A significant decision of the Supreme Court dated February 13, 1996 has invalidated the administrative doctrine linked to the assessment of buildings occupied by their owners concerning wealth tax.

The base of this tax is made up by the assessment of taxable goods on January 1st of the taxable year, according to the rules in effect concerning inheritance taxes, i.e. according to their fair market value. This value corresponds to the price that the owner may gain from the sale of a determined good, according to the market figures and the intrinsic characteristics of the good. But the assessment of a building varies depending on whether the good is considered as occupied or not. For instance, the rental of a building justifies for the owner the application of a discount in relation to its market value.

A taxpayer owning its main residence had declared its flat for a value of FF1,300,000. During a tax adjustment, the Tax Authorities considered that this good had to be declared up to FF2,500,000, which is the price corresponding to its market value. The taxpayer then referred to the court, considering that the flat could not be valued as such since the latter was occupying it with his family.

The Tax Authorities consider that a building occupied by its owner should be valued as if it was not occupied. This doctrine is especially based on a decision of the "Social Chamber" of the Supreme Court (Cass. Soc. October 26, 1972), concerning inheritance, according to which a building occupied without any right to it by the heirs of the deceased person, should be considered as legally free.

Regarding the litigation, the County Court of Creteil has considered that, as the flat is occupied by its owner and his family as their main residence, and not by a third party having a rental agreement, it should be valued as if it was a free good.

The Court nullified this judgment, specifying that the County Court could not consider a flat as free in the same decision for the purpose of its assessment, after noticing that it is occupied by its owner.

The Supreme Court considers that the occupation of a building by its owner is a matter for its de facto state and should lead the good to be considered as occupied for assessment purposes.

The solution might have general consequences and apply as much to second homes as to cases where the occupation would be the result of a third party to whom the owner would have, even tacitly, granted a use and dwelling right. The assessment rules being identical with respect to wealth tax and settlements and successions, the principle arising from the decision would thus apply to these other taxes.

It seems that the Tax Authorities will agree with the Court advice, but only concerning the assessment to wealth tax of the main residence. It might also set an indicative rate of discount for occupation. But the Tax Authorities will probably refuse to extend the solution to the second home, as well as to the rights of inheritance on a free basis (successions and settlements).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.

For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/, Joel Fischer on 33/, or Laurent Borey on 33/(1)/55 61 10 10 or enter text search: "ARCHIBALD ANDERSEN Profile".

The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G.Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.