• Exit Tax on Eligible Assets that Become Subject to the French Reit-Like Regime
  • June 8, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • Companies that have elected for the specific REIT-like tax regime set forth under Articles 208 C et seq of the French tax code (Société d'Investissements Immobiliers Cotée, SIIC) are exempt from corporate income tax on (i) rental income (realized either directly or through tax flow-through partnerships), (ii) capital gains arising from the sale of eligible real estate assets, and (iii) dividends received from subsidiaries having themselves elected for the specific SIIC tax regime.

    Article 208 C of the French tax code, however, provides that the election for the SIIC tax regime gives rise to the taxation of the unrealized latent capital gains attached to assets that are eligible for the SIIC tax regime (real property rights, wholly owned buildings, usufruct rights, the rights of a lessee under a construction or ground lease, rights of a lessee under a financial lease, rights on properties temporarily granted by the French State or one of its subdivisions, and shares in certain partnerships or SIIC subsidiaries that have the same business purpose as a SIIC (Eligible SIIC Assets)) at the reduced rate of 19 percent. Such so-called exit tax has to be paid in four installments over four years as from the SIIC election year (Exit Tax).

    Article 208 C ter of the French tax code further provides that the Exit Tax is also due by a company that has already elected for the SIIC regime on unrealized latent capital gains attached to Eligible SIIC Assets that become eligible to the SIIC regime. This is the case, for instance, where a non-SIIC company holding Eligible SIIC Assets is merged into a SIIC company, or where a SIIC subsidiary that has not elected for the SIIC regime is transformed into a partnership (in such case, the Eligible SIIC Assets give rise to the Exit Tax only to the extent of the share held by the SIIC into the newly formed partnership).

    Unlike the regime provided for by Article 208 C of the French tax code, Article 208 C ter of the French tax code does not provide that the Exit Tax installments to be paid on the years following the year where the relevant event (e.g. the merger) took place will remain due at the rate applicable on such year. Such difference became relevant in 2009, when the initial Exit Tax rate of 16.5 percent was increased to the current rate of 19 percent.

    In the context of an ongoing procedure between a SIIC company and the French tax authorities, presumably involving an application of the provisions of Article 208 C ter of the French tax code after the above-mentioned rate increase but in respect of an event that took place before such increase, a SIIC company has thus challenged the constitutionality of these provisions.

    Considering that such provisions had never been reviewed by the Conseil constitutionnel and could potentially create a breach of equality between taxpayers, the Conseil d'Etat requested a QPC from the Conseil constitutionnel.