For French residents or investors looking to acquire real estate in Dubai, using a French société civile immobilière (SCI) holding a UAE limited liability company (LLC) may appear to offer the best of both worlds: a French structure to organise ownership and a local company to acquire and operate the property. In practice, however, choosing between an SCI subject to French personal income tax (IR) and one subject to French corporate income tax (IS) has significantly different tax implications.
The structure examined involves two levels: a French SCI holds all or part of the share capital of an LLC established in Dubai, which acquires, owns, leases and, where applicable, sells the property.
This distinction is fundamental. The SCI does not directly own the property located in Dubai; it holds shares in the LLC. Rental income and capital gains are therefore not necessarily treated as French real estate income. Their tax treatment depends, in particular, on the tax regime applicable to the SCI.
SCI subject to corporate income tax: UAE LLC profits may be taxable in France
When an SCI elects to be subject to French corporate income tax (IS), it becomes a separate entity liable to tax in France. Its tax treatment is therefore similar to that of a French company holding a foreign subsidiary.
The main consideration is Article 209 B of the French General Tax Code (Code général des impôts, CGI). This provision may result in the profits of a controlled foreign company being taxed in France, even where those profits have not been distributed to the French company.
An SCI subject to corporate income tax that holds more than 50% of a UAE LLC falls, in principle, within the scope of this provision. The key question then becomes the tax regime applicable to the LLC.
With UAE Corporate Tax levied at 9% on taxable profits exceeding AED 375,000, the LLC may be considered subject to a preferential tax regime under French tax rules. Article 209 B must therefore be carefully considered.
However, a safeguard provision exists. The French company may seek to demonstrate that the LLC’s activities are based on genuine economic considerations and that its establishment in the UAE is not primarily intended to artificially shift profits to a low-tax jurisdiction.
This issue is particularly relevant to real estate activities. An LLC carrying out genuine commercial operations or maintaining a real economic presence in the UAE may be in a more favourable position than a mere “letterbox company” passively holding a rented property.
It is therefore important to be able to demonstrate the LLC’s actual presence and activities: directors, decisions made in the UAE, local bank accounts, contracts with real estate agents or property managers, financing arrangements, management of works and rental operations, accounting records and, more generally, evidence of where decisions are genuinely made and economic risks are assumed.
An advantage during the holding period… but taxation at two levels
An SCI subject to corporate income tax nevertheless offers a traditional advantage: as long as profits remain within the corporate structure, they can be accumulated and reinvested without being immediately taxed in the hands of the individual shareholder.
However, when profits are ultimately distributed to the individual shareholder, a second level of taxation arises. Dividends paid to individuals are, in principle, subject to the French flat tax (prélèvement forfaitaire unique) of 30%, unless the taxpayer elects taxation at progressive income tax rates.
Between the LLC and the SCI, the French parent-subsidiary tax regime (régime mère-fille) may, subject to certain conditions, allow most of the French taxation on dividends to be eliminated, apart from a 5% add-back for expenses and charges.
An SCI subject to corporate income tax may also offer advantages upon disposal. If the SCI sells its shares in the LLC and those shares qualify as participating interests under the applicable legal conditions, the capital gain may benefit from the French participation exemption regime, potentially resulting in an effective tax rate of approximately 3%.
This possibility must, however, be distinguished from a direct sale of the property by the LLC, which falls within the scope of UAE Corporate Tax and may subsequently give rise to additional tax consequences when the sale proceeds are distributed.
SCI subject to personal income tax: a very different mechanism
An SCI subject to personal income tax (IR) operates under a fundamentally different tax framework.
The SCI itself is not subject to tax on its profits. It is treated as fiscally “transparent” or, more precisely under French law, translucent. Its taxable results are determined at company level and subsequently taxed in the hands of its shareholders.
However, it is important to note that, in the structure examined, the SCI does not directly own the property. Instead, it holds shares in a UAE LLC, which is treated in France as a separate taxable entity comparable to a corporation.
Amounts distributed by the LLC to the SCI are therefore not directly classified as rental income. They primarily consist of dividends or, depending on the transaction, capital gains on shares.
