Is It Still Possible to Implement Tax-Free Step-Up of Real Estate Assets Held Through a French SCI?

July 25, 2016

The Lupa decision creates uncertainty in applying the Quemener principle in a Luxembourg situation

On July 6, 2016, the French Supreme Court rendered a surprising decision[1] that limits the right of tax payers to implement a tax-free step up of French real estate assets held through French SCIs (société civile immobilère). Such tax free step up is usually implemented pursuant to guidelines known as the Quemener principle. The Quemener principle seeks to  neutralize situations that would create either a double deduction or double taxation of SCI partners. Such situations arise because an SCI is a French tax transparent partnership: its taxable income is taxed in the hands of the partners at the end of each financial year, regardless of whether  such income is distributed to the shareholders of the SCI.

The example below explains how the regime has historically operated. An SCI owns an asset with a 100 tax basis but a fair market value of 300. An investor purchases the SCI shares for 300. Following such purchase, the SCI implements a step-up of its asset from 100 to 300. As a result, the investor is taxed on a gain of 200. The SCI is dissolved and the SCI shares are cancelled. Pursuant to the Quemener principles, the investor is entitled to increase the tax basis of its SCI shares by the amount of the stepped up gain. As a result, the investor can offset its 200 taxable gain with the 200 capital loss that the investor will incur upon the cancellation of the SCI shares[2]. Following the SCI’s dissolution, the tax basis of the assets of the dissolved SCI in the books of the investor is 300.

Since 2007, the published guidelines of the tax authorities have confirmed the application of the Quemener neutralization principles in the context of a voluntary step-up of the tax basis of an SCI’s assets (followed by a dissolution of such SCI). The French Supreme Court has also recently confirmed that these principles apply to the cancellation of shares in an  SCI following a step-up in the context of a tax reassessment as determined by French tax authorities [3].

Despite the longstanding guidelines of the tax authorities, in the Lupa decision dated 6 July 2016, the French Supreme Court concluded that the Quemener neutralization principles should only apply where the same gain (i.e., gain on the SCI shares and gain deriving from the step-up of the SCI’s asset) has been taxed twice at the level of the SCI’s partner. In that respect, the taxpayer’s argument regarding the existence of the economic equivalent of double taxation was rejected by the French Supreme Court and the Government Attorney. However, it is worth noting that the Lupa facts were very specific:

  • Within a period of a few days, the French investor implemented a series of complex intragroup transfers and mergers between French and Luxembourg companies, which were timed to occur shortly before the execution of the 1st amendment to the France-Luxembourg tax treaty dated 24 November 2006 (this amendment  ended double exemption situations in the context of French real estate investments);
  • The French investor implemented two basis step-ups:
    • a step-up of the value of the SCI shares at a time where the SCI was held by a Luxembourg company, which itself had been acquired by the French investor. As a result of the provisions of the France-Luxembourg tax treaty applicable at such time, the step-up gain was not  taxed in France;
    • a step-up of the value of the assets of the SCI at a time when the SCI had been transferred to the French investor as a result of the dissolution of the Luxembourg company.
  • The SCI shares were transferred to the French investor as a result of the dissolution of a Luxembourg company, a dissolution that did not fall within the scope of French corporate income tax;
  • The investor could not avail itself of the 2007 published guidelines of the tax authorities confirming the application of the Quemener neutralization principles in the context of a voluntary step-up of the tax basis of an SCI’s assets.

Based on the context of the Lupa decision, and noting that the Quemener principles have been consistently applied by the French Supreme Court for  16 years since the landmark Quemener decision[4], the Lupa decision should most likely be viewed as a one-off decision that does not significantly narrow the scope of application of the Quemener principles (except for the situation where SCI shares have been revalued and transferred in a tax-free manner prior to their cancellation).  Nevertheless, given the uncertainty created by this decision, we recommend that our clients and friends pay careful attention to the evolution of the French published guidelines relating to the implementation of the Quemener principles.


   [1]   CE 6 July 2016 n°377904 (Lupa)

   [2]   Such loss being equal to the difference between 300 (the value of the net assets of the SCI upon the dissolution) and 500 (being the sum of the purchase price of the SCI shares of 300 and the step-up gain of 200)

   [3]   CE 27 July 2015 n°362025

   [4]   CE 16 February 2000 n°133296


Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, Jérôme Delaurière or Jeffrey Trinklein, or any of the following lawyers:

Jérôme Delaurière – Paris (+33 (0) 1 56 43 13 00,
Jeffrey M. Trinklein - London/New York (+44 (0) 20 7071 4224 / +1 212-351-2344),
Ariel Harroch – Paris (+33 (0) 1 56 43 13 00,
Nicholas Aleksander – London (+44 (0) 20 7071 4232,
Hans Martin Schmid – Munich (+49 (0) 89 189 33 110, 

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