The Covid 19 crisis has only heightened the French appetite for property investment. In addition to LMNP or the classic PINEL investment, this investment can be made in what is known as “pierre-papier”. Paper real estate allows you to invest in real estate through a fund or company shares. There are many different types, including SCPI, OPCI and SIIC, but the most common and well-known is the SCI (Société Civile Immobilière). This type of investment offers a number of advantages, particularly in terms of wealth management. However, while the SCI is indeed a simple solution for investing in real estate, it also entails a number of constraints, particularly in terms of taxation.
Buying and managing real estate with an SCI
To begin with, it’s important to understand that it’s the company that owns the property, not the partners, who only own the shares in the company.
This makes it possible to separate private assets from company assets, and can have a number of advantages, particularly in terms of :
- personal taxation
- private asset management
- inheritance
Beware, however, that “self-sale”, or the acquisition of private property by an SCI in which you are a shareholder, may in some cases be considered an abuse of rights, particularly if the transaction is carried out in order to avoid creditors or to reduce taxation.
Buying real estate through an SCI
Once an SCI has been set up and its articles of association defined, the purchase of a property by the same SCI proceeds in the same way as for any other real estate transaction:
- This must be carried out by a notary.
- Financing may come from the company’s own funds or from loans taken out with a bank in the company’s name.
It’s worth remembering that SCIs, as companies, don’t have the same borrowing facilities as private individuals (zero-rate loans, PELs, etc.). What’s more, the bank often requires additional guarantees from the partners, even though legally, SCI partners are indefinitely liable for liabilities not paid by the company.
Dismemberment of ownership of SCI shares
The dismemberment of ownership of shares in an SCI involves the division between :
- Usufruct, or the use of the property, whether to live in it or to receive rental income from it
- Bare ownership, which is the right to own the property without being able to enjoy it.
A common example is a family donation. The parents set up a non-trading property company (SCI) to which they contribute their property, retaining the usufruct (they live in it) but giving the bare ownership to the children. On the death of the usufructuary, the children receive full ownership of the property without inheritance tax.
This dismemberment implies different rights and duties for each party. A tax analysis or a consultation with an estate expert (notary, tax specialist, chartered accountant, etc.) can help you prepare for succession.
SCI and taxation
An SCI can be taxed in one of two ways: income tax (basic system) or corporation tax (optional system).
SCI subject to corporate income tax
Often presented as the best option, a non-trading property company (SCI) governed by corporate income tax has a number of major advantages:
- Tax depreciation of asset reduces taxable income
- Deduction of expenses (work, notary fees and registration fees)
- Management of associates’ taxable income, by deciding on the amount of dividends distributed
- Taxed on the basis of income actually received by associates (dividends taxed at 30%)
But before choosing the SCI à l’IS, it is important to consider its disadvantages:
- Higher capital gains due to deduction of depreciation, resulting in high taxation of the capital gain on disposal of the property.
- Deficits not deductible from partners’ income
- Higher accounting costs, as SCIs subject to corporate income tax are subject to commercial accounting.
- CRL on rental income of 2.5% (Cf. § CRL)
SCI for income tax purposes
On the other hand, a property investment company (SCI) subject to income tax (IR) is similar to owning a property directly, in terms of taxation, as it is subject to property income rules:
- Each partner is taxed personally, to the advantage of low-income earners, according to the tax scale.
- Any losses incurred by the SCI may be deducted from the net taxable income of the SCI partners, up to a limit of 10,700 euros per year.
- Real estate capital gains are subject to 19% income tax and 17.2% social security contributions. A progressive allowance is applied after the 6th year of ownership of the property (and not of the SCI shares), leading to total exemption after 22 years for income tax and 30 years for social security contributions.
Nonetheless, the disadvantages of a SCI taxable for income tax purposes need to be taken into account:
- Non-deduction of depreciation, which generally results in a much higher taxable property income than that calculated for a non-trading property company subject to corporation tax;
- Natures of deductible expenses more restricted than in a SCI subject to corporate income tax ;
- Income taxed in the hands of associates can be totally unrelated to the income they actually receive. This is particularly the case when there is a loan to repay and income only covers the monthly loan repayments and expenses. This point needs to be anticipated, as the impact in terms of cash flow and taxation is not neutral, and can pose real difficulties if not properly anticipated;
- It is not possible to rent out a property on a furnished basis, and if this income exceeds 10% of the SCI’s total income, the latter will have to opt for corporate income tax. It should be noted that, from now on, the IS option for a SCI can be revoked for 5 years, after which it becomes definitive.
SCI subject to income tax or corporation tax
In the final analysis, it appears that there is no “best option”, and that it is necessary to study each individual case to decide whether it is more advantageous to create a SCI subject to income tax or a SCI subject to corporation tax. In general :
- The SCI à l’IS is more attractive for high-income earners, and if the aim is not to resell the property in the short-to-medium term and generate a capital gain;
- The SCI tax-exempt property company is advantageous for people with low taxable incomes (0 or 11% bracket), as well as for those wishing to realize capital gains on real estate.
Taxation: Contribution tax on rental income from non-trading property companies (SCI)
The contribution sur les revenus locatifs, or CRL, applies to income not already subject to VAT from the rental of buildings completed more than 15 years ago, owned by a legal entity subject to corporate income tax or a non-profit association.
In the case of a non-trading property company (SCI) that has not opted for corporation tax, it is sufficient for one partner to be subject to corporation tax for the company to be liable for the CRL.
The tax on rental income is 2.5% of net income over the tax period (financial year). This applies not only to rents actually received, but also to any premiums and subsidies.
There are, however, a few cases in which the CRL may be waived:
- Low rents (less than €1830 over the tax period) per premises ;
- Rent subject to VAT;
- Rental of dwellings on a farm ;
- Vacation village real estate rentals ;
- When the building has undergone major renovation/transformation work likely to assimilate it to a new construction within the last 15 years;
VAT liability of non-trading property companies
An SCI may be liable for 20% VAT, depending on the property rented out (furnished or unfurnished) and its use (residential, agricultural or professional).
SCI for residential use
The SCI is never subject to VAT, unless the furnished rental is accompanied by 3 additional services (cleaning, reception of guests, breakfast…). It should also be noted that short-term furnished rental is only possible through an SCI (non-trading property company) subject to corporation tax.
SCI for agricultural use
The SCI is exempt from VAT, but can choose this option if the lessor is himself subject to VAT.
SCI for professional use
SCIs renting out furnished or equipped property for professional use are subject to VAT. It is exempt from VAT in the case of bare rental, but can opt to be subject to VAT.
Conclusion on SCI taxation
SCI taxation is a vast field in which the uninitiated can easily get lost. It is therefore advisable to seek advice in advance from qualified professionals who are capable of understanding each situation and proposing appropriate solutions. It is therefore essential to prepare your investment carefully, so that it is consistent with your personal objectives.
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