This distinction is decisive.
Article 209 B no longer applies, but Article 123 bis must be considered
Since an SCI subject to personal income tax is not itself liable to corporate income tax, Article 209 B does not, in principle, apply to it.
However, another anti-avoidance provision must be examined: Article 123 bis of the French General Tax Code, which applies to certain interests held by French-resident individuals in foreign entities benefiting from preferential tax treatment.
Where an LLC’s assets consist primarily of real estate located in Dubai, Article 123 bis should, in principle, not apply, as this provision mainly targets entities whose assets consist of securities, receivables, deposits or current accounts.
Nevertheless, this conclusion must be monitored over time. An LLC that gradually accumulates substantial cash reserves may see the composition of its balance sheet change. The analysis should therefore be revisited in light of the company’s actual circumstances.
The main advantage: retaining and reinvesting rental profits
An SCI subject to personal income tax may therefore provide a particularly attractive deferral of taxation.
As long as the LLC retains the profits it generates, no income is distributed to the SCI. Since the SCI receives no distributions, its shareholders are not taxed in France on those undistributed profits.
The ability to accumulate rental profits within the LLC is one of the principal attractions of an SCI subject to personal income tax.
However, this advantage must be weighed against the tax consequences upon exit. When profits are eventually distributed, they are taxed in the hands of the shareholders under the rules applicable to investment income.
More importantly, this structure does not benefit from the particularly favourable capital gains tax regime applicable to individuals who directly own real estate, notably the allowances based on the length of the holding period.
An often overlooked issue: inheritance
Regardless of whether the SCI is subject to personal income tax or corporate income tax, one issue deserves particular attention: inheritance taxation.
Under this structure, the investor does not directly own the Dubai property. Upon death, the heirs inherit shares in the French SCI.
In the structure examined, this distinction is significant: shares in a French SCI constitute intangible movable property under French law. The interposition of a corporate structure therefore prevents the investor from benefiting from the inheritance tax treatment that may apply to real estate held directly in the UAE under the France-UAE tax treaty.
Shares in the SCI may consequently remain subject to French inheritance tax under the ordinary rules, potentially reaching 45% for transfers in the direct line of descent, after the applicable allowances.
This represents an important difference compared with direct ownership of Dubai real estate by an individual and should be considered from the outset of any estate planning strategy.
What about French real estate wealth tax (IFI)?
With regard to French real estate wealth tax (impôt sur la fortune immobilière, IFI), choosing between an SCI subject to personal income tax and one subject to corporate income tax does not fundamentally change the analysis.
Interposing companies does not, in itself, remove the value of real estate from the taxable wealth of an individual. The net value of property located in Dubai must therefore be taken into account when assessing the French investor’s liability to IFI, where the relevant conditions are met.
Personal income tax or corporate income tax: there is no universal answer
The choice between an SCI subject to personal income tax and one subject to corporate income tax cannot be based solely on the tax rate applicable in the UAE.
An SCI subject to corporate income tax may be attractive where the objective is to accumulate profits, reinvest within a French corporate structure and, in certain circumstances, optimise the taxation of a future disposal of shares. However, it exposes the structure to Article 209 B and may require evidence of genuine economic substance within the UAE LLC.
An SCI subject to personal income tax may allow taxation on undistributed LLC profits to be deferred and, in the structure examined, fall outside the scope of Articles 209 B and 123 bis. However, this advantage may be offset upon exit by less favourable taxation of gains and the absence of holding-period allowances available for directly owned real estate.
In both cases, the structure also presents the same major drawback: it does not preserve the potentially favourable inheritance tax treatment associated with direct ownership of real estate located in the UAE.
The choice of structure must therefore be made before the acquisition, taking into account not only the taxation of rental income but also the intended holding period, financing arrangements, distribution policy, exit strategy and, above all, the investor’s wealth management and estate planning objectives.
In international real estate investment, the question is therefore not simply whether an SCI should be subject to personal income tax or corporate income tax. The essential issue is to identify the economic and wealth management objectives pursued and determine which structure can achieve them without ultimately creating a tax burden greater than the benefit initially sought.