have specific regulations attaching to them.
A société civile is civil by its character when it:
has a civil activity or business; and
is not a société on which the law confers a commercial character by reason of its form or its objects.
Sociétés civiles are principally governed by Section IX of Book III of the French Civil Code, particularly Articles 1832 to 1873. Commercial companies (société anonyme, société à responsabilité limitée) are governed by the French Commercial Code.
Individual members of a société civile immobilière by virtue of its constitution usually have joint unlimited liability for its debts, but the unlimited nature of their liability is usually only in proportion to and to the extent of their holdings, i.e. it is not several. The usual constitution can however be varied to make the liability of the members expressly both joint and several.
A société civile immobilière is for legal purposes a separate legal entity from that of its members and therefore is capable of owning assets, which do not merge with the assets of each individual member.
The principal consequences usually attached to a separate legal entity, a personnalité distincte de ses membres, in French law are:
it may own property;
it may enter into contracts in its own name;
it may sue and be sued;
it will not be wound up by the death of one of its members.
However, in the case of a société civile immobilière, the consequences of being a separate legal entity from its members are not in French law as strong as for a trading company for the following reasons.
Sociétés civiles (including a société civile immobilière), although separate entities from their members, are created by contract between the members and are therefore based on a relationship that is intuitus personae. This is to say that the personality, efforts and interests of each individual member have an important, perhaps essential, part to play in the formation, management and subsequent dissolution of sociétés civiles.
A société civile immobilière is both a collective entity with a legal personality of its own and a contract between its various members. Article 1832 of the French Civil Code defines 'a société as a contract by which two or more persons agree to combine assets or contributions of work with a view to sharing profits or benefiting from the savings therefrom ...'.
A société civile immobilière must have at least two members (who may be husband and wife).
A société civile immobilière does not (and cannot) have a board of directors nor any directors nor a chairman. It is managed on a day-to-day basis by the gérant (manager), appointed by the statuts which are the regulations or deed creating and governing the société civile immobilière. Since the vast majority of société civile immobilière companies are wholly passive, and do not trade in any sense, except for, perhaps, letting a property, the term 'management' should be tightly construed. The duties of the gérant generally consist of merely convening a routine annual general meeting and signing the accounts (if any).
Although French commercial companies such as an 'SA' have their capital divided into shares called actions, the capital of the sociétés civiles (including sociétés civiles immobilières) is not divided into actions but into parts d'intérêt, (participation holdings), the transfer or assignment of which is restricted.
From the legal point of view, a société civile immobilière is a single purpose land holding vehicle whose only use is the purchasing and holding of property, land, and the like. Such a vehicle cannot be used for any other purpose.
Tax treatment in France In order to prevent situations where members shield themselves behind the veil of corporate personality, the French tax authorities (and French tax law) treat sociétés civiles and sociétés civiles immobilières as transparent from a tax point of view. The effect is that the French Revenue looks to each individual member and taxes each member's share directly as taxable income and capital gain in exactly the same way as if the members were owners of the underlying assets in their personal names. Any profits made by a société civile or société civile immobilière whose members are individuals will therefore be taxed in France as personal income tax in the hands of the individual members. Under Article 206 of the French Code Général des Impôts (General Tax Code), a société civile immobilière will be taxed as a company with impôt sur la société only if it trades commercially, and unless it so trades, it will be outside the scope of Article 206. French capital gains tax (plus-value) for individual members is payable on any capital gains made by members in respect of their share of the gains of property sales made by the société civile immobilière. A société civile is not required by law to file financial statements with the Clerk of the Commercial Court, as commercial companies must do, nor is there withholding tax on profits which a société civile immobilière distributes to its members, (except in the cases where it has voluntarily opted for impôt sur les sociétés). Tax treatment in the United Kingdom In the past, our experience has been that United Kingdom Revenue has accepted the transparent nature of a société civile immobilière and, for