Property in France : should you use an SCI?
We have had quite a few questions from clients and others about the French SCI – the Société civile immobilière. So we wanted to take this opportunity to explain a little more about it is and when it might be useful if you are buying property in France.
What is a société civile immoblière?
Many people think of the SCI in France as at least roughly equivalent to an LLC (limited liability company) in the US. If you buy a vacation home or an investment property in the US, just about any lawyer will tell you to set up a simple LLC to be the owner of the property. Why? Well, in the US, you do this first and foremost to protect yourself from lawsuits.
The LLC is a formal company that, if handled correctly, separates its assets from your personal assets. Theoretically, if someone is injured in a fall from your LLC-owned vacation home balcony, they can sue and collect damanges from the LLC but won’t be able to get a court order for your personal bank account, your personal home, etc… even if you lose the lawsuit. Mind you, there are exceptions to this, and we strongly recommend property and general liability insurance as the more important defense against this risk.
Aside from liability protection, the US LLC legally can do just about anything any other US company could do. It could run the property as a vacation resort, charging for weekend stays and spa treatments. It could sell locally-made products from a shop on the site. It could fabricate machine parts and a completely different site and simply hold your property as an investment.
Like the LLC, the French SCI can provide some protection from legal liability. In the case of a lawsuit (and assuming the SCI has been property managed), the owners of an SCI are only at risk from losing the amount of money they invested in the company. Their personal assets are safe.
But this is where the similarity ends. The word “civile” in the name means that the SCI specifically can’t run any sort of commercial business. It can’t rent furnished rooms, sell hand-made candles or run factories. All that the SCI can do is own property and rent it out -- without furnishings or services.* In fact, in the instances when French law allows SCI owners to do some commercial activity (like furnished rentals), the owners must accept the loss of the company’s signature tax structure, meaning that the SCI is probably not your best choice in that case.
When is an SCI useful?
While the liability protections of an SCI are appealing, a good French insurance policy is going to be far more important. But the SCI does have a few advantages that might make sense in your situation.
Reason #1 Made to Measure Rules
The SCI is made so that a small group of people can share the ownership of a property over the long term. The structure requires that you have at least two owners and that you set up bylaws – the rules by which decisions will be made, maintenance will be handled, sale or use of the property will be determined, how an owner can be bought out, etc… You have a decent amount of flexibility with the bylaws. So you can get creative about these.
The SCI was really invented for families or friend groups going in on the purchase of a property for their own use. As you can imagine, the limited liability and flexibility of the bylaws makes it easier to set up all the rules amongst yourselves so that they fit your particular situation and hopefully, help you avoid conflicts in the future.
Reason #2 Ease of Transfer
The other feature that makes SCI’s popular in France is the relative ease and discounted cost of transferring an interest in the property. Let’s say that you have bought a vacation home in Annecy to share with four friends. After five years, one of your friends realizes she won’t be using it anymore and asks that the other three owners buy her out.
Your bylaws will provide guidelines for how she makes the request, how her shares will be valued and what options the other owners have. If the property were not in an SCI, you would all have to go to a notaire to register the sale of part of the property, pay the transfer tax, and do all of the notice, registering, etc… commonly associated with the sale of real estate in France.
Because you did put the property in an SCI, you can avoid most of that. You are not in this case transferring real estate at all. You are actually just transferring shares in a company (the SCI). So, while you still probably want to go to a notaire or attorney, the process is much less pricey and a lot easier.
That being said, your friend who is selling her SCI shares will be liable for capital gains tax at the time of sale if the value of those shares (in this case, tied to the value of the property) has increased since she bought in.
Reason #3 Gifting and Inheritance
The third reason that SCI’s are popular has to do with gift and inheritance taxes. To be clear, putting your real estate into an SCI will do absolutely nothing to exempt you from gift and inheritance taxes. But, it might lower them.
As we’ve just noted, an SCI can let you transfer an interest in a property without actually selling any part of the property. Instead shares in the SCI are transferred. And while the value of an SCI is closely tied to the property, it is not identical and is generally less. In addition, any debts held by the SCI will be subtracted from its value and thereby lower the value of the shares that are being gifted or inherited.
If you are creating an SCI to owned by a parent and his or her children (known as an SCI familiale), you have the option of donating up to 100,000 EUR in SCI shares every 15 years per person. You can also use your SCI bylaws to specifically transfer only the nue-propriété and not the usufruit of the property, which is to say an interest in the title but without a right to use the property. This feature becomes useful when one member of the family is living in or regularly using the property during their lifetime and does not want use-rights transferred until after.
How does an SCI affect your taxes?
Unless you invoke the exception for commercial use mentioned above, the SCI is taxed as a pass-through entity under the IR (impôt sur le revenu) tax régime. Which is to say that your portion of any income or losses your SCI has in a given year will show up on your personal tax statement for that year. So, if an SCI rents out an property for a profit of 3,000 EUR after deductions, and you owned a third of the SCI, you will report your share (1,000 EUR) of the income on your tax returns (under rental income on form 2042). You can deduct the usual business and property expenses from an SCI’s revenue to determine profits.
An SCI usually does not qualify for a micro-foncier tax régime (in which you get an automatic abatement against profits). But it might under very limited conditions (see the taxation link below).
You generally cannot offset capital gains from other properties using a loss from an SCI.
You can find more on the SCI structure at the website for the French Ministry of the Economy here: https://www.economie.gouv.fr/particuliers/societe-civile-immobiliere-comment-faire.
You can find details on taxation of an SCI from the Finance Publique website here: https://www.impots.gouv.fr/particulier/societe-civile-immobiliere.