French Civil Real Estate Company (SCI) for Israeli Tax Purposes - Tax Exposures and Reducing Double Taxation for Israelis with Real Estate in France
A professional guide for Israeli residents: classification of the SCI, the Israel-France tax treaty, effective management and control, and practical steps for proper reporting.
This article explains the Israeli taxation of an SCI and the tax exposures that may arise for Israeli residents who hold real estate in France through an SCI (Société Civile Immobilière) – sometimes also referred to as a “French civil company” or a “civil real estate company”. In France, an SCI is generally classified as a transparent entity for tax purposes, so rental income is attributed to the rights holders and taxed in their hands. In Israel, the same structure may receive a different classification, create classification and timing mismatches, and lead to double taxation and reporting uncertainty.
What is an SCI and what does “transparency” mean in France
An SCI is a widely used French entity for holding and managing real estate, usually held by at least two rights holders. When an SCI is transparent (from a tax perspective) in France, the income is attributed to the rights holders and taxed in their hands (and not corporate tax at the entity level).
The problem with taxing an SCI in Israel
In Israel, it is possible that the SCI will be classified for tax purposes as a “regular company”. Whether a distribution will be classified as a dividend depends first and foremost on the entity’s classification in Israel and on the facts of the case.
In scenarios where the entity is classified as a company, two-tier taxation may arise in Israel:
- Treating the income as the company’s income.
- Additional tax upon distribution of the profits to the rights holders, sometimes as dividend tax.
This creates a gap between the two countries:
- In France: tax on rental income attributed to the rights holders.
- In Israel: tax that may arise at a different point in time and under a different classification.
This gap may make it difficult to obtain a foreign tax credit and may lead to economic double taxation.
Key tax exposures when investing in France through an SCI
Double taxation on rental income
In France, rental income of a transparent SCI is attributed to the rights holders and taxed in their hands. The tax rates in France depend on the circumstances (residency, type of income, additional levies, and so on).
In Israel, if the SCI is classified as a company, distributing profits to a rights holder who is an Israeli resident individual may be considered a dividend and subject to dividend tax. The tax rate and classification depend on the taxpayer’s specific circumstances (including whether the taxpayer is a substantial shareholder or not), on the provisions of the law, and on treaty aspects.
Numerical example
- Assume annual net rental income (after expenses) of 100,000 euros.
- In France, the rights holder is taxed on the rental income under the applicable tax rules.
- In Israel, if the classification results in tax on a distribution, there may be Israeli tax on the distributed amount, in addition to the tax in France.
- The main difficulty: the French tax was paid on rental income, while the Israeli tax liability may be imposed on a dividend or at a different time. The classification and timing mismatch may limit the availability of a full credit, depending on the applicable rules.
Before distributing profits, it is advisable to perform a dedicated review of the income classification, the foreign tax credit route, and the reporting implications.
Article 6 of the Israel-France tax treaty and rental income
The tax treaty between Israel and France provides an important framework for taxing income from real estate. As a rule, the source state (the country where the real estate is located, for example France) is granted the primary taxing right with respect to rental income from real estate.
In Israel, taxation may apply under domestic law, but a relief mechanism is generally available under the treaty (credit or exemption), subject to the classification and the facts. Therefore, even when there is no Israeli tax on the rental income at the “direct” level, there may be Israeli tax at the level of profit distributions, depending on the classification and the circumstances.
Tax liability upon sale of the property
Selling real estate in France may have tax implications in both France and Israel, depending on the seller’s residency, the holding structure, and the income classification.
When the holding is through an SCI, there may be a two-layer tax scenario:
- Taxation at the entity level (under French and/or Israeli law, depending on the classification and tax residency).
- Additional taxation at the individual level upon distribution.
Action point: Before a sale, it is recommended to perform a dual simulation (France and Israel), including distribution scenarios. This helps avoid tax surprises and identify the correct reporting route.
