Taxation of French rental income through a French company

In this article, we will take an in-depth look at the tax treatment of rental income through companies, highlighting the differences between companies subject to IR (Income Tax) and those subject to IS (Corporate Tax). We will focus solely on companies domiciled in France.

Companies Subject to « IR » (Income Tax)

Family SARL, SCI « IR », …

When real estate investments are made through companies subject to income tax, such as a Family SARL or an SCI IR (Real Estate Civil Company subject to Income Tax), rental income is taxed at the level of the shareholders based on their share of the company’s capital (50% ownership equals 50% of the profit or loss).

Difference between Unfurnished and Furnished Rentals

The main difference lies in the nature of the rental: unfurnished or furnished. Rental income from unfurnished properties is classified as « revenus fonciers » (property income), while furnished rentals are considered a commercial activity generating « BIC » (Industrial and Commercial Profits).

Tax Consequences of income tax Taxation

1. Unfurnished Rentals (Revenus Fonciers): Deductible expenses such as loan interest and management fees can reduce the taxable base, i.e., the gross rental income. Revenus fonciers are then subject to the progressive income tax scale, not forgetting the famous social levies CSG and CRDS at a rate of 17.2%…
2. Furnished Rentals (Revenus BIC): In furnished rentals, income is subject to the « régime réel » (real regime) of taxation, which allows for a wider range of expenses to be deducted, as well as the possibility of amortizing the rented property to significantly reduce taxable profit. However, BIC income is also subject to the progressive income tax scale and the 17.2% social levies.

Not all forms of income tax companies taxation allow for furnished rentals. Due to its commercial nature, furnished rentals can only be done through a Family SARL to remain under IR taxation; in other cases, the option for IS taxation will be mandatory.

Companies Subject to IS (Corporate Tax)

SCI IS, SAS, SARL, …

When real estate investments are made through companies subject to corporate tax, such as SCI IS (Real Estate Civil Company subject to Corporate Tax), SAS (Simplified Joint-Stock Company), or SARL (Limited Liability Company), there is no distinction based on the type of rental (unfurnished or furnished).

Taxation under IS regime

Rental income is subject to the normal IS tax rate, just like any other commercial company, which means 15% up to €42,250 of profit and 25% beyond that.

The advantage lies in the ability to reinvest profits at a tax rate often more advantageous than the progressive income tax scale. However, it’s worth noting that distributing profits to shareholders can also be subject to levies, creating a potential double taxation.

Consequences of Furnished Rentals for an SCI Transitioning to IS Taxation

The commercial nature of furnished rentals results in a change in the tax regime for any SCI renting a furnished property, starting from the first euro of rental income received. This change is not automatically performed by the tax authorities and must be done by the taxpayer themselves, under penalty of unpleasant surprises, especially when selling the property.

Indeed, the « IS » status of an SCI leads to a significant change in the calculation of capital gains: it is no longer a matter of individual capital gains but rather that of a commercial company subject to IS. Without delving into the details of the calculations, this is rarely in favor of property owners, especially when they are unaware of this change. You can read our excellent article about SCIs if you’d like to know more about this topic: https://www.thefrenchtaxrepresentative.fr/buying-a-french-property-with-a-sci-english-version/

Please note that tax authorities are in communication with all platforms connecting property owners and individuals, making it easy for them to identify properties that have been rented (furnished).

Importance of Keeping Proper Accounting Records

Proper accounting is crucial, regardless of the legal form of the company. It allows for accurate tracking of income and expenses, maximizing tax deductions, and ensuring tax compliance. This is particularly important for companies subject to IR, where justifying property expenses or BIC is essential, as well as for companies subject to IS, where precise accounting is necessary to determine taxable income. Additionally, even when the property is not rented, maintaining proper accounting records is essential, especially for managing shareholders’ current accounts and financial transparency.

Importance of General Meetings

General meetings play a crucial role in the management of real estate companies. They provide a platform for discussing and deciding on the distribution of profits among shareholders. This distribution can have significant tax implications, especially in the case of companies subject to IR, where shareholders are individually taxed based on their share of profits.