example, regarded the gains of an individual société civile immobilière member which have been treated as transparent in France and taxed there, also as being transparent in the United Kingdom and taxed as that of the individual with the benefit of double taxation relief. In particular, the Double Taxation Relief (Estate Duty) (France) Order 1963 [SI 1963 No 1319] in Article IV(g) specifically refers to 'an interest in a partnership, which term includes … a société civile under French law, … and in the case of a société civile immobilière this shall be where the land developed in accordance with the objects of the société is located'. It would appear, however, that the cases of Joseph Carter & Sons Ltd v Baird [1999] STC 120 caused the Revenue to change its view in relation to sociétés civiles immobilières and Memec plc v Commissioners of Inland Revenue [1998] STC 754 caused the Revenue to review the classification of foreign entities generally. As a result, in Tax Bulletin issue 39 (February 1999) the Inland Revenue set out a list of those factors which it considered relevant, being as follows: (a) Does the foreign entity have a legal existence separate from that of the persons who have an interest in it? (b) Does the entity issue share capital or something else, which serves the same function as share capital? (c) Is the business carried on by the entity itself or jointly by the persons who have an interest in it? (d) Are the persons who have an interest in the entity entitled to share in its profits as they arise: or does the amount of profits to which they are entitled depend on a decision of the entity or its members, after the period in which the profits have arisen, to make a distribution of its profits? (e) Who is responsible for debts incurred as a result of the carrying on of the business: the entity, or the persons who have an interest in it? (f) Do the assets used for carrying on the business belong beneficially to the entity or to the persons who have an interest in it? Particular attention is paid by the Revenue to factors (c) and (d). Whether an entity is fiscally transparent or opaque will not necessarily be the same in all cases or for all taxes. The Revenue subsequently issued in Tax Bulletin issue 50 (February 2001) its views on a number of different overseas business entities; whether they were transparent or opaque and when that Revenue view had last been considered. Sociétés civiles immobilières are stated to have been last considered in February 2000 and are now to be regarded as being opaque. Benefit in kind problem The issue of directors or shadow directors being subject to an income tax charge under sections 145 and 146, Taxes Act 1988 by virtue of a benefit in kind enjoyed in relation to the occupation of a company's property has been well aired over the years. It was argued by Richard Bramwell QC in Taxation, 17 June 1993 at page 272 and 14 March 1996 at page 628 that, if one considers the ministerial statement made in the course of the Parliamentary debates on the Finance Bill in 1963 (Volume 677), the ambiguity in section 837, Taxes Act 1988 should be resolved by reference to that statement. That made it clear that the section was limited to land in the United Kingdom and that accordingly section 145 should have no application to land held outside the United Kingdom. The Revenue manuals clearly show that the Revenue does not currently share that view, e.g. Schedule E Manual at paragraphs 11440 and 11441. It has, however, been the decision of the House of Lords in R v Allen that has caused a number of professionals to review past practice. Although R v Allen did not assist in resolving the factors that make a person a shadow director under section 168(8), Taxes Act 1988, it certainly underlined the general issues. The question of a shadow director was considered in Secretary of State for Trade and Industry v Deverell [2001] Ch 340. The question of 'those, … , with real influence …' appears to broaden the definition considerably. It has been argued by Henry Dyson and Keith Croft in Solicitors Journal, 15 February 2002, that in relation to a société civile immobilière, if its constitution specifically provides that no member may be a gérant and that his powers are spelt out and that in practice such a gérant is appointed and operates independently as such, that this may be sufficient to ensure that there is no member who is a director or shadow director, so that no benefit in kind problem ensues. We do have some difficulties with this view. In practice, we doubt that many clients will be prepared to follow this course, and in addition it is clear that the intuitus personae nature of the members of a société civile immobilière makes this very difficult to argue, even if the tests in Deverell were overcome. It may be preferable to avoid the use of a société civile immobilière, if possible. However, in circumstances where the benefits of its use, by allowing owners of properties in France to organise their property holdings effectively and carry out some estate planning, by turning French immovable property subject to French succession law into movable property subject to the law of the individual's domicile, outweigh the disadvantages, then the problem of the potential benefit in kind must be faced.
