SCI – SOCIÉTÉ CIVILE IMMOBILIÈRE
REAL ESTATE INVESTMENT COMPANY
SOCIÉTÉ CIVILE IMMOBILIÈRE (SCI)
REAL ESTATE INVESTMENT COMPANY IN FRANCE
SCI and Property Purchase - Using an SCI to purchase a property in France
A common way of buying a property in France is through the use of a Société Civile Immobilière, or SCI.
This type of company is used because it gives the founders a lot of flexibility to give the property to who they want when they die, instead of having to follow the normal French inheritance rules.
WHAT IS AN SCI?
An SCI is essentially a fully incorporated company with a registered office in France.
The Registered Office can be the property itself.
The SCI then owns the property in question.
Being a company, the SCI is itself owned by shareholders, in most cases, family members.
The shareholders can be resident or non-resident in France.
Note: It is important to note at this point that the tax consequences of the purchase through an SCI should be analysed according to French law and the tax treaty between France and the home country before going ahead with any purchase.
ADVANTAGES OF AN SCI
1. Inheritance: the use of an SCI overcomes some of the problems caused by the traditional inheritance laws in France.
French law dictates that upon the death of the home's owner, the property is divided up between the surviving spouse and any children.
The decision about what to do with a property which may now be too big for - for example - an elderly widow, is passed on to the widow and any children either from that marriage or previous. This can be potentially "uncomfortable" where stepchildren are involved.
However, using an SCI and its shareholder status means that the parents can appoint themselves as majority shareholders.
They can make provision that upon the death of one or the other that his or her shares are passed onto the surviving spouse, therefore ensuring that the controlling share remains in the hands of the parent, and any decision regarding the property belongs to the partner of the deceased.
2. Where succession remains the issue, shares in a company are easier to distribute than immovable property, and so managing inheritance, and transferring the property, is simplified.
3. The shareholder structure means that it is easier to divide up shares, rather than splitting the ownership of a property.
In turn, this makes it easier for individuals with small budgets to pool their funds and buy a property that they would not be able to buy individually.
It is also easier to dispose of the shares without the aid of a notaire, thereby making the SCI more flexible than direct ownership.
4. When using an SCI to buy a property, the net worth of the property can be reduced for tax purposes by way of debt. This can minimise French wealth tax and inheritance tax liability.
5. Where foreign residents are concerned, the use of an SCI can be a great advantage for people whose home inheritance laws are more flexible than French laws.
• Upon death, the applicable law is normally the one of the country where the property is located. However, if the property is owned through an SCI, then the applicable law will be the one of the last country of residence of the deceased.
• Owning a home in France via an SCI means that the French property becomes part of the estate of their country, as opposed to direct ownership of immovable property, which is subject to estate law in France. This is important to bear in mind in terms of inheritance.
If you have chosen to purchase a home in France via the Société Civile Immobilière or SCI and because the SCI is effectively a company, you will need to:
Establish and register your SCI; and
Keep annual accounts;
These are some pointers on how to take care of the paperwork involved in running your SCI.
A French SCI is obliged to maintain its accounting in French, based on the French Tax Code. This means following the French accounting plan.
Note: The average SCI holds family property and does not have much bookkeeping.
It would, under these circumstances, be quite hard to maintain normal English (or other) accounting records and it would involve some training to be able to learn how to keep your books on the French basis. It is often easier to use an accountant who works within the French system, the cost of which is probably justified.
The accounting of an SCI is not regulated as it is not normally used for commercial purposes. You can obviously control your own accounts but this does not avoid the French accounting issues.
For an SCI to exist as a real company it must:
Keep regular records,
Prepare annual accounts
Hold an annual general meeting of the members to approve the accounts.
Maintain statutory records in a legal register.
If this is not carried out, the company can, under the civil code, be considered to be non-existent with the resultant tax consequences. It is important to understand that an SCI is a "moral person" and by not filing annual tax returns one can be assessed for a 3% tax on the market value of the property annually
HOW TO MANAGE INCOME RECEIVED ON AN SCI
When furnished property owned by an SCI is rented out, it is considered a location meublée. The French tax authorities see this as a business activity (as it is owned by a company, the SCI) and the relevant corporation taxes are imposed.
