Temporary usufruct of SCI shares: the Administrative Court of Appeal (CAA) disagrees with the Committee on Abuse of Rights

The Administrative Court of Appeals, in a case in which we represented the taxpayers, has just overturned a tax assessment on the grounds of an abuse of rights.

This case involved taxpayers who had formed real estate investment companies (SCIs) before transferring the temporary usufruct of their shares in those companies to a holding company that they indirectly owned. Following the transfer of the temporary usufruct, capital increases were carried out in the SCIs to finance the acquisition of income-generating properties. The holding company did indeed pay up its capital, unlike the bare owners. Loans were taken out to complete the financing of the transactions.

administration these transactions to be an abuse of rights and consequently taxed the taxpayers as if the transfer of temporary usufruct of the shares had not taken place. Consequently, the bare owners were taxed on the real estate income generated by the SCIs. The depreciation and interest that had been deducted by the holding company were added back to its taxable income byadministration. Penalties ranging from 40% to 80% were also imposed.

The Committee on Tax Abuse, in opinions issued at its meeting on November 15, 2019 (Opinions No. 2019-42 et seq.), had ruled thatadministration were indeed entitled to initiate proceedings for abuse of rights because the transactions constituted an artificial arrangement and had an exclusively tax-related purpose (the committee had confirmed its position in a second referral during the tax audit of subsequent years: Opinion No. 2024-14 et seq., session of November 14, 2024).

On May 28, 2025, the Paris Administrative Court of Appeal overturned the tax assessment.

First, she believes that there is no artificial arrangement because:

- Whileadministration the entire series of transactions (the formation of SCIs with minimal capital, the division of ownership interests, the capital increase, the failure of bare owners to pay in their capital, etc.) to constitute an artificial arrangement, they nevertheless rule out only the division of SCI ownership interests through the abuse of rights procedure.

-administration dispute that the transactions enabled the bare owners to build up a real estate portfolio without directly bearing the financing costs.

-administration dispute the validity of the financing transaction that enabled the acquisition of real estate.

- The mere fact that the bare owners' capital has not been released—which could eventually lead to a depletion of the holding company's assets to the detriment of its interests—is not sufficient to characterize the arrangement as artificial.

The Court further notes thatadministration any evidence to justify a literal application of the provisions that would be contrary to the legislature’s intent.

She concludes that the tax assessment based on abuse of rights should be set aside.

CAA Paris, May 28, 2025, No. 24PA01225 et seq.

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