Tax Bulletin issues 39 and 50
The Tax Bulletins specifically refer to foreign business entities and the distribution of profits. In the circumstances of a société civile immobilière holding French immovable property for the benefit of United Kingdom taxpayers and which property is not let, if the société civile immobilière is not carrying on any business activity and not creating profits, then one may argue that as stated in Tax Bulletin issue 39 whether a société civile immobilière is transparent or opaque will not necessarily be the same in all cases. One can argue further that the classification in Tax Bulletin issue 50 can be distinguished, that the Revenue's traditional view is still correct, and the société civile immobilière should be classified as transparent rather than opaque. In addition, if the statuts of the société civile immobilière are varied to ensure that the members' liability is both joint and several, this may give an added argument that the société civile immobilière should be regarded as transparent in the United Kingdom in addition to France, being more similar to that of a partnership than a body corporate. Who is the beneficial owner? Historically, it had been assumed that an English trust would not be relevant to French immovable property, and that therefore the beneficial owner for United Kingdom tax and other purposes must be the French titleholder, being the société civile immobilière. For United Kingdom tax purposes, the question is a matter within the jurisdiction of the United Kingdom rather than the French court. The Hague Convention on the Law Applicable to Trusts and their Recognition (ratified in England by the Recognition of Trusts Act 1987), makes it clear that, since the United Kingdom has specifically not ratified Article 13, the English court must recognise a trust of property in a territory without a law of trusts, e.g. France, established by a settlor from such a territory, if the law of a territory which has a law of trusts has been chosen by the settlor, e.g. England. Whether or not, however, the Hague Convention applies to a declaration of trust as opposed to a settlement is a nice point. Questions of 'rockets' and 'rocket launchers' are beyond the scope of this article but, broadly, the authors of Lewin on Trusts (seventeenth edition) believe that the convention does apply to a declaration of trust, while other authorities such as the von Overbeck Report and Underhill & Hayton's Law of Trusts (fifteenth edition) express some doubts. If the convention might not apply to declarations of trust, then in any event the cases of Webb v Webb [1994] QB 696 and Ashurst v Pollard [2001] Ch 595 have shown that the English court will under the common law enforce an English trust in relation to beneficial interests in foreign immovables even in circumstances without a specific settlement. It seems perfectly feasible, therefore, to argue that in circumstances in which United Kingdom taxpayers have purchased French immovable property through the vehicle of a société civile immobilière, that vehicle may hold the property as nominee for the United Kingdom taxpayers as absolute beneficial owners. Each individual case needs to be examined on its own facts. In addition, if the English court did find that the société civile immobilière holds the French property as bare trustee for the individual United Kingdom taxpayers, who hold the beneficial interest in French immovable property in their own right, then the court might also find that French succession law should also properly apply to such property interests, thus perhaps overriding one of the purposes in using a société civile immobilière in the first place. It would be important therefore that the terms of the English trust give full effect to the succession planning required. Previously, the main interest of a tax practitioner on hearing that his client has a property in France (or elsewhere), may have been in politely asking its general location and then calculating the chances of being offered a week's stay there himself. For the future, the practitioner might be advised to ask a little more about its actual manner of ownership and whether this has any implications for the client's United Kingdom tax liabilities. It seems to us that the private client lawyer will be called upon to boldly go where few private client lawyers have boldly gone before. Richard Frimston, solicitor and notary public, is a partner with Russell-Cooke Solicitors and R A D Urquhart, scrivener notary and avocat à la Cour de Paris, is a partner with De Pinna, Notaries, London. The views expressed in this article are personal to the authors and not intended to be a substitute for appropriate professional advice.
