Buying a French property with an SCI – English version

SCI: three little letters for an acronym that is almost familiar to everyone but whose real meaning is less well known… In this article we will try to shed some light on SCI and what it means to set one up.

What is an SCI?

The SCI (Société Civile Immobilière) is a form of company whose purpose is the acquisition and management of real estate in France. It must have at least two partners, who may be individuals or legal entities, and its activity is said to be civilian and therefore cannot have a commercial one activity EXCEPT if it opts for the corporation tax option – we will come back to this later.

The share capital is free and is divided into shares between the partners in proportion to their contributions.

What is the purpose of an SCI?

An SCI is generally created for various reasons:

• To invest in real estate with several partners (family members or not)
• To manage a property portfolio together with the possibility of transferring the shares of the SCI between the partners, which is easier than with joint ownership (i.e. possession of the property by several people without an SCI)
• Transfer of property assets, including the possibility of dismembering ownership (to be discussed with your notary)
• Managing the property assets of a professional activity while separating them from the operating company, which is useful in the event of a subsequent move or sale of the company

What taxes will I pay with an SCI?

Before discussing taxes, it is important to note that an SCI can be subject to income tax (impôt sur le revenu or IR in French) or corporation tax (impôt sur les sociétés or IS in French), which changes absolutely everything taxwise.

SCI subject to income tax:

An SCI subject to income tax is said to be fiscally transparent because its profits or losses will be taxed directly on the income of its partners up to the amount of their capital participation. Its activity can only be civilian and not commercial: it can only rent an unfurnished property, furnished rental being a commercial activity.

For example, for an SCI with two partners, each with a 50% share, the profit of 10,000 euros would be taxed personally as rental income for 5,000 euros for each of the two partners.

                SCI subject to corporation tax:

An SCI subject to corporation tax is said to be fiscally independant because its profits will be taxed internally with the corporation tax and the profits remain owned by the company: the taxation of its partners is not affected. It can rent out unfurnished or furnished property, as this option for corporation tax gives it a commercial capacity.

For example, for an SCI with two partners, each with a 50% share, the profit of 10,000 euros would be taxed at 15% (i.e. 1,500 euros) and it would keep the net profit without any obligation to distribute it to the partners.

Caution: the taxation is very different between the two types of tax options. It is very important to note that furnished rental automatically leads to an option for the IS, which changes the whole calculation of the taxation of income, whether during operation or on resale. It is therefore not advisable to rent out furnished property with an SCI without being prepared for the tax consequences of the SI.

What are the accounting and tax obligations of an SCI?

A company is a separate legal entity and therefore has various legal obligations that are not optional.

It is therefore necessary, in order, to

1- Create the company in order to register it in the Trade and Companies Register

2- Submit a tax return to the tax authorities each year, regardless of the activity of the SCI (i.e. even when the property is not rented and the SCI has no activity!)

3- Dissolve and liquidate the company when it no longer has any purpose

What is the impact of the presence of an SCI on the capital gain on the property?

This is an excellent question because the impact on capital gains can be significant and very confusing for owners when they are not aware of it.

Indeed, as long as the SCI is subject to income tax, the impact on the calculation of the capital gain remains almost nil, as the calculation remains the same as for a property that has been acquired on a personal basis.

The major differencecomes with the corporation tax option which changes the entire calculation of the capital gain. Here are the key points without going into too much into technical detail:

• The property will be depreciated over a period of 25 to 50 years, which will impact the calculation of the final capital gain
• The proceeds from the sale of the property will be subject to corporation tax at the rate of 15 and then 25%.
• The proceeds from the sale of the property will remain the property of the SCI: if the partners want to obtain the money personally, they will have to make a dividend distribution which is also taxed

Let’s take an example to illustrate:

Property acquired 10 years ago for 300,000 euros

Resale 10 years later for 300,000 euros

For most people, there is no capital gain, is there? And yet…

We will have to depreciate the « construction » part of the property over 30 years:

Depreciation: 300,000 * 75% * 10/30 = 75,000 euros (we took off 25% of the price for the land valuation)

Thus, for accounting purposes, the capital gain is 300,000 – 300,000 + 75,000 = 75,000 euros

The SCI will therefore have a profit liable to corporation tax of 75,000 euros: 14,524 euros

The partners will have to pay €14,524 in tax even though they have not actually made a capital gain.

This example is simplistic but reflects the reality of the calculation of capital gains with a SCI subject to corporation tax, which is extremely different from the capital gains of private individuals and must be anticipated by the owners.

This is not an indictment against SCIs, which can be a formidable asset-building tool (the author of this article is an advocate of SCIs), but they must be thought through and anticipated in advance.

SCI: the summary

The main points of this article, which we wanted to be both simple and exhaustive, are adjectives rarely used together.

• An SCI is not compulsory for a joint purchase: a property can be acquired in joint ownership
• Setting up an SCI entails annual tax reporting obligations which are not optional, with real fines for non-compliance
• An SCI can normally only rent bare buildings, any furnished rental entailing an option for corporation tax, which radically changes the tax regime

Clearly, setting up a SCI with family, friends or investors can be a good idea as part of a global strategy for tax and asset optimisation. This being said, the consequences can be serious, especially financially.

We therefore advise all our readers to find out more before creating an SCI for the purchase of their property and to anticipate the consequences, particularly when purchasing a second home that will not be rented out or will be rented out only to a limited extent (furnished! ….)

Do not hesitate to contact us for more information on this subject, we will be able to guide you quickly towards the option that best suits your situation : info@theftr.fr