Setting up an SCI (the Property Investment Company) in France.
Many buyers purchase the property in France through an SCI. Let's better this type of purchase and learn how to own your real estate through the SCI and what are its advantages.
What is SCI and what purposes is it for ?
An SCI (Société Civile Immobilière) is a private non-profit limited company or a civil society for the ownership and management of property. This type of French company allows members of one family or group of people to become owners in equal or unequal shares and manage together one or more real estates. This type of the company is perfectly adapted for those thinking about additional income or pensions renting their real estate, or about a gradual transfer of property to other family members.
How to set up an SCI ?
It is relatively fast to set up an SCI to manage a property. In most cases, the SCI is formed during the real estate purchase period after a preliminary purchase contract (Compromis de Vente) has been signed, but before the title deed (Acte de Vente) has been signed. As a rule, a notary (Notaire) takes complete charge of this process and he is responsible for all administrative and registration formalities: preparing the company statute (statuts de la société), publishing a notification of SCI registration in the JAL legal bulletin (journal d'annonces légales), submitting the statutes to the local Chamber of Commerce (Chambre de Commerce et d'Industrie/CCI) and registering the company charter in the tax office. A few weeks later Kbis, a certificate of incorporation or other legal proof of your company's registration, is issued which contains all the information about the company and its founders. This information remains open and it is provided on request to any third party.
How does the SCI operate ?
To set up the SCI only two shareholders are required and they can be individuals or legal entities. There is no maximum number of shareholders and there are no rules on their nationality as in some other types of companies. A minor child can hold shares of the SCI since the company does not have any commercial activity. Such types of the company can operate up to 99 years.
The company charter defines its functionality. It should be prepared in written form and should include:
- the company information such as its name and its headquarters (the address of the property or a shareholder's address, if in France)
- the purpose of company; it should be not a commercial company;
- details of the company shareholders
- division of shares, contributions of shareholders; each shareholder must make a contribution of equal or unequal value. Contributions can be monetary and property: money, furniture, materials, real estate (in whole or in part). All these contributions constitute the social capital of society. Making a contribution of real estate, you need to know that this type of contribution is considered as a purchase, and it will be subject to capital gains taxation in case of real estate sale.
In addition to the basic information, shareholders specify necessary conditions and functions of the company (such as clauses on reduction of capital, selling of properties, property transfer and so on) that allow for greater flexibility and management of a property over other ownership structures situated in France.
To run the SCI shareholders can appoint a director (a gérant) who will have the responsibility and the authority to sign certain acts and documents that goes with it. The shareholders can also foresee the clause, which obliges all owners of the company for the preliminary approval when selling shares to a third party.
The clause en tontine so that the company passes directly to the surviving spouse or partner on his/her death is often added to the company charter. This condition helps to avoid the division of shares between children and the spouse and retain a controlling share in the parents property. To create a company charter correctly and not to forget to mention all the necessary conditions, it is preferable to apply for a specialist assistance.
What is the SCI taxation ?
In terms of income tax the SCI is considered as a fiscal "transparent" company, so, that the SCI owners are taxed as individuals. In a classic situation, the SCI income from long-term unfurnished rentals is subject to income tax. For residents of France, the income tax is calculated on a progressive scale from 14% to 45% and the social charges (Prélèvements Sociaux) of 17.2%. For non-residents, the income tax rate is 20% and the social charges, except in the case of the non-residents who are affiliated to the social security scheme in another state of the European Union.
If the property is rented out on (unfurnished) occasional basis, then each shareholder is liable for French income tax in that part of the rental income to which he is entitled. His rental income is added to his other income and is indicated in the tax declaration for the individual. In this case the taxation is absolutely identical to that one when managing real estate directly without the SCI. Moreover, the taxation is applied even if incomes are not distributed among the shareholders and remain in the SCI to finance new acquisitions.
Capital gains related to the sale of real estate or shares of the SCI will be subject to taxation on the income of individuals. The seller of shares will be taxed at 19% and applied on top the social charges of 17.2%, so the total tax is 36.2%.
Net capital gains is a result from the allowance application for the duration of the property ownership. When selling real estate, the ownership parties of more than 5 years can apply for tax reliefs of the gross capital gains.
It is important to know that the calculation takes into account only full years of ownership. Thus, the gains from the real estate sale is exempt from the tax after 30 years of ownership to either the sale of the property or company shares. In turn, the sale of the property or shares will attract stamp duty (around 5%), although at a slightly lower rate for the sale of shares and the departmental tax will be applied as well.
