Using an SCI to Purchase Property in France
A Société Civile Immobilière (commonly called an “SCI”) translates loosely as a Private Limited Company for Property Purposes. An SCI usually owns one or more properties with the purpose of renting them out or making them available for free to its shareholders.
What is an SCI?
- An SCI is essentially a private, limited and fully incorporated company with a registered office in France. This office can be the property itself
- The shares of the SCI then own the property in question
- Being a company, the shares of the SCI are owned by its shareholders, in many cases, family members
- The shareholders can be resident or non-resident in France
Note: It is important to note that the tax consequences of a purchase through an SCI should be analysed according to French law and the tax treaty between France and the shareholder’s home country before proceeding with any purchase.
Forming and Using an SCI for a Property Purchase in France
An SCI consists of a certain number of shares, determined within its constitution, and a minimum of two shareholders. The company statutes (statuts de la société) is a legal document prepared by a notary. An SCI must be registered at the local Chamber of Commerce.
The statutes include:
- the company name (the street name of the property or a chosen name)
- its headquarters (the address of the property or a shareholder’s address, if in France)
- the amount of capital
- functions, conditions (such as clauses on reduction of capital, selling of properties, and so on)
- details of the company manager
The difference between buying a property with an SCI and buying as an individual is the creation of shares within the company. The shareholders own the shares which own the property in the proportions specified within the statutes. The shareholders of the SCI are responsible for the debts of the company in proportion to their portion of the shares. If an SCI has two shareholders, each one is responsible for 50 percent of the debts of the company. A certain amount of confidence is needed between the shareholders to guarantee the smooth running of the company. The choice of the manager of an SCI should be made carefully as well.
An SCI may be created when purchasing a property. Usually this is done after the signing of the preliminary contract and before the signature of the title deed with the notary. The property held by an SCI may be sold at any time without dissolving the SCI and the SCI may purchase another property at any time. An SCI may also be dissolved at any time; this generally happens when an SCI no longer owns any property.
Steps to forming and running an SCI
The costs for setting up an SCI are minimal and the process can be relatively quick. A qualified solicitor or notary is in charge of setting up an SCI, though notaries are usually used. An SCI is established in the following way:
- Shareholders complete and sign the statutes prepared by the notary or solicitor
- The notary prepares and then submits the statutes to the local Chamber of Commerce (Chambre de Commerce et d’Industrie/CCI)
- A bank account in the company name is opened once the statutes are signed
- A few weeks later the notary will receive the official registration document (Kbis) and will forward a copy to the SCI
Documents needed from the shareholders
- Identification documents: birth certificates, marriage certificate if applicable, copies of passports
- Documentation proving the country of residence
Advantages of an SCI
The creation of the SCI has a number of advantages when purchasing and owning real estate in France:
- Non-resident shareholders in an SCI are not taxed in France as the shares are considered movable assets; they are taxed in the country of residence.
- If all precautions are taken, liquid assets can be maintained at zero value in the SCI so French Wealth Tax (ISF) is avoided (unless the value is greater than the calculated net value).
- In the event of the death of a shareholder, the succession of the shares of the company (the inheritance) is not subject to urban pre-emption rights or to a notary act in France. This means that if a shareholder dies, because the shares are considered mobile assets, the probate laws of the country of residence of the deceased apply.
- The establishment of an SCI does not trigger any taxation. An annual report must be filed; unless the property is rented out, the SCI will show no profits. The manager is not bound by a fiscal regime, social security taxes or retirement charges. An SCI is liable for Capital Gains tax for the first 15 years however, as it is considered a transparent company. The only time when taxes are declared is when the property within the SCI is rented out professionally.
Disadvantages of an SCI
- All decisions within an SCI are subject to a collective decision by all shareholders. This could cause problems in the event of the death of a shareholder as heirs may not work harmoniously with the rest of the shareholders.
- Mortgages taken out with an SCI are generally slightly more expensive and can be more difficult to secure.
- British citizens only: the HM Revenue & Customs are studying the possibility of taxing French SCIs in the UK on the basis of an average rental income because the shares are considered movable and thus a UK asset.
Accounting and an SCI
Because an SCI is usually created solely to purchase a property, the accounting can remain very simple. This benefit is lost if the SCI lets one or more properties professionally; the tax declarations become complex and a different type of company formation could be preferable.
Any income or expense triggered through the SCI must be managed with a bank account in the name of the company. All invoices relating to the property must be in the name of the SCI and be paid through the company’s bank account for future declarations of capital gains tax. Otherwise, no deductions of major works can be taken into account for capital gains taxes.
A yearly SCI tax declaration (Form 2072) must be filed. If the property held by the SCI is not rented out professionally, then the SCI does not declare any revenue. Most SCI declarations show zero revenue.
Managing an SCI
For all collective decisions concerning an SCI, a \”deliberation\” is required. This replaces the traditional Power of Attorney and represents the collective decision of the share holders. A deliberation must be drawn up, usually by a notaire, when the SCI changes share holders, takes out a mortgage, or dissolves.
The dissolution of an SCI can be done quickly once the deliberation is signed by all share holders. Form M3b (available from a notary or the Chamber of Commerce of Registration/Greffe du Tribunal de Commerce) must be filled out and prepared by a notary and then filed with the office of the local Chamber of Commerce of Registration. A small fee will be charged.
Because an SCI is a legal entity, it is strongly recommended to get professional advice from a specialised English-speaking notary who has all documents available – these are quite complex and in French only – and will prepare them on behalf of the SCI.