Comparison table: direct holding of real estate in France vs. holding through an SCI – Israeli taxation points and foreign tax credit challenges
Topic | Direct holding of the property in France (by an individual) | Holding through an SCI (transparent in France) |
Holding structure | The property is registered in the individual’s name | The property is held through an SCI, and the individual holds rights in the SCI |
How rental income is taxed in France (general) | Typically, French tax on rental income under the tax rules applicable to the property owner (residency, tax brackets, deductible expenses, additional levies, etc.) | Typically, the French tax is attributed to the rights holders in the SCI and taxed in their hands, under the tax rules applicable to them |
Potential tax point in Israel | In many cases, depending on the treaty and the classification, income from real estate is treated so that the relief mechanism (exemption/credit) prevents double taxation in practice – depending on circumstances and reporting | If in Israel the SCI is classified as a company, the Israeli tax may arise upon distribution of profits to the rights holders (sometimes as tax on distributions/dividend tax) – depending on classification and facts |
Foreign tax credit challenge | Typically easier to apply, because the French tax is attributed to the individual’s rental income (still depends on routes and reporting) | The French tax is paid on rental income, while in Israel the tax may apply to a distribution classified differently and at a different time. Therefore, the credit varies – depending on the circumstances of the case |
Documentation and recordkeeping highlights | Lease agreement, French tax returns, expense supporting documents, bank statements, purchase and financing documents | In addition to the property documents: SCI bylaws/incorporation documents, minutes and material resolutions, identity of authorized signatories, documentation of where decisions are made (effective management and control), distribution documents and cash flows |
Key risk focus: the SCI’s tax residency in Israel (effective management and control)
One of the most important focus points in SCI matters for Israeli residents is the entity’s tax residency in Israel, and in particular the effective management and control test.
Under Israeli law, a company’s residency is determined, among other things, by the place of incorporation or by where effective management and control is exercised in practice. This is a substantive, fact-based test. It examines where the key and strategic decisions of the entity are actually made, and not only where formal meetings are held.
How to reduce exposure and increase certainty
To reduce tax exposures and improve certainty, it is recommended to plan the holding and reporting structure while taking a combined view of French and Israeli law.
Among other things, one may consider:
- Mapping exposures and assessing risks before reporting, before changing residency, before a structural change, or before a sale.
- Building a bi-jurisdictional compliance and reporting strategy that aligns with the relevant classifications and reduces disputes.
- Consistently documenting decision-making, including minutes and supporting documents.
- In suitable cases, considering an advanced approach to the tax authority or obtaining a tax opinion, especially where classification and timing mismatches exist.
When an Israeli resident holds real estate in France through an SCI, classification and timing mismatches between the tax systems may create double taxation, credit difficulties, and reporting uncertainty. The Israel-France tax treaty provides an important framework, but the practical result depends on the facts, the classification, and how reporting is carried out.
Nimrod Yaron & Co. has experience handling SCI matters and their Israeli French tax implications, including situations where classification and timing mismatches exist between French law and Israeli law. In recent years we have provided advice and drafted very complex opinions in SCI matters, while arriving at the optimal solution for each of our clients.
We offer a set of tailored solutions depending on the circumstances, for example:
- Mapping exposures and assessing risks before reporting or before a structural/family change.
- Building a compliance and reporting strategy that reduces exposure to double taxation and disputes.
- Supporting documentation and decision-making processes to reduce the risk of incorrect classification of the company’s residency.
- Full tax opinions that provide protection for tax planning.
- Preparation for dealing with the Tax Authority.
- As needed, holding discussions and resolving disputes with the Tax Authority.
The precise solution depends on the details of the case (holding structure, the rights holders’ involvement in management, frequency of material decisions, payments and cash flows, family status, and existing tax files in Israel and France).
To schedule an introductory call and a personal initial review, click here.
FAQ
Is a transparent SCI considered transparent in Israel as well?
Not necessarily. Israel may classify the entity differently for tax purposes based on tests and circumstances, so it is important to review the classification and the reporting implications.
Why does tax I paid in France on rent not always entitle me to a credit in Israel?
In certain situations, the French tax is paid on rental income, while in Israel the tax liability may be on a distribution classified as a dividend or at a different time. The classification and timing mismatch may limit a full credit, depending on the applicable rules.
Does the Israel-France tax treaty prevent Israeli tax on rent from France?
The treaty provides a framework that generally allocates the primary taxing right for real estate income to the source state. Implementation depends on the classification, the facts, and how reporting is done in Israel and France.
What does “effective management and control” mean for an SCI?
This is a test that examines where material decisions are actually made. Effective management from Israel without proper documentation may create a risk of being classified as resident in Israel.
What should be prepared before selling a property held through an SCI?
It is recommended to perform an orderly simulation (France and Israel), review distribution implications, plan the reporting route, and prepare in advance with the appropriate documents.
When should a tax ruling be requested?
Sometimes when there is material uncertainty regarding the classification of the entity or the income, or when a material transaction is expected (sale, distribution, restructuring) and advance certainty is required.
What do you need to know in order to review my case?
Generally, documents and the factual picture are required (holding structure, French tax returns, cash flows, contracts, who makes decisions and from where, and more). We provide the precise list after a short introductory call.