This becomes complicated when the owner of the SCI wishes to cease the rental activity. This is viewed as a change in activity and thus generates an automatic capital gain taxation to which the relative corporate taxes are imposed.
However this problem can be avoided with correct planning, little inconvenience and can save the owners taxation and money. It is therefore best to seek the advice of a trusted tax lawyer or accountant in order to set up the correct structure to minimize your tax liability. It is also essential to seek professional advice when planning to set up an SCI.
Wealth tax is due on the net value of the shares of the SCI; that means the value of the property, less debt. This even applies to non-residents. Assets are cumulated for wealth tax purposes. (This is not always clearly explained to foreigners.) French case law emphasizes that it is vitally important that records be maintained.
Note: The UK currently is reviewing its treatment of SCI's as they have misinterpreted the French administration's notions of a French SCI. There is considerable correspondence and confusion concerning this issue and the UK Inland Revenue service has agreed to suspend all litigation pending their review on this issue.
QUESTIONS AND ANSWERS ABOUT A SCI
Is the SCI taxable?
The SCI is taxable on profits. It is not exactly tax transparent, although the burden goes to the taxpayer. There are two possibilities:
Tax on Net Receipts (Imposition sur les revenues - IR)
The profits are split according to the share percentage of each member. There are no heavy administrative burdens, and going the IR route, means there are no accounts to submit at the end of the year. However, this route does not allow the SCI to deduct all costs or VAT (TVA), but only take off a fixed charge of 14%, to get to the "net profit"
Company Tax (Imposition sur les sociétés - IS)
First the profits are subject to tax (15% if the profits are retained, 33.3% if distributed- but with a possible tax credit of 50%). The big advantage of this regime is that no tax should be payable at all as mortgage interest can be deducted, restoration costs are allowed and VAT can be repaid. The same accounting rules as Sàrls or Eurls must be complied with.
How is the SCI taxed if there are no profits?
If the SCI has no profits and there is a turnover of less than €76,000 there is no tax. If the turnover is bigger, there is a small turnover tax (Impôt Forfaitaire Annuel- IFA), which at a million euros is only €2,175.
What is the SCI not allowed to do?
The SCI cannot trade or exercise a profession.
Can an SCI hire its furnished flats, rural houses, holiday flats? and if not:
How can this be done?
The SCI is to hold heritable/ real property. Any rent from furnished lettings should be less than 10% of total turnover figure. The solution is to create two structures:
1. The SCI for the unfurnished property rents
2. A SÀRL or a foreign company: such as a UK Company, for the furnished or commercial property rents.
Is a notary needed to start an SCI?
YES, because any act of purchase, sale or cession of heritable property has to be done by public deed.
Would it be any use buying a plot of land through an offshore company?
No, as the offshore company pays the same taxes on profits derived from real estate in France.
Can a SCI buy or rent heritable property outside France?
Yes. The tax and possibly the legal treatment depends on the country where the property is.
What about General Meetings (Assemblées générales)
Like all companies in France a general meeting annually, with a minute (procès-verbal) signed by the gérants (not by the associés). The rules of the meetings are set out in the statutes (statuts).
Can a company be the "gérante" of a SCI?
Yes, but the people behind the company then become the people responsible. The company which is "gérante" need not be a partner.
What are the obligations of the partners (associés) of a SCI?
As it says in article 1857 of the Civil Code, the partners are responsible for a percentage of any debt in accordance with the percentage of their shareholding, in the case of non-payment.
Can a non-French person be "gérante"?
Yes, but they have to have a French residency document.
Can salaries be paid through an SCI?
Partners' salaries are not a deductible cost in arriving at profits. Salaries of assistants have to be related to the property, such as gamekeeper or security guard. It is difficult to justify the salary of a cook or a cleaner, as this is related to a business inside a property, and not the property itself.
Can a vehicle be in the books?
Only when needed for the land, such as a tractor. A normal car is not allowed.
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