9. Ownership of Property in France through a French Property Company (SCI)
- 9.1. What is an SCI?
9.2. Advantages
9.3. Disadvantages
9.3. Disadvantages of Company (SCI) Ownership of French Property
9.3.1. Formalities
One of the drawbacks of an SCI is that there are clearly a number of formalities to undertake in creating the company and those that also need to be maintained once it has been created.
Thus, there is the need to hold an annual general meeting, prepare a set of annual accounts, maintain a company bank account and submit an annual tax return. Repairs and improvement works, as well as the running costs of the property, must be processed through the company, with funds deposited in the company bank account by the owners.
It is, after all, a separate legal entity and must be managed as such.
If this is not done properly there is the risk that the French tax authorities will not accept the company as a proper legal entity.
A simple and fairly inexpensive way of handling these formalities would be to hand them over to a French accountant who should be able to take pain for you for around €500 per year.
9.3.2. Cost
There is also a cost to setting up and running the company.
If you set up a new SCI at the same time as the purchase of a property then expect to pay in the order of €1000 in additional taxes and Notaire fees. This figure is likely to increase substantially if you also seek advice from an avocat or specialist lawyer.
If you already own the property and you wish to transfer it to an SCI then expect to pay several thousand euros in fees and taxes. Moreover, if the property is not your principal residence, you will need to pay capital gains tax on the difference between the purchase cost and sale value to the company!
You will need to pay annual accountancy fees, and Notaire fees will also be payable for any changes of statute.
9.3.3. Taxable Benefit
Hitherto, the use of an SCI has come within the gaze of the UK Inland Revenue, as it was construed that the occupation of the property free of charge was a company perk - a non-financial fringe benefit, which was taxable.
In the UK budget in March 07, the government abolished the taxation of an SCI as a taxable benefit.
The new rule will apply retrospectively, so those who have already purchased using an SCI will be eligible for a tax refund.
This is a major piece of news for those thinking about buying in France through an SCI, which now makes this approach much more interesting for UK buyers.
Ownership of a property through an SCI is not considered a taxable benefit by the French taxation authorities.
9.3.4. Tax Relief
Owners of a property purchased through a SCI are not eligible for tax relief on works carried out to the property and neither can they benefit for subsidised mortgages that are available to certain groups.
Thus, if you were resident and wanted to benefit from tax relief currently available for undertaking energy efficiency works, you would not be able to do so if the property was held by an SCI.
9.3.5. Equity Release
There are many banks who are not prepared to grant equity release against a property held in an SCI. Accordingly, if you think you might later want to use capital tied up in the property to do improvements or use for other purposes, it would be best to stay clear of an SCI.
9.3.6. Disagreement
Finally, you also need to consider whether you are all able to work together in harmony, and what should happen in the event that there is disagreement between the owners of the company.
If everything runs smoothly and all agree about things then there is little to worry about.
However, if disagreements arise then there is not always an easy solution. Careful preparation of the constitution (statuts) of the company needs to be undertaken.
Thus, the constitution can stipulate that the parties are not permitted to sell shares to anyone outside of the company and to grant a pre-emption to existing owners. However, if no one in the company is able, or wishes, to buy, then no resolution is possible.
Even if the constitution permits sale to persons outside of the company there is unlikely to be a market outside of family and friends for the shares. In this respect, therefore, the SCI might not be the flexible legal vehicle that it set out to be!
Conversely, where a majority of the shareholders wish to sell and a minority do not wish to do so, it is important the articles provide for the obligatory sale of shares where a suitable majority is achieved.
Under no circumstances should you try to constitute the company ‘offshore’ as this does raise potential tax liability in France and is unlikely to be accepted by the French legal and tax authorities.
Next: Ownership Structures - Conclusion
Back: Advantages
House Buying Process in France