What is a SCI (“Société Civile Immobilière”) ?
A SCI is a civil company as defined by the French Civil Code. It means that it is a non-trading entity. This company is frequently used to own properties in France for the purposes of management and preservation of family assets. The company can hold one or several properties, either available to its members or rented to third parties.
Tax aspects of an SCI
Real estates located in France and owned by a SCI are subject to French tax laws (local taxes, income from real property, capital gain tax, inheritance tax). A SCI is “fiscally transparent”, which means that members of the SCI are taxed as individuals. Each individual member of the SCI must pay the tax in proportion of his/her shares. So if the SCI purchases a property which is subsequently sold at a profit, the capital gains tax will be paid by its members in proportion of their respective shares.
The use of a SCI can have considerable advantages:
-In contrast with the classic purchase structure of “indivision”, which can cause problems when the owners disagree to sell the property, the SCI gives the members a lot of flexibility as they can transfer their shares freely between themselves and to others. The SCI is indeed a separate legal identity distinct from its members, so that the property is owned by the SCI and not by its members personally. This has the advantage that in case of a group purchase, the departure of a member does not cause any change in ownership.
-The SCI has been often used by non-residents to avoid the provisions of French inheritance laws and in particularly the forced heirship rules as the SCI shares are subject to the inheritance law of the deceased’s last country of residence. Since the European Regulation Brussels IV, which entered into force on 17 August 2015, this principle has not changed, but British nationals, whether they buy a French property in their individual names or via a SCI, can now make a will designating English law to settle their French estate.
However, French Inheritance Tax will still apply to transfers upon death of shares in an SCI, regardless of the last residence of the deceased member. Therefore, it is important for any disposals by English Will of shares in an SCI to take French Inheritance Tax into Account.
-The SCI is an effective tool in respect of French inheritance tax planning:
Indeed, a parent can give to each of his/her children €100,000.00 and €31,865.00 to his/her grandchildren tax free. In the case of French property, this estate planning operation can be advantageous is the property was purchased by a SCI. Each parent can indeed transfer every 15 years some of his/her shares to his/her children and to his/her grandchildren with the same tax allowances mentioned above. The SCI enables its members to transfer gradually their shares to their children or grandchildren and is commonly used by families as a vehicle to plan the transmission of assets between members of a family.
-The value of the property may be reduced by 10-20% for the calculation of the wealth tax as it is more difficult to sell company’s shares rather when the property itself when a property is owned by an SCI.
There are several disadvantages to a SCI:
-Using a SCI to purchase a property will incur additional expenses: professional legal fees to set up the company (between €1,200.00 and €3,000.00), registration formalities (between €500.00 to €800.00).
-As a company, there is a certain amount of annual paperwork that must be completed. While one can delegate this to an accountant, there would still be his fees to consider. A minimum amount of declarations/reporting requirements might be required each year. Yearly accounts should be kept, which are approved by the members in a general meeting.
-If the property is let, it must be let unfurnished. If let furnished, the company might be subject to corporation tax.
-If might be more difficult for the purchasers to obtain a mortgage if they intend to purchase a property via a SCI. The lender’s requirements might be stricter if the property is purchased by a SCI rather than individuals.
Setting-up – an overview
A SCI must have a minimum of two members (associés). There is no maximum limit to the number of members an SCI can have. The SCI is managed by a gérant which will be appointed by the members. The gérant is in most cases a member of the company. There is no minimum capital required. However, when the SCI is being set up for the purchase of a property, it is normal for the members to subscribe to the value of the purchase price
The “Statuts” of the company, which are similar to the Memorandum and Articles of Association of an English private limited company, has to be established in writing. They can be negotiated and signed privately (sous seing privé) or via a notarized deed (acte notarié). When the SCI is purchasing a French property, its statuts must be registered by the notaire at the French land registry within one month of their signature. After the signature of the “Statuts”, an announcement that the SCI is being registered must be published in a legal newspaper (“Journal d’annonces légales”) covering the department in which the future SCI is to be registered. In addition, a request for registration of the company must be sent to the local Companies registry (“Centre de formalités des Entreprises”) of the place of the registered office.
Buying a French property via a SCI can offer advantages as well as disadvantages. The choice of such structure must be done after review of the personal situation of the purchasers (assets, age, matrimonial situation, children) and their future objectives with regard to the French property (property to be kept as a family asset or as a short term investment?). Potential purchasers considering purchasing a French property via a SCI must therefore take legal advice on the appropriate purchase structure before signing any purchase contracts.
If you have any questions on this topic, please contact Loic Raboteau via email at firstname.lastname@example.org or tel on +44 (0) 20 7356 0833.