The one-time allocation of the entire rental loss recorded by a civil real estate company (SCI) to its ultra-minority shareholders (1%) does not constitute an abusive clause according to the French Council of State (Conseil d’État).

Allocation of Rental Losses to Ultra-Minority Shareholders: Legal Validity and Fiscal Considerations

Council of State, 8th – 3rd Chambers Joint, October 18, 2022, No. 462497

The French Council of State recently ruled on the situation of two parents holding 1% of the capital of a civil real estate company (SCI), while their children held the remaining 99%.

For three consecutive fiscal years, the shareholders decided that the annual losses would be fully allocated to the parents, allowing them to report the entire rental loss of the SCI on their personal income tax returns.

The tax authorities challenged these decisions, considering them abusive (“clause léonine”), and adjusted the parents’ tax declarations to account for the share of SCI rental losses exceeding their 1% ownership.

However, the Council of State ruled that these decisions were not abusive, since their effect was limited in time. Consequently, the parents were allowed to deduct these losses from their personal income tax returns.

At first glance, this decision may appear to validate these operations from a tax perspective. It is worth noting, however, that the tax authorities did not base their adjustment on the grounds of tax abuse, meaning the Council of State did not address the fiscal regularity of such decisions in that context.

Caution is therefore advised, and this practice should not be generalized, particularly given the “mini-abuse of rights” regime, which came into effect on January 1, 2020, sanctioning operations carried out primarily for tax purposes. This regime provides the tax authorities with a new tool to challenge such operations.

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