Preponderance of real estate and tax convention: the French domestic law invites itself in the conventional interpretation

Cass. com., 6 May 2026, No 24-22.185, published in the Bulletin

By a judgment of 6 May 2026, the Commercial Chamber of the Court of Cassation gave an important clarification on the interpretation of the treaty clauses relating to preponderance companies.

The question before the Court exceeded the only calculation of the solidarity tax on the capital of a non-resident. More fundamentally, it dealt with the link between an international tax convention and domestic tax law when the convention used a concept without providing an autonomous definition.

The solution chosen deserves special attention for non-residents holding, directly or through foreign companies, real estate assets in France.

A chain of detention between Russia, Cyprus, Switzerland and France

The taxpayer was a tax resident of Russia.

For the years 2015 and 2016, he had declared to the solidarity tax on wealth the 100% holding he held in a company under Cypriot law, Callistephus.

The detention structure was international in nature.

The Cypriot company held all the capital of two Swiss companies. It also held 5 % of the capital of two French civil real estate companies.

The remaining 95% of the capital of these two SCIs was held by the taxpayer's daughter.

The four companies owned real estate in France.

After including its interest in the Cypriot company in its ISF statements, the taxpayer finally requested the exclusion and, in 2017, requested the restitution of part of the tax paid.

The tax administration rejected this request. The Paris Court of Appeal confirmed the position of the administration by a judgment of 7 October 2024.

The taxpayer then provided himself with cassation.

The debate: should the convention be interpreted independently of French law?

The dispute concerned Article 22(2) of the Franco-Russian Tax Convention of 26 November 1996.

This provision provided that the property constituted by shares, shares or other rights in a company or legal person whose assets are principally constituted, directly or by the interposition of one or more other companies or legal persons, of immovable property situated in a Contracting State may be taxed in that State.

France could therefore impose the holding held by the Russian resident if the Cypriot company were to be regarded as having an asset consisting, directly or indirectly, of immovable property situated in France.

All the difficulty was the determination of this « Property balance ».

The Franco-Russian Convention did not define this concept.

The taxpayer essentially maintained that a strict and independent reading of Article 22 of the Convention was necessary.

According to the analysis, the 5 per cent stake held by the Cypriot company in the French SCI did not allow the full value of the real estate held by these companies to be included in its assets.

In particular, the taxpayer challenged the inclusion of 95 per cent of the capital of the CIS held by his daughter.

It also argued that the current accounts provided by the Cypriot company to finance the acquisition of buildings should be analysed as securities and taken into account as such in order to assess the composition of its assets.

The argument of the taxpayer was therefore based on a central idea: the convention itself had to determine the extent of the power to impose on France, without it being possible to import in its interpretation the mechanisms of French tax law.

Article 3(2): the clause referring to domestic law

The Court of Cassation rejects this analysis.

Its reasoning is based first on Article 3(2) of the Franco-Russian Convention.

That provision provides that, for the application of the Convention by a Contracting State, any term or expression which is not defined therein shall have the meaning assigned to it by the law of that State, unless the context requires a different interpretation.

The Convention also specified that the meaning given by the tax law of the State concerned prevailed over that of the other branches of its law.

This clause, classic in conventional matters, becomes the heart of reasoning here.

For the Court of Cassation, the concept of a legal person whose assets consist mainly of immovable property is not defined by the Franco-Russian Convention.

Moreover, no element of the treaty context, and in particular the protocol annexed to the Convention, required a different interpretation.

The meaning given to this concept by French tax law should therefore be sought.

Reference to Articles 750b and 990D of the CGI

The Court of Cassation then refers to the internal rules applicable to the ISF for the disputed years.

The former Article 885 A of the CGI made natural persons not domiciled taxably in France subject to the ISF for their property situated in France.

The former Article 885 D referred, for the purposes of determining the base of the ISF, to the rules applicable to transfer fees per death.

This reference led in particular to Article 750 ter of the CGI.

In its wording applicable to the dispute, that text regarded as French the shares and shares of unlisted companies or legal persons having their registered office outside France and whose assets consisted mainly of immovables or immovable rights situated in France, in proportion to the value of those assets in the total assets of the company.

