In its decision of 6 May 2026 (No. 24-22.185), the French Supreme Court clarified how the concept of a legal entity whose assets consist principally of immovable property should be interpreted where this concept is not defined in an applicable tax treaty.
In this case, a Russian tax resident held 100% of the shares in a Cypriot company, which in turn held two Swiss companies and a 5% interest in two French civil real estate companies (sociétés civiles immobilières – SCIs). The SCIs themselves held real estate assets located in France. The remaining 95% of the interests in the SCIs were held by the taxpayer’s daughter.
The taxpayer applied to the French Tax Authorities (the “FTA”) for a refund of French Wealth Tax (impôt de solidarité sur la fortune – ISF), arguing that his interest in the Cypriot company should not be included in his French Wealth Tax base. His claim was rejected, and he subsequently brought proceedings before the French courts.
Article 22(2) of the France-Russia tax treaty provides that shares, interests or other rights in a company whose assets consist principally, directly or through one or more intermediary companies, of immovable property situated in a Contracting State may be taxed in that State. The case therefore concerned the interpretation of the concept of a legal entity whose assets consist principally of immovable property under the France-Russia tax treaty.
Under Article 3(2) of the tax treaty, where a term is not defined in the treaty, it must be given the meaning attributed to it under the domestic law of the relevant Contracting State.
Accordingly, the French Supreme Court upheld the reasoning of the Court of Appeal, which applied Article 750 ter, 2° of the French Tax Code (the « FTC »), together with Article 990 D of the FTC, to determine the meaning of the concept referred to in Article 22(2) of the treaty.
The Supreme Court held that the concept of a legal entity whose assets consist principally, directly or through one or more intermediary companies, of real estate located in France or of rights relating to such property must be interpreted by reference to Articles 750 ter, 2° and 990 D of the FTC. The relevant French domestic law rules therefore require both direct and indirect ownership to be taken into account.
The Court also held that, since the France-Russia tax treaty contains no specific provision governing the treatment of interests held by family members, the relevant provisions of French domestic law must apply. Accordingly, the interests held by the taxpayer’s daughter in the SCIs had to be taken into account for the purposes of determining whether the relevant legal entities fell within the scope of the real estate provision of the treaty.
The decision confirms that, where a tax treaty does not define the concept of a company whose assets consist principally of immovable property, that concept is construed in accordance with French domestic law (Articles 750 ter, 2° and 990 D of the FTC), provided that the treaty does not require a different interpretation. Thus, the interests held by the taxpayer’s spouse, ascendants, descendants and siblings are taken into account, as are indirect holdings through any number of intermediary entities, irrespective of the percentage held.
Non-resident investors holding French real estate through entities should therefore assess their holding structure, including the interests of family members, against the relevant provisions of the FTC and not solely against the applicable tax treaty. The presence of a clause similar to Article 3(2) of the France-Russia treaty should be verified for each tax treaty concerned.
The decision was rendered in respect of the French Wealth Tax. The French Real Estate Wealth Tax (Impôt sur la Fortune Immobilière – IFI), which replaced the French Wealth Tax in 2018, no longer relies on the « principally real estate » criterion. However, this interpretation could be applied to treaties concerning gift and inheritance taxes since Article 750 ter of the FTC continues to govern those taxes.