The existence of a lease under which a société civile (non-trading company) rents out a property unfurnished belonging to it does not necessarily protect it from being liable to corporation tax (IS) due to the existence of a sublease on a the same property but furnished, as ruled by the Administrative Court of Nîmes on July 11, 2023 (TA Nîmes, 3rd chamber, n°2102347).
A société civile must carry on a non-trading activity in order not to be subject to corporation tax.
The rental of an unfurnished property is considered to be such an activity.
On the other hand, the rental of a furnished property is considered to be a commercial activity which, when carried out by a société civile, in principle automatically makes it liable to corporation tax.
Consequently, while a société civile that is not subject to corporation tax cannot effectively rent out the property it owns to avoid the risk of being subject to corporation tax, this is not, in principle, the case for its lessee.
In this scenario, the société civile leases the property it owns unfurnished, and the tenant sublets the property furnished. The tenant pays rent to the société civile under a lease agreement and is responsible for furnishing the property. If he decides to sublet the property furnished, he will receive rental income from this sublease, which he must declare to the tax authorities.
In principle, this mechanism means that the société civile is not concerned by the rental of the property furnished, since it is not the beneficiary of the resulting rent.
On March 31, 2023, the Marseille Administrative Court of Appeal ruled that such an interposition was possible, including for furnished rental by partners in a société civile, provided that the rental agreement related to the property furnished was not provided by the société civile, but by the partners as beneficiaries of a lease from the latter on the furnished property. To justify his position, the judge considered that:
– Proof had been provided that the tenants had furnished the property themselves; and
– The tenants had declared the income from the sublease.
Under these conditions, the Court confirmed that the société civile should not be subject to corporation tax, contrary to the position of the tax authorities.
A decision to the contrary has just been handed down by the Nîmes Administrative Court on July 11, 2023.
Under the terms of a lease agreement, the société civile (SCI) F had rented to Mrs B, manager and 50% shareholder in the company, various premises including, in particular, a cottage and 5 independent guest rooms, which Mrs B declared she was operating as a furnished rental business.
In this particular case, to confirm that SCI F was subject to corporate income tax, the Court pointed out that:
– Customer payments for the rental of the cottage and the independent guest rooms were received directly into SCI F’s bank account;
– Expenses incurred in running the cottage and the independent guest rooms were paid through SCI F’s bank account;
– That the credit card terminal used by customers to pay for their rentals was linked to SCI F’s bank account;
– No rent was actually collected on SCI F’s account for the rental to Mrs B , even though this was SCI F’s sole source of income;
– That the income declared by SCI F exceeded the rent agreed under the terms of the lease contract with Mrs B.
Therefore, while it is possible to set up an interposed rental system to avoid a non-trading company being subject to corporation tax, it is a delicate matter and must be implemented rigorously if it is not to be rejected by the tax authorities.
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Philippe Schmidt
Johanna Segalis