But the device went further.

In assessing the indirect detention of a building, Article 750b also took into account interests held jointly with certain members of the family group, including descendants.

He also referred to Article 990 D of the CGI for the notion of holding by interposed entity.

Article 990 D adopts a particularly broad concept of interposition.

An entity shall be deemed to own property or immovable rights in France by interposed entity if it holds an interest, « whatever the form and quotity », in an entity owning the property or itself interposed in a chain of interests.

The number of legal entities involved is indifferent.

An extensive concept of the preponderance of real estate transposed into the Convention

Here lies the essential contribution of the stoppage.

The Court of Cassation held that the conventional concept of a company whose assets consist mainly, directly or indirectly, of immovable property situated in France must have the meaning given to it by Articles 750 ter and 990 D of the CGI.

In other words, the French domestic tax law does not merely determine the modalities of taxation once the power to impose is granted to France.

It intervenes upstream to give its meaning to a concept used by the Convention itself.

This distinction is fundamental.

The principle of subsidiarity of tax treaties has traditionally led to the determination, at first, of whether French domestic law provides for taxation, then, in a second stage, of whether the applicable tax convention prevents such taxation.

However, where the Convention uses an undefined term and includes a clause similar to Article 3(2), its interpretation may itself require a return to domestic law.

Domestic law then enters into treaty reasoning through the use of the reference clause.

In the case decided, this articulation allows France to retain the extensive concept of indirect real estate holding resulting from Articles 750 ter and 990 D of the CGI.

The presence of Cypriot and Swiss companies in the holding chain therefore does not neutralise the French location of the underlying real estate assets.

Similarly, the low direct participation of 5 per cent of the Cypriot company in the French SCIs is not sufficient, in the circumstances of this case, to exclude the application of the mechanism.

The holding of the remaining 95% by the taxpayer's daughter falls within the scope of the French rules referred to in the Court's conventional interpretation.

A solution that is part of previous jurisprudence

The decision of 6 May 2026 is not entirely isolated.

In a judgment of 19 March 2013 concerning the Franco-Kuwaiti tax treaty, the Chamber of Commerce had already faced taxation on the ISF of a resident of Kuwait holding interests in a Kuwaiti company, itself linked to French SCI owners of buildings located in France.

The Court had already admitted an analysis taking into account indirect real estate holding.

However, the judgment of 6 May 2026 is of particular interest because of its clear reasoning.

Published in the Bulletin, it expressly identifies the legal mechanism for the use of domestic law: Article 3(2) of the Convention and the absence of an autonomous treaty definition of the concept at issue.

What range under IFI?

The judgment concerns the ISF due for the years 2015 and 2016.

It is therefore necessary to be careful before mechanically transposing its solution to property tax.

IFI follows its own rules of base and indirect detention.

However, the conventional teaching of the decision retains its importance.

The question of the link between the French rules on the indirect holding of immovable assets and the capital clauses contained in the tax treaties remains central for non-residents.

Above all, the method of interpretation adopted by the Court exceeds the ISF alone.

Whenever a tax treaty uses a concept without defining it, it is necessary to verify the existence of a clause referring to domestic law comparable to Article 3(2) and then to examine whether or not the treaty context requires an autonomous interpretation.

The analysis can therefore never be limited to the mere reading of the conventional article conferring the power to impose.

Special vigilance for international heritage structures

Finally, this judgment recalls an essential practical reality.

The interposition of a foreign company is not sufficient to place a French real estate investment outside the scope of French tax.

Where a non-resident holds French assets through one or more foreign companies, the tax analysis must cover the entire chain of ownership.

The jurisdiction of incorporation of the companies, the shareholding of each holding, the composition of the family shareholding, the nature of the underlying assets and the financing arrangements must be jointly examined.

A precise reading of the applicable tax convention and, in particular, its definitions, its protocol and its general interpretation clause should also be carried out.

The judgment of 6 May 2026 is particularly clear in this respect: where a treaty concept is not defined, the clause referring to domestic law may lead to the importation into the interpretation of the Convention of the sometimes extensive mechanisms of French tax law.