Reform of the tax regime governing partnerships

The French tax authorities have published a 'white paper' on the tax treatment of French partnerships (sociétés de personnes or SDP). It proposes consultation on changing the concept of partnership as defined in French tax law towards a concept closer to international standards.

In France, partnerships are regarded as taxable persons in their own right, but the tax is due by their partners. Under international standards, partnerships are fiscally transparent, with the partners carrying on their business through the structure.

The white paper prompts legitimate fears regarding the evolution of the tax on capital gains realised on the disposal of shares in an SDP whose assets consist mainly of real estate. This change has been put forward before without success. However, there are reasons to believe that this time it could happen as soon as 2011.

These modifications may have multiple effects, in particular in international relations and the application of tax conventions to SDPs. Certain tax conventions do not permit France to tax the capital gains realised on disposals of shares in an SDP whose assets consist mainly of real estate.

One exception is where the SDP's sole object is "the acquisition of buildings with a view to assigning their ownership or enjoyment to their partners". The tax authorities however use a wide interpretation of the concept of building - see in particular the Franco-German or Franco-Belgian conventions.

By recognising the transparency of SDPs, these conventions - without further modification - might permit the taxation in France of capital gains realised on the disposal of shares in a French SDP whose assets consist mainly of real estate. This is all the more true for the Franco-Luxembourg tax convention, since it refers to the SDP as a person for tax purposes.

Many of the Luxembourg real estate funds invested in France are structured via French SDPs of the SCI type that own real estate assets and are held by Luxembourg-based holding companies. Under certain conditions, such a scheme can permit the non-taxation in France of capital gains on disposals of real estate assets via the disposal of the companies that own the buildings.

Such non-taxation could be abolished. In fact, according to the new version of the Franco-Luxembourg tax convention (2008), capital gains on disposals of SDPs holding buildings in France that are realised by partners residing in Luxembourg are not taxable in France. In this case, the tax personality of the SDP "is distinct from that of its members".

As a consequence, the capital gains in question would then become chargeable, including the portion existing in deferred form on the date of effect of the reform. This fear is reinforced by the draft "sweeping" provision aimed at taxing in France any profit made by a non-resident that is today doubly exempt on account of the difference in the tax definitions used by the states concerned.

Without the need for any ratification of the kind required to modify international treaties, this measure could be introduced into French domestic law quickly. Such a change could be voted on and implemented within a few weeks of the introduction of the draft law.

What is the required approach?

  • To check whether any actual financial risk exists
  • To consider the solutions that could be implemented within a timescale compatible with the introduction of such a scheme should such a risk be confirmed.