The SCI (Société Civile Immobilière) is often presented for its governance advantages when acquiring a property.
While it is naturally subject to income tax, it is also possible to prefer the french corporate income tax regime, both regimes having advantages and disadvantages.
Through a SCI
Firstly, with regard to the SCI subject to income tax, it allows the company to benefit from a system of semi-transparent taxation – the tax being calculated at the level of the SCI but paid by its shareholders, whether or not there is a distribution of dividends – with the possibility, by a vote at the meeting, of establishing a profit distribution key different from that relating to the share held in the share capital. However, such an operation has already been re-qualified by the tax authorities as an indirect donation, but the courts have already had the opportunity to oppose this approach of the tax administration (e.g. when the majority of the rights to the profits are held by the parents but the profits revert to the children, due to a decision voted during a meeting of shareholders) – see Cass. com. 18 Dec. 2012, no. 11-27.741).
When it is subject to income tax, the SCI may receive “land income” – from empty rentals which is considered as a civil activity.
This income will be taxed, whether distributed or set aside by the SCI, in the hands of the partners according to the income tax scale and social security contributions at the rate of 17.2% (with a preferential rate of 7.5% from January 1, 2019 for persons who are affiliated to a social security scheme in the EEA or Switzerland).
On the sale of a property held by a SCI subject to income tax, which generates registration fees of around 5.80% (excluding notary fees) :
- In the presence of individual partners who are tax residents in France, the tax regime applicable to the sale will be the one applicable to capital gains on real estate owned by individuals (19% income tax; 17.2% social security contributions; a surcharge of 2 to 6% for a net taxable capital gain in excess of 50,000 euros; above all, the possibility of benefiting from tax deductions for the duration of the holding, which generate an exemption from income tax after 22 years and from social security contributions after 30 years). Taxation can be entirely avoided for the partner who, on the day of the sale, occupies the property free of charge as his main residence;
- In the case of individual partners who are not French tax residents, the applicable tax regime will be the same as for French residents. However, for those who are affiliated to a social security system of an EEA country or Switzerland, they benefit from social security contributions at the rate of 7.5% instead of 17.2% for disposals made since January 1, 2019;
- In the case of a shareholder who is a legal entity subject to corporate income tax, the capital gain will be taxed at the applicable corporate income tax rate.
It is entirely possible to also transfer the shares of the SCI that holds a property, whether the latter is subject to income tax or corporation tax; in this case, the transfer will be subject to registration duties of 5% (due to the fact that the SCI is mainly composed of real estate assets); in the absence of a majority of real estate assets, registration duties are 3%.
With regard to the SCI subject to corporate income tax – on option, this is a truly opaque company; the profits received by this company are taxable at the company level at the corporate income tax rate, i.e. 15% up to 38,120 euros of profits and 28% above – in 2021, the 28% rate will be reduced to 26.5% and then will stabilise at 25% from 2022 onwards. Profits are then taxed, in case of distribution in the form of dividends, in the hands of individual shareholders at the flat tax rate (30%, i.e. 12.8% of income tax and 17.2% of social contributions, or optionally, at the progressive scale of income tax).
When corporate income tax is paid, the SCI makes a depreciation charge on the real estate assets it owns. This depreciation has two consequences:
- They represent, during the life of the SCI, charges that will reduce the profit generated by the SCI and thus lead to lower taxation, or even to a deficit that:
- Can be carried forward – i.e. to a subsequent fiscal year – without any time limit and capped at 1 million euros per year + 50% of the portion of the profit above this ceiling
- Can be carried back, but only to the profit of the previous fiscal year and up to a maximum of 1 million euros – the remainder is referred to as a carry-back claim, which therefore generates a claim against the Treasury that is deducted from the fiscal profit of subsequent fiscal years.
- When the property is sold by the SCI, these depreciations will increase the taxable capital gain because such depreciations reduce the net book value of the property in the accounts of the SCI, the capital gain being calculated by making the difference between the sale price and this net book value. The capital gains base is then taxed at the applicable corporate tax rate.
Moreover, by opting for corporate income tax, the SCI may receive income from a furnished rental, which is a commercial activity. However, an SCI subject to income tax that receives such income would be reclassified as a company subject to corporate income tax and would suffer the consequences of this regime, in particular on the sale of a property (the capital gain being calculated as the difference between the sale value and the net book value, at a rate of 28%).
There is also a difference in treatment between a SCI subject to income tax and a SCI subject corporate income tax, which is based on the possibility of making a property available to a partner free of charge. While this practice is tolerated in the case of a SCI subject to income tax, it is not tolerated in the case of a SCI subject to corporate income tax. Therefore, such a practice will result in a double consequence:
- The reinstatement in the taxable income of the company of the rents that it should have received from its partner due to the use of the property;
- The partner who has benefited from the partnership’s largesse will be taxed, at the flat tax rate of 30%, on this deemed distributed income.
Through a family limited liability company
While the income tax regime generates less tax friction on the disposal of a property, it is often the corporate income tax regime that is preferred during the period of ownership of the property.
The possibility of combining the advantages of the two regimes remains open, in particular through the family limited liability company subject to income tax, which is a commercial company that can carry out furnished rentals but also depreciate real estate assets in order to reduce the tax burden and benefit, when the real estate is sold, from the tax regime for professional capital gains – with a tax regime that depends on the length of ownership of the property (- or + two years) but which remains more advantageous in the calculation of the taxable capital gains base compared to a company subject to corporate income tax (as described above).
However, it is possible that this interesting patrimonial strategy may now be contested by the tax authorities in view of the inclusion, by the 2019 Finance Act, of a new “floor” for tax abuse under the terms of Article L. 64 A of the LPF, which makes it possible to reclassify operations whose main objective is to avoid or reduce the tax burden.
Prior to the incorporation of this new article, only transactions whose sole purpose was to achieve tax savings were covered. This new article therefore broadens the scope of the tax abuse; this new procedure will be applied by the tax authorities as of 2021 for acts passed or carried out since 2020.
Through a Monegasque SCI
There is also sometimes an interest, for some people, in opting for the Monegasque SCI, because of the confidentiality it ensures with regard to the identity of its manager, its partners or the location of the property it holds.
A 3% tax on the market value of buildings located in France may be applied (numerous exemptions exist for this tax).
Furthermore, when a Monegasque SCI sells a property located in France, this sale will be registered according to French registration fees (rate of 5.80%, excluding notary fees); on the contrary, in the event of the sale of shares of the Monegasque SCI holding a property in France, modest registration fees of 1% will be levied in Monaco as well as registration fees of around 5% in France (rate applicable to the sale of shares in a company that is mainly composed of real estate assets).