Société Civile Immobilière (SCI)
- What is an SCI?
- Multiple Ownership of French Property
- Transfer of French Property
- French Inheritance Laws/Taxes
- Tax Implications
- Business Use
- Setting Up an SCI
- Running an SCI
5. Tax Implications of SCIs
In this section we examine the implications of using an SCI in relation to the following French taxes as well as debts:
Inheritance taxes were considered in the previous section.
5.1. French Income Tax
In terms of income tax the principal of 'fiscal transparency' applies for family SCIs, so that owners of the SCI are taxed as individuals.
It is possible for an SCI to be taxed on the basis of company taxation (Impôt sur les Sociétés-IS), but this would not normally be necessary for a family owned SCI.
Company taxation is only likely to be of benefit if you let out the property on a regular basis and in an SCI with a substantial amount of debt. Even then the choice of company taxation is by no means self-evident.
For instance, the relieves and exemptions that apply in relation to capital gains tax for an individual do not apply to an SCI taxed by IS, which can have huge implications on the resales of the property.
If you choose company taxation the decision is also irrevocable!
Accordingly, in this guide we focus on individual, not corporate, taxation.
If you rent out the property on an (unfurnished) occasional basis, then you will be liable for French income tax in that part of the rental income to which you are entitled. You declare this income (revenus fonciers) on your personal income tax return.
Shareholders of the company who have taken out debt to finance the acquisition of the property can obtain tax relief against their personal liability to French income tax, provided the property is their main home. The tax relief would not be granted to the company itself.
One of the fiscal disadvantages of holding a property through an SCI is that owners are not eligible for grants on works carried out to the property. Thus, if you were resident and wanted to benefit from the main grant (Ma Prime Renov) available for undertaking (say) energy efficiency works you would not be able to do so if the property was held by an SCI. That said, supplementary grants offered by energy suppliers through the certificats d’économie d’énergie” (CEE) scheme are available.
Neither would get away with paying a rental to the SCI, and then (as a tenant) charging the rental cost against your liability to income tax. The tax authorities would almost certainly be unwilling to accept this, unless the property was also used for business premises (see later).
Ownership of a property through an SCI is not considered a taxable benefit-in-kind by the French or UK taxation authorities.
5.2. French Capital Gains Tax
An SCI cannot be used for the express purpose of buying and selling of property, as the fundamental purpose of an SCI is management of family property.
Of course, there is nothing to stop you selling the property at any time and if you decided to do so the rules on the application of French capital gains tax for an SCI are broadly the same as those for individuals, provided the SCI has not opted to be taxed through company taxation.
Nevertheless, some of the reductions and exemptions that apply to individuals do not apply in full in the case of an SCI, such as the exemption that applies for elderly persons on a low income.
Neither in the sale of shares is the liability to capital gains tax reduced by the notional cost allowances for works and legal costs as occurs with disposal of a property. Only actual eligible costs can be charged against liability to the tax.
The sale of the property can take place either by way of the sale of the company with the property in it, or through the sale of the property itself.
In either case there is no liability to capital gains tax on the sale of the property, or the shares in the SCI, if the property is your principal home.
Where the property is not your main home there is tapered exemption over 30 years of ownership, for either the sale of the property or company shares. We say more about the rules that apply in our Guide to French Capital Gains Tax.
In either case, the sale of the property or shares will attract stamp duty (around 5%), although at a slightly lower rate for the sale of shares.
Where only one of the shareholders 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 sale of shares of the company between the shareholders does not escape capital gains tax liability, unless the seller occupies the property as their principal home, the shares have been held 30 years, or where the value of the shares in the company is equal to, or exceeds the sale value of the property.
In this respect, you need to be careful about the sale of shares to other shareholders, which needs to be at their real value, or the tax authority may decide that the sale is a disguised gift, in which case you may be liable for gifts tax.
That said, there are generous gift tax allowances for gifts between parents and their children, and the ability to gift shares to children is one of the principal reasons why a SCI is used as an ownership structure in the first place.
If you have held the property less than 30 years, and it is not your main home, then it may be possible to escape or reduce liability to capital gains tax by the sale of the company itself (with the property in it), rather than merely the sale the property and then dissolution of the company.
This could happen where the share capital in the company was no greater than the sale price, as in this case no capital gain arises!
The use of an SCI with a variable capital structure is helpful in being able to realise this objective, although if the share capital of the company is substantially changed immediately prior to sale of the company the tax authority may well take an interest.
Alternatively, if you have held the shares for at least 30 years, but the property for a shorter period, then the sale of the shares with the property in it creates an exemption from capital gains tax. This is one reason why it often makes sense to retain one SCI for multiple and successive properties.
However, avoiding capital gains tax through use of the share structure does mean you will need to find a buyer willing to buy the company, and the market for buyers of an SCI is a lot smaller than for the direct purchase of real estate.
One of the reasons is that there are fewer guarantees to a purchaser of a company than by the direct purchase of a property, and a new buyer may not have the same interest in retaining the property in a company.
One other way in which liability to capital gains tax is reduced on the sale of shares is where there is a debt in the company.
Thus, an SCI with 2000 shares valued at €100 per share holds a property purchased for €200,000, against which there is a mortgage of €50,000. At the time of sale the property is valued at €300,000. This means that the net value of the shares is €250,000 giving rise to a liability to capital gains tax on only €50,000.
Finally, you should also consider the gift of all or part of the property to a member(s) of your family as a way of reducing liability to capital gains tax. You can read more about this approach in our pages on Gifts of Real Estate.
5.3. French Wealth Tax
In relation to wealth tax, the tax authorities allow a discount of around 10% in the value of the property due to the lack of liquidity of shares.
The allowance of 30% of the value of the main home against wealth tax available to an owner who holds a property direct is not available to a property held through an SCI, a rule that was confirmed in January 2020 in a ruling by the Constitutional Council, in which they stated: "Même lorsqu'ils détiennent l'intégralité des parts sociales, ne disposent pas des droits attachés à la qualité de propriétaire des biens immobiliers appartenant à celle-ci......... La valeur des parts détenues au sein d'une société civile immobilière ne se confond pas nécessairement avec celle des immeubles lui appartenant."
That said, the authorities seem prepared, on a case by case basis, to allow up to 20%. The chances of this being granted are greater the higher the number of shareholders in the SCI, on the basis that it would then be more difficult to dispose of the shares, thereby reducing their value.
In principle, debts for acquisition and major works are deductible in the valuation of the property, but since 2018, with the changes in wealth tax, the deductibility of debts has become a far more complicated matter, so professional advice needs to be taken. See our Guide to French Wealth Tax.
Even though you may occasionally let the property, no VAT is chargeable, and the company cannot recover VAT on expenditure.
Rental properties in France for residential use are not subject to VAT, unless a range of services (such as cleaning and meals) are also provided.
5.5. Gifts Tax
If you wish transfer the property with the company to your children then the SCI does have some advantages, as, provided you have debt in the company this can be set off against liability to gifts tax as it reduces the net value of the company. This in turn reduces the level of stamp duty.
Mention must also be made of the liability of members of the SCI for the debts of the company, which are personal, and therefore not limited by corporate rules. Their liability is proportional to their share of the company's capital.
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