9. Ownership of Property in France through a French Property Company (SCI)
- 9.1. What is an SCI?
9.2. Advantages
9.3. Disadvantages
9.2. Advantages of Company (SCI) Ownership of French Property
9.2.1. Decision Making
If the property is being purchased by an extended family or a group of unrelated people, the SCI provides greater flexibility with the difficulties that can sometimes arise through ownership indivision or en tontine, as previously discussed.
Thus, where several people are buying a property, an SCI can provide for a decision-making procedure less stringent than the two thirds majority required for indivision; it can also provide a means to sell the property, which would not be available under tontine.
However, we consider the constraints of indivision and the flexibility of the SCI are both are often exaggerated, so it is a moot point as to whether this may be a good enough reason alone for creating an SCI. It may only be an important point where there are multiple purchasers who are not from one family, or where say, the property is purchased by, two or three generations of the same household.
9.2.2. Transmission of Family Wealth
One of the most frequent reasons why an SCI is established is to manage the gradual transmission of family wealth to children, and to prevent the enforced sale of a family home to a third party on the death of the parents.
Thus, the shareholding of the SCI could be changed over time so that children (and grand-children if necessary) of the family can be granted, by way of a tax-free gift, an increasing proportion of the value of the property. In this way, the liability to inheritance tax is reduced.
In practice, as tax-free gifts can only be made every six years up to a maximum value, there are limitations on how effective this may be, as it may take many years for the value of the property to be transferred.
Neither is an SCI needed to make a tax-free gift of the property.
However, the process is easier with an SCI, as all you would need to do to make the gift would be to transfer shares of the property between different owners, rather than having to actually go through a property transfer procedure, as would otherwise be the case.
Top Tip!
Moreover, if there is debt (a mortgage) in the SCI, then the value of any transfer by way of shares in the property can be reduced by offsetting it against the debt.
Thus, in the case of the gift of property having a market value of €350,000 with a mortgage of €100,000, liability to gifts tax would arise on only €250,000, against which gift tax allowances would also be available.
Accordingly, provided there is a debt in the company, the costs of tranferring part or all of the shares in the company to another shareholder (child, partner) are substantially reduced. This would not be possible if the property were not held in a company structure.
There are also reduced transaction costs with a transfer of shares in an SCI over the transfer of property under indivision by way of a gift or sale. In each case registration taxes of about 5% are payable, but, in the case of a share transfer, there are no notairial fees payable.
On the death of the parents, the shareholding structure of the SCI would theoretically ensure that one member of the family could not enforce the sale of the property, as would be the case if the property was held indivision between them.
The articles of the company could also provide that any one of the owners wanting to dispose of the property would be obliged to offer their shares to the other owners. It would be best to stipulate a minimum period during which the option of pre-emption would be available, in order to provide other shareholders with time to organise funding for the purchase.
Other than the gradual transmission of the parents home to their children, an SCI may similarly be a way in which parents can help their children get on the property ladder.
Thus, where the son or daughter is unable on their own to raise sufficient capital, the parents could be joint-purchasers of the property.
There are various approaches to how this might be best achieved, depending on your fiscal circumstances, which you would need to discuss with your advisors.
9.2.3. Inheritance Laws
We first deal with the position concerning inheritance rights before taking a look at inheritance taxes.
The main value of buying a property through a SCI is to avoid French laws on inheritance rights, which does not permit complete freedom of action of disposal of assets on death. This advantage applies without restriction if the owners are non-resident, but it can also be structured to apply in part to those who are resident.
The reason why a SCI structure avoids French inheritance rules for non-residents is that only fixed assets held by them are captured by the rules and, as shares in a company are considered as meubles (movable objects), they are exempt from controls on the disposal of fixed assets in France.
Thus, if you are non-resident, the use of an SCI enables you to dispose of the property as you wish, without being encumbered by French laws on inheritance rights.
Nevertheless, even for residents of France it is possible to obtain some relief from the inheritance laws through an SCI. This is achieved through a particularly special ownership structure, in which rights over a particular property are divided between the owners.
This ownership structure is called démembrement croisé.
The structure is complex, but briefly, two or more people buying a property would do so on the basis that neither holds an interest in the freehold of the property. Instead each holds shares that grant them (say) half of the 'life interest' and half of the 'reversionary interest', on an overlapping basis.
On death of one of the owners, the life interest of the deceased is merged with the reversionary interest held by the surviving partner, to grant them freehold ownership of half of the property, whilst they also retain a life interest in the remaining half.
The remaining interest in the property will be the former 'reversionary interest' of the deceased which passes to their inheritors, who inherit the full freehold of half the property on the death of the remaining owner.
Whilst, therefore, the inheritors of the deceased will become reversionary owners of part of the property (without the right of occupation), the surviving owner retains an interest and the right to remain in exclusive occupation until their death.
Top Tip!
We consider this structure is particularly useful if you are buying as an unmarried couple.
The use of this structure is sometimes frowned upon by notaires as it seeks to get around the payment of gifts tax on the reciprocal grant of a life interest. So a gifts tax on the 'life interest' is potentially payable. This liability can be reduced by buying the property with a mortgage as the loan is offset against liability to the gifts tax.
