The question of what elements may serve to identify a primarily tax-driven purpose (“but principalement fiscal”) has recently been addressed by a French Court (Tribunal judiciaire de Compiègne) in a decision rendered on September 2 2025 concerning the French Real Estate Wealth Tax (Impôt sur la Fortune Immobilière – WT).
Pursuant to Articles 964 and 965 of the French Tax Code (FTC), the WT applies exclusively to individuals whose French real estate wealth, assessed at the household level, exceeds €1,300,000 as of 1 January of the relevant tax year.
Since the introduction of WT by the 2018 Finance Act, the deductibility of debts incurred for the acquisition of real estate assets has been a major source of difficulty. Precisely, article 973-II of the FTC is designed to neutralize, in the valuation of shares in real estate companies, the effect of debts contracted by a company for the acquisition of a taxable asset from the taxpayer himself or from a member of his tax household exercising control over the company. This provision specifically targets so-called Owner Buy Out schemes. Under such arrangements, a taxpayer transfers a real estate asset to a company under his control (typically a Société Civile Immobilière). The purchase price is financed by a shareholder loan, in which case the taxpayer converts a taxable real estate asset into a claim (the shareholder loan) excluded from the WT base, while simultaneously reducing the taxable value of the SCI shares by the amount of the debt.
However, a safeguard clause allows deduction if the taxpayer can prove that the loan was not contracted for a primally tax-driven purpose, with the burden of proof on the taxpayer, contrary to Article L. 64 A where it lies with the French tax authorities. Specifically, since January 1, 2021, acts that seek to benefit from a literal application of the law or court decisions, but go against their intended purpose (fraudulent abuse of rights (abus de droit)), and are motivated by the desire to avoid or reduce taxes that would otherwise be due, fall under the so-called “mini abuse of law” regime. In this respect, the concept of “principal purpose” under Article L. 64 A of the French Tax Procedure Code is broader than the notion of an “exclusively tax-driven purpose” as defined in Article L. 64 LPF.
In the case at hand, retired farmers sold two properties to SCIs financed by debt and shareholder loan. The French Tax Authorities argued that the shareholder loans fell within the scope of Article 973-II of the French Tax Code and added the relevant amounts back into the taxable base, resulting in additional tax assessments for 2020 and 2021. Precisely, they considered that even a modest annual WT saving (€6,000) and a reduction in rental income is sufficient to establish a “primally” tax-driven purpose.
The court rejected this method and held that the notion of “primarily” requires a holistic balancing of all effects, including non-tax benefits such as estate planning. The court underlined that this assessment cannot be purely mathematical and that patrimonial objectives, like a donation-sharing arrangement delayed for reasons beyond the taxpayers’ control, cannot be reduced to tax savings calculations. The court accepted estate planning as a legitimate purpose and found in favor of the taxpayers.
Although only a first instance ruling, the judgment confirms that an Owner Buy Out structure can be defended, provided it forms part of a broader estate planning project rather than an end in itself. The assessment of a “primarily tax-driven” purpose cannot be reduced to a mere mathematical comparison between tax savings and asset values; it requires a qualitative analysis that considers the legal, economic, and family dimensions of the transaction.
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