The French SCI – Property holding company
When purchasing residential real estate in France, foreign residents are often interested in the idea of owning the property through a holding company.
We have summarised below the main legal and tax reasons :
Simplifies Co-ownership
The use of an SCI provides for maximum flexibility and stability if it is intended that a property should be bought by several individuals compared to purchasing as joint owners “en indivision”.
Indeed the “indivision” regime is known to be disadvantageous for the following reasons :
There is no obligation for the co-owners to keep their rights of ownership and to remain in the “indivision”. In the case of a dispute between any of the co-owners, the others might be forced to sell the whole property or at least to buy back the other(s) “share”. Of course the resale of the property will require the agreement of everyone and any objection could bring the situation to a standstill.
The “indivision regime” might also be a disadvantage when one of the owners dies. Indeed, according to French inheritance law the heirs and beneficiaries (including the surviving spouse) would receive the deceased’s part of ownership. The former owners would then have to share the right of ownership with these heirs and beneficiaries.
Tax transparency
For tax purposes (for example, income tax on rent of unfurnished property) an SCI is totally transparent and therefore tax is charged on the underlying shareholders as if they held the property directly.
It is important to consider the type of rental that will be carried out by the SCI.
Setting up a French property owning company is not adapted to renting out furnished property because French law considers that this is a business (and not a civil) activity. Should the SCI run directly a rental business, any income would become subject to corporation tax, not individual income tax. It is therefore important to use another vehicule (such as SARL) to operate the property and use a lease contract between the SCI and the said operator. It is also important to keep in mind that SCI should not own any furniture.
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Creation and management of an SCI
An SCI can be created very simply and the share capital will generally be a small amount, for example 1.000 euros.
Our charges, taxes, costs and disbursements for setting up the company and dealing with the initial registration formalities are available upon request.
As for the management of the company, this is relatively simple. Although there is no specific text stipulating that maintaining accounts is a legal requirement, in practice, it is highly recommended. These accounts can be maintained at a minimal level.
Transfer of the ownership of French property to a French SCI
Should a decision be made to transfer a property to an SCI after the property has been acquired (as opposed to acquiring the property directly through the SCI), the following should be kept in mind :
A. Cost
REGISTRATION TAX AND TRANSFER TAXES
The transfer of real estate to an SCI is treated as a contribution to the capital of the company and is taxed according to the nature of the contribution, namely whether it is in return purely for shares or also for another consideration such as the repayment of a loan attached to a property.
If the contribution is of the full value of the property (i.e. no outstanding loan) the costs payable on the transfer would be limited to our fees of around 0,5 % (including VAT) of the value of the property, and land registry fees of 0.1% of the same value.
However, if the contribution includes the company taking on the outstanding liability of a loan over the property, that part of the value is taxed at the same rate as an ordinary sale of the property, namely around 6% .
CAPITAL GAINS TAX
The transfer of the property to an SCI will also be considered as a chargeable disposal of the property for capital gains tax purposes. The charge to capital gains tax will depend upon the increased value in the property since its acquisition and a number of other conditions, which require further details (see our note on CGT).
B. Other consequences
RIGHT OF PRE-EMPTION
The transfer of the property will be considered as a proper transfer which would entitle the local authority to exercise its right of pre-emption should it wish to do so. This is unlikely, but is should be kept in mind