It is possible for an SCI to be taxed on the basis of company taxation (Impôt sur les Sociétés). The choice of this option should be done carefully as it is irrevocable.
Company taxation has some advantages. First of all, from the taxable amount, you can not only deduce the property management costs, but also the depreciation of real estate owned by the SCI. Every year, the balance sheet value of real estate is reduced and a deficit is created allowing avoiding any taxation.
In cases of the SCI making profits of up to 38 120 euros, it falls subject to a tax reduction of 15%. All that exceeds 38 120 euros is taxed at a rate of 33.33%. If the owners of the SCI choose dividends, then a 40% tax allowance will be applied, and the remaining 60% will be levied on an income from movable capital for an individual. Nevertheless, the choice of company taxation creates difficulties in selling real estate. In fact, in case of sale, the shareholders of the society do not receive allowances for the duration of real estate ownership. This choice is only interesting if the owners of the SCI have big incomes, but this option should be not considered if they want to sell real estate and distribute capital gains from that sale.
Property and gifts transfer through the SCI
The SCI is an effective tool in respect of inheritance and gift property transfer. When setting up the SCI, your inheritors can hold shares in the company at the time of purchase, usually with a minimum number of shares. The shareholding of the SCI could be changed over time so that children of the family can be granted, by way of a tax-free gift, an increasing proportion of the value of the property. The transfer of shares implies tax allowances, for example, a parent can give to each of his/her children 100 000 euros to his/her children tax free every 15 years. In this case, it is desirable that the amount of shares will be round, for example, 100 euros or 1 000 euros, in order not to exceed the tax threshold. The SCI enables the parents to gradually transfer the shares to their children or grandchildren and provide them the opportunity to share equally the family assets among the children.
In addition, the transfer of property rights can occur when sharing the property rights. Transferring property to children, giving the rights of "bare property" to them, parents can keep the right of "usufruct." The usufruct has the right to use the real estate, rent it and receive income from it. In the case of the death of the parent, the usufruct is simply annulated. Consequently, children will inherit the parental shares automatically and become the owners of the entire estate, without paying any inheritance taxes.
Moreover, there is unconditional tax advantage when calculating the gift tax, the company's loan is taken into account. If there is a mortgage in the SCI, then the value of any transfer by way of shares in the property can be reduced offsetting it against the debt. To determine the value of the SCI shares, the value of the net asset (asset minus liability) is calculated: all assets are summed up, including cash in the company's bank account and the value of the property, and liabilities such as accounts payable, bank interest, current accounts of employees are deducted. The result is divided by the number of units that make up the company capital. The net asset is taxed as a gift. And, on the contrary, in the case of owning and donating real estate directly, the mortgage is not deducted. It is also important that the procedure of donating shares is much simpler and less costly than the procedure of donating the property directly.
What are formalities to run the SCI ?
Once you have set up the company, there are a number of accounting, taxation and legal formalities to regularly undertake, as the company is a separate legal entity. To run the SCI properly you should follow such formalities as holding an annual general meeting with drawing up the meeting protocol, prepare a set of annual accounts, maintain a company bank account, and submit an annual tax return. If the SCI is subject to an income tax, it is recommended to keep accounting, at least in a simplified form, using Excel tables. If the SCI is subject to a corporate tax, the accounting is mandatory. Moreover, all incomes and expenditures must be made through the bank account opened on the company’s name. Non-compliance with these rules can lead to the fines by tax authorities.
The Monegasque SCI.
What is the difference between the french SCI and the monegasque SCI ?
You can buy real estate in France by the SCI registered in Monaco. The registration procedure for the SCI of Monaco origin is identical to the French one. The legal address of the company must certainly be located in Monaco, so often the legal address is provided by a company located in Monaco. Renting a legal address costs approximately form 700 to 1500 euros per year. Information about the Monegasque company and its owners remains confidential, but it can be provided to the authorities (French tax administration, etc.). Meanwhile, information about the French company can be provided to any third party.
The SCI of French origin can only own the immovable property, the SCI of Monegasque origin can also own the movable property (a portfolio of financial instruments, shares of another company, etc.). In certain cases when more than 50% of the company assets of the Monegasque SCI constitutes movable property, the shares of the company in the property transfer can be subject to the Monaco inheritance tax, the rate of which, for example, when transferred from parents to children is zero (in France, at most 45%) and transfer to third parties is 16% (in France at 60%). All other taxes that are levied on the owners of the company (residence tax, property tax, wealth tax, income tax, capital gains tax on the sale of shares and others) remain exactly the same as for the French SCI.