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What is an SCI in French law? What is it aimed at? What is its tax treatment?

What is an SCI in French law? What is it aimed at? What is its tax treatment?

Published on : 28/07/2020 28 July Jul 07 2020
News

Under French law, a société civile immobilière (SCI) is a management or investment company whose purpose deals with real estate properties. Generally, an SCI is set up primarily to build or to buy real estate properties with a view to giving them for rent or to put them at free disposal for the shareholders.

It has mainly two advantages: it eases real property joint ownership; it can be also an efficient real estate investment vehicle.
 

French SCI eases real property joint ownership

An SCI eases ownership of real estate properties by many persons and it eases the transferring of the properties. The shareholders of an SCI are owners of the shares. They can sell those shares or transfer them. As for the real properties themselves, they remain as assets of the SCI.

In that respect, SCI ownership is more attractive than what French law identifies as indivision. Basically, indivision refers to a situation in which several persons have the same legal right on an asset (or several assets) that they jointly own. For instance, when someone dies, the assets he leaves are jointly owned through the indivision.

Nonetheless there is a major difference: whereas indivision is not a legal entity, SCI is. Thus, whatever is concerned with assets of an indivision must be done jointly by all members or by the joint representative. For instance, the selling of a real estate property which is in indivision requires the unanimous consent of all members provided that the refusal of a member jeopardises the common interest of the indivision.

Likewise, the use of assets included in an indivision by a member requires:
  • Consent of other members,
  • Respect of other members rights
  • Respect of the assets purpose
  • Payment to other members in consideration of the use of the assets.

Moreover, the termination of an indivision can be triggered by a single member even when the other members do not want that termination. There is a general rule under French law stating that no one can be compelled to remain in an indivision. The sharing can be therefore triggered at any moment.

In this respect, indivision can lead to blockages when the interests of its members are different from one another and cannot be reconciled. Indivision can make vulnerable the possibility of asset accumulation.

Contrary to an indivision, an SCI functioning is more flexible.

The setup of an SCI can be helpful to prevent the stripping of real estate assets, in particular when a person dies leaving inheritors. In an SCI, the inheritors cannot trigger the sharing of the real estate properties owned by the SCI since their rights are not about the real properties but, rather, the shares held initially by the deceased person.
 

An SCI is a remarkable managing and investment vehicle

The SCI is often used as an investment vehicle. In that instance, an SCI allows several persons to realise commonly real estate investments.

For instance, a couple is about to purchase an investment real estate property. They can set up an SCI and purchase the real estate property through that SCI. They can finance that, partly, through their capital contribution. The SCI can take out a credit to complement the remaining amount.

Basically, the rentals will fund the loan repayment. As for the interests of the debt repayments, they can be set off against the taxable income. An SCI is also entitled to claim deductions from its income in respect of any expenses incurred for the purposes of its activity (with some exceptions). Some costs incurred by the SCI may be deductible as well. The leverage in that hypothesis will increase the economic return of the project.

The holding percentage by each shareholder may vary according to their respective capital contribution. Likewise, the statute of limitations can be negotiated so that the management authority and the shares transferability.

The disparity in spousal incomes is taken account in an SCI because each person contributes according to his financial abilities.

The common ownership of an SCI is combined to a tax neutrality: The SCI is deemed, for tax personality, not to have a legal personality. Thus, the ultimate taxpayers are the individuals who hold the SCI.

For instance, tax neutrality in a, so called SCI familiale (household SCI), is reflected as follows:
  • Rentals are taxed as rental income and the taxpayers are the shareholders,
  • Capital gains on the selling of shares are taxed according to capital gains on rela estate properties,
  • The value share is comprised in the taxable asset for wealth tax on real estate property (impôt sur la fortune immobilière),
  • Gift and inheritance taxes on shares are the same than if the real estate property is held directly by the deceased person or the donor.
 

An SCI is helpful to organise transferring of asset accumulation

The shareholder can anticipate the transferring of their real property assets and meantime still have the control over the management of the SCI. A spouse who has set up an SCI can separate the bare title and the usufruct of their shares. They may preserve the usufruct and control the SCI, while giving the bare tile to their sons.
In this hypothesis the future restoration (bare title and usufruct) of the ownership will be free from tax.

SCI is not just about advantages. An SCI is a legal entity ad is subject, as such, to legal and accounting requirements. An SCI shall have, for instance, statute of limitations. It shall organise general meetings each year at least.
 

Tax treatment of SCI

From a tax standpoint, an SCI is described as being “transparent”. That means that tax rules look through the SCI and tax the profits of the shareholders.

SCI are indeed treated as partnerships: an SCI calculates its taxable profit or loss using the tax rules that apply to each partner and for French resident and non-French resident. The SCI then pays tax on behalf of each shareholder according to the calculation it made. Therefore, the ultimate taxpayers are the shareholders. Each shareholder tax liability depends on the percentage of shares he holds in the SCI.

The SCI may be liable to corporation income tax in certain circumstances. They can opt for corporation income tax and lose their “transparency”.

The SCI are mandatorily non-trading companies. As a result, if they carry on business with the view to profiting, then they are construed to carry on commercial activities. Thus, they become mandatorily liable to corporation income tax.



Malick DIOUF tax law firm situated at Épône in the Yvelines department (78), assists you namely, at Paris, Lyon or Marseille if you want to set up an SCI. The law firm also provides advice on legal and tax matter relating to an SCI.
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