In relation to inheritance taxes an SCI does not, per se, escape exemption from French inheritance tax for either residents or non-residents, as the company is considered to be ‘fiscally transparent’.
Nevertheless, in view of the fact the shares of an SCI are less liquid than ordinary company shares, the taxation authorities do tend to allow a discount of around 10% on the value of the property against liability to the tax.
Perhaps of even greater interest, it is possible to structure the company to reduce potential liability through the use of an SCI démembrement croisé, as outlined above.
No liability to inheritance tax arises for a surviving married partner, although there may be taxes to pay for the other inheritors of the deceased, depending on their relationship and value of the estate they inherit. The use of démembrement croisé reduces their potential liability because of the value of the reversionary interest in the property inherited on death has a lower fiscal status.
Nevertheless, the issue is a complicated and controversial one, and you need to take sound professional advice, as the tax authority could choose to tax the full freehold value of the property if they considered that the structure was being used simply to avoid tax.
If this type of cross-ownership structure is not used, it is also possible to reduce liability through the use of a suitable debt structure in the company, or to avoid the payment of inheritance tax altogether, on the death of the first party, through the use of an SCI created with shares issued en tontine.
That having been said, buying the property indivision with a mortgage on it, or using a secured loan on the property to undertake renovation work, would also be another method of reducing potential liability to inheritance taxes, particularly if you were non-resident.
Once again, however, things are not always that straightforward, for if you are obliged to take out a life insurance policy to cover repayment of the mortgage on the your death (as is required by French lenders) then the use of debt to reduce inheritance tax liability is not possible.
9.2.4. Income Tax
In terms of income tax, whilst the SCI is considered a separate legal body, the same principal of fiscal transparency applies, so that owners of the SCI are taxed as individuals. There are no particular advantages from the perspective of income tax but, again, you can create some.
Shareholders of the company who have taken out debt to finance the acquisition of the property, can obtain mortgage tax relief against their own liability to French income tax, provided the property is their main home. Under French income tax rules, this relief cannot be granted to the company.
If you rent out the property in the SCI on an unfurnished basis, you can elect for the SCI to be taxed through company taxation. Depending on your circumstances this may offer some fiscal advantage over taxation through the income tax system.
You could also pay a rental to the SCI to live in the property, which can be offset against your potential French income tax liability. In turn, if the annual results of the company show a deficit (as a result of a mortgage or investment for renovation), then the company may well not be liable to tax!
9.2.5. Capital Gains Tax
Similarly, in terms of capital gains tax, there are no automatic benefits and, in any event, liability to French capital gains tax will not arise if the property is your principal home.
There are occasional reports in the French press that it is possible to escape, or reduce, liability to French capital gains tax through the use of a an SCI with a variable capital strucuture. If the capital value of the company is no greater than the sale price of the property in it, then no capital gain arises.
We have our doubts about the application of this rule, but there are serious journals that claim it is possible, so it cannot be discounted as an option. All we recommend is that you act with prudence and take very good advice.
One other way of reducing capital gains liability is by the use of a gift of all or part of the property to a member(s) of your family. You can read more in our notes on Capital Gains Tax and Gifts of Real Estate.
An SCI cannot be used for the express purpose of buying and selling of properties.
It is a legal structure whose fundamental purpose is the management of family property. Of course, there is nothing to stop you selling the property at any time, but if you buy and sell through an SCI on an habitual basis, then you will find the tax authority will consider it a commercial activity, and you will be taxed on this basis.
Where one of the parties uses the property as their principal residence then, on sale of the property, the person occupying it as their principal home will escape capital gains tax on their part of the value of the property.
The transfer of shares of the company between the owners does not escape capital gains tax liability, unless the seller occupies the property as their principal home, or where the capital in the company is equal to or exceeds the sale value of the property.
9.2.6. Wealth Tax
To be advised.
9.2.7. Business Use
There may be fiscal and other advantages in using an SCI in tandem with another business.
This may occur where the business property is held by an SCI to whom the business then pays a rental. If the business property is purchased using a mortgage, the mortgage payments can be offset against the rental payments, thereby reducing (or eliminating altogether) liability to income tax by the SCI.
This practice in not uncommon, but, beware that an unreasonable rent is unlikely to be accepted by the French tax authorities.
In the event of later sale of the business, it may be possible to then retain ownership of the property from which rental income would be received.
This option cannot be used where the business premises and your home are one and the same property.
Some people have set up an SCI with a view to using the company as a 'firewall' between the business and the family home in the event that the business gets into financial difficulties.
Whilst this is generally true, it may not always apply, as the SCI has legal transparency and could (possibly) be seized by a potential creditor.
If you wish to keep family interests separate from business interests then you may otherwise want to consider setting up a limited company for the business.
If the SCI is also used as the business premises it can also be used to reduce or escape liability to wealth tax, for those fortunate few who may be liable. Business assets are not liable to wealth tax.
Next: Disadvantages
Back: Introduction
House Buying Process in France