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What are the terms and conditions for the taxation of real estate rentals in France by a foreign State?

Posted on April 21, 2020

The terms and conditions governing the liability for corporate income tax of foreign States that carry on in France a real estate leasing business directly or through SCIs with which they are associated, are specified by the “Conseil d’Etat”.

Should a foreign State which has made real estate investments in France be subject to corporate tax, in the same way as French private or public instances carrying out such operations? This was the question raised by the “Conseil d’Etat” in two cases in which the real estate leasing activities carried on in France were carried out, in one case, directly by the foreign State owning the buildings in question, and in the other, by French SCIs with which the foreign State is associated.

The subjection of one State to the taxes of another State is likely to raise questions relating to the immunities enjoyed by States because of the principles of equality and reciprocal independence of these entities: immunity from jurisdiction (which prevents a State from being subject to the courts of another State) and immunity from execution (which protects a State from acts of forced execution and measures of constraint undertaken by the services of another State). These immunities could not apply in the present case since, in the case, it was the foreign State which had taken the initiative to bring the matter before the court and, in the other case, there was a dispute as to the basis of assessment in the absence of any dispute over recovery. Following the example of the positions already taken by States other than France, there was therefore nothing to prevent, in those circumstances, the foreign State from being taxed in France in respect of its property leasing activities.

In the cases mentioned, the findings of the Public Rapporteur show that the State of Kuwait was the owner of the building in question and received the rental income directly, without the intermediation of the public agency KIA having any impact in this respect.

That is why, the “Conseil d’Etat” confirms that the management of real estate assets may constitute a profit-making operation even if it is not of a commercial nature within the meaning of Articles 34 and 35 of the General Tax Code (“Code général des impôts”). The provisions of Article 206-5 of the same code do not preclude the liability to corporation tax under ordinary law of property income received by a non-profit-making or similar organisation, where, having regard to its purpose and its particular conditions of exercise, the rental activity is a profit-making operation within the meaning of Article 206.5 of the General Tax Code.

In a judgment of the same day, the “Conseil d’Etat” also considered, with regard to capital gains on real estate made by taxpayers domiciled outside France, that the exemption from the levy provided for in the article 244 bis A of the CGI, benefits foreign States but does not extend to partnerships in which they are partners (CE 22-02-2020 n°423160, SCI Faucon).

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