The French SCI and the Cayman Tax

The programme law of 22 December 2023 has made several important amendments to the so-called 'Cayman tax' with effect from 1 January 2024. This will have an important effect for the French Société tax transparent société civile immobilière ('SCI') held by Belgian resident individuals.

The 'Cayman tax' is a set of rules in the Income Tax Code that oblige taxpayers to report the existence of trusts or other legal arrangements (“constructions juridiques”) such as companies in tax havens or insurance contracts that they have set up, and to declare the income of the assets of the legal arrangement as if they were still the owners.

What has changed?

To determine whether or not companies incorporated within the European Economic Area qualify as a 'legal arrangement' for the Cayman tax, until now, one had to check the Royal Decree. For 'hybrid companies' the Royal Decree provided two grounds for exclusion.

A 'hybrid company' is a company that is not considered fiscally transparent by Belgian standards, while the company's state of residence taxes the shareholders in a transparent manner on the company's net income. That results in a tax mismatch.

The first of the two exclusion grounds for 'hybrid companies' was that the main purpose of the company consists of the exercise of an activity, as a result of which income is realised that should be exempted under the double taxation treaty in Belgium should it be realised by the underlying shareholders directly, without a company. This is the case for the SCI. The income it earns from the rental or use of real estate located in France is liable to tax in France under the double taxation treaty. Belgium should thus exempt this income.

An SCI was not considered to be a legal arrangement.

Under the amended Cayman tax regime, this exclusion ground was abandoned.

The other – remaining – exclusion ground, also known as the '1% rule' means that the shareholders pay at least 1% income tax in the country where the company is resident. Specifically, an SCI is only excluded if the shareholders pay 1% income tax or more in France on the net income of the SCI. Only then is the SCI not considered to be a 'legal arrangement' – and its shareholders are not subject to the Cayman tax.

To apply the '1% rule', one first has to calculate the taxable base of the SCI as if it were an entity subject to Belgian corporate income tax and determine how much the Belgian corporate income tax would be. Then one has to check how much French income tax the Belgian shareholder paid and check whether this constitutes at least 1% Belgian corporate income tax (if it had been due), taking into account their shareholding in the SCI. If this threshold is met, the SCI is not a legal arrangement.

How does this work in practice?

If the SCI earns income in a year from the rent or sale of real property, the Belgian tax base and tax due must be determined in accordance with the Belgian rules. This means that one has to take account of deductions like depreciation, tax-deductible expenses, etc. in accordance with the Belgian legislation. If the taxable base, is positive, corporate income tax will be due (according to Belgian standards), and one must examine whether the 1% threshold has been met. If a Belgian resident holds 50% of the shares of the SCI, then the criterion is whether the French income tax payable by the Belgian resident for that tax year is at least 1% of 50% of the corporate income tax that would be due by analogy in Belgium by the SCI.

If the taxable base under the Belgian rules is 0 or less, e.g. because the French property was not let or because the tax-deductible expenses and depreciation are higher than the taxable income for that taxable period, then the SCI cannot be a legal arrangement even if the shareholders in France did not pay any income tax.

The Belgian shareholders of an SCI will have to make this calculation every year. An SCI can be a legal arrangement one year and not the other.

However, it seems likely that most SCIs should not be considered to be a legal arrangement. This has the advantage that the shareholders of SCIs do not have to report the SCI in their annual income tax return, and do not have to declare the income of the SCI as if it was their own income.

It is to be noted that for the years when an SCI is regarded as a legal arrangement, the shareholders have an obligation to report its existence in their income tax return, they have to report the income of the SCI in a transparent manner as if it was their own income, they cannot claim an exemption under the double tax treaty between Belgium and France for income from real property and they have to take into account that the tax administration has ten years instead of three to assess the tax. A tax return with a legal arrangement is indeed deemed to be a ‘complex’ income tax return.

Distributions by the SCI are dividends according to the Belgian tax authorities taxable at a fixed rate of 30%. They will not be exempt from dividend taxation under the Cayman tax. Indeed, another change to the Cayman tax rules means that only income that have been effectively taxed in Belgium can later be distributed tax-free under certain conditions.

Conclusion

This new administrative burden, on top of the high tax burden with a dividend tax at 30% after the French tax on the rental income or the proceeds of a sale may make Belgian shareholders consider an exit out of the SCI.