Definition of an SCI :
An SCI (Société Civile Immobilière), translated as a property investment company is a special type of French company which is principally constituted for the ownership and management of property. It is a non-trading company, that is, this structure is not set up to pursue commercial objectives.
The company will have a distinct legal identity from that of its shareholders, although except in very particular circumstances, it has no separate fiscal identity. For this reason it is said to be ‘fiscally transparent’.
Thanks to the flexibility of its statutes, The property investment company (SCI) is ideal to administer a family’s wealth. As long as you respect the constraints this structure imposes, it facilitates the management and transmission of wealth and opens road for serious tax savings.
Notaries greatly recommend this structure to their clients to manage property assets (as part of an SCI) or rarely furniture. They suggest this structure when it comes to help you overcome the various legal obstacles arising from family or property status or to take advantage of many tax cuts.
Indeed, the property investment company is a tool that fits all situations. The statutes and operating rules are written very freely so as to provide for every eventuality in the management of assets.
However, we must not think that everything is easy to get. The Formalism at its creation is rigorous and operating rules are binding. In other words, the benefits of a property investment company are deserved. Here are the main advantages of this structure.
A – Against the difficulties linked to the indivision of wealth
Indivision that occurs most often after a succession is a real headache. Decisions to preserve the property can be taken by a single undivided. But all the others require two-thirds of the undivided rights, or even unanimously. These rules are the source of constant blockages cause if the interest holders do not agree and it is the judge who must decide, mostly in deciding the sale of goods and sharing the revenues to the undivided . This situation can also be found in the case of unmarried couples.
In a civil society, because an sci is one, the scope and limits of the manager’s powers are defined in the statutes, such as permission of the other partners for important operations. In addition, you can expect different majorities depending on the type of decisions to make. Last but not least, civil society can rule the rule of Article 815 of the Civil Code which provides that “no one may be forced to remain in undivided and sharing can always be provoked“.
Obviously, in a civil society, the risk of judicial dissolution and sharing exist, but only according to Article 1844-7-5 ° of the Civil Code, for “reasonable causes.” The outgoing partner must prove in court that the reason given in support of his application presents a serious nature to justify an end to the company. However, court decisions show that judges pronounce the dissolution in case of total paralysis of civil society. What, precisely, correctly written statutes will largely avoid !
B – For the transmission of family assets
The holding of part of your wealth through a civil society is an ideal tool to optimize legal and tax transmission in your lifetime. In this light, it is the company shares that are the subject of a donation.
By placing the rental properties in an SCI and transmitting shares in bare ownership to their children, parents adapt very freely the articles on the law of look they prefer to keep the assets. They thus have the choice to ensure total control of their management and income they can get from, including deciding that the usufruct managers have the freedom to sell and buy homes without reference to children bare- owners.
The donation is also facilitated by the fact that shares are more easily separable a property and then allow a gradual transmission time well. This is especially tax that the donation of shares has many advantages. According to case law, the IRS admits that compared to property held directly, the share price is still lower than the market value of assets divided by the number of units. For the courts, in a family-oriented company, the discount is at least 10%. In other words, instead of giving property worth 100, you transfer title to that property worth 90.
SCIs & Furnished Rentals
Many properties are owned by an SCI (société civile immobilière), which is a private limited company used in real estate. This type of structure allows better organisation of the management of the property; it also avoids the frequent problems of blocking in the case of joint ownership; and it facilitates transfer.
As a rule, this type of company is subject to income tax. In this instance, the tax system is comparable to that of a ‘direct’ acquisition.
Alternatively, the SCI may be subject to corporation tax. This type of taxation can represent a financially dangerous trap in certain situations and this risk is even more significant because an SCI can be automatically subject to corporation tax, especially in the case of furnished rentals.
What happens in the case of a furnished rental property?
An SCI carrying out a commercial activity is mandatorily subject to the corporate tax. The tax authority can, in this instance, initiate a reclassification.
The rental of a furnished property constitutes a commercial activity if it is carried out on a regular basis. Thus an SCI regularly renting out a furnished property can be reclassified and subject to the corporation taxation system.
With regards to the term ‘regular’, it was decided (CE 28th December 2012 no.347607) that a short- term seasonal rental (15 days to one month) over three consecutive years would be considered as commercial. Therefore the duration of the rental over a period of a year is not a decisive factor.
What are the consequences of a corporation tax reclassification?
The tax consequences can be disastrous.
– The sale of a property is not subject to the tax system for individuals, but is under the corporation tax system. Thus this transaction will not benefit from the very favorable allowances for duration of ownership and will also have to take into account the depreciation of the property.
Purchase in 2006 of a property valued at 2,000,000€ Sold 11 years later for a price of 2,700,000 Euros
- In the case of a sale by an SCI subject to income tax or by a private individual : 66,174 Euros
- In the case of a sale by an SCI subject to corporation tax (with a hypothetical depreciation of 2% per year): 380,000 Euros It would also be necessary to add to this amount the taxes due for ‘releasing’ the money from the sale of the company (tax on dividends)
- The use of a property by a shareholder (when a shareholder spends a few weeks in the property) incurs corporation tax on the ‘assumed rent’ that the property would have earned if it had been rented to a third party. Furthermore, this revenue is considered as a benefit in kind which, for the beneficiary shareholder, constitutes distributed revenue subject to income tax categorized as investment income. The shareholder thus has to pay taxes whilst enjoying his property!
The tax authority can proceed with the reclassification whilst the company is in operation or just after a property sale as part of an audit.
Are there solutions to avoid this reclassification?
There are obviously solutions to avoid this reclassification.
A Bad Idea
The wrong solution would be to combine a bare (unfurnished) lease by an SCI (private activity) with a lease of the furniture by another company.
The Council of State (CE 16th May 1990 no.68854) stated that a private company renting out a property under a bare lease, which at the same time forces the tenants to sign another lease for the rental of furniture with another company partly composed of the same shareholders, is in fact considered as the rental of a furnished office, resulting in its reclassification for corporation tax.
This dubious solution is considered by the tax authorities as an abuse of the law and thus doesn’t work.
A Good Solution
There are legal structures that allow a commercial activity to operate without being subject to the corporation tax system.
The Family SARL (société à responsabilité limitée), which is a family-controlled limited liability company, allows the rental of a furnished property while remaining subject to a transparent tax system. It is therefore strongly recommended that existing SCIs, currently renting out a furnished property, make a simple change to a Family SARL which involves a simple legal formality.
This change will not require the liquidation of the company or the payment of duties and allows a rental activity to be carried out under an appropriate structure.
To make this change, or for more information, you can contact us at:
Cabinet ROCHE & CIE
BP 1222 – 40, Rue du Président Edouard Herriot 69202 LYON CEDEX 01
+33 (0)188.8.131.52.06 – Tel
+33 (0)184.108.40.206.80 – Mobile