Good News for the Wealthy/To Buy or Not to Buy Via an SCI

GREAT NEWS ON WEALTH TAX FOR PROPERTY INVESTORS

With the changes to the French wealth tax — Impôt de solidarité sur la fortune (ISF) — come tax advantages to property investors. Thanks to President Emmanuel Macron, the wealth tax will apply ONLY to their French real estate assets, and not to any other financial assets. This has been a concern for years by immigrants who have substantial portfolios outside of France. This new law has been in effect since the beginning of the year, as follows: a 0.5% tax on real estate assets worth €1.3 million or more will be applied to the net value of property above €800,000. The tax is only applicable to the amount of equity one has in the property, meaning that if a mortgage holds a lien on the property, then the amount owed on the mortgage is also exempt. Therefore, if an owners has a property valued at €1.5 million, and equity of €1 million, the tax would be assessed on the €200,000 above the €800,000 at 0.5%.

TO BUY OR NOT TO BUY VIA AN SCI

An SCI (“Société Civile Immobilière”) is a civil company, much like an LLC in the U.S., but is specific to property in France and is defined by the French Civil Code as a “non-trading entity.” One SCI can hold one or more properties, and can have two or many members, or shareholders.

Like an LLC, it is fiscally transparent, and therefore the SCI is subject to French tax laws, just as are its individual members. When a property held in the name of an SCI is sold, for example, the capital gains tax will be paid by its members in their respective shares.

Some of the advantages of owning the property in the structure of an SCI is the ability for each member to hold a different number of shares that can be easily transferrable among members or sold apart from the others. In the past, an SCI was a big advantage to non-residents who wanted to avoid the forced heirship laws of France so that the shares could be bequeathed as they wished. Since August of 2015 this became no longer the case, as European regulations determined that non-resident owners may now designate the laws of their country of residence to settle their estate in France. French inheritance tax still applies, however, regardless of the SCI and regardless of the last residence of the deceased member. It is recommended that the owner create a French will to make this designation.

Another advantage to holding the property in the SCI structure is the ability for a parent to transfer some or all of his/her shares once every 15 years to his/her children, tax free, thus reducing future inheritance taxes imposed on the heirs. In addition, the value of the property is reduced when calculating the wealth tax because the sale of the shares can be more difficult than selling the property itself.

The disadvantages can sometimes outweigh the advantages, however. First off, there are additional expenses to legally create an SCI — between €1,200.00 and €4,000.00. There is annual reporting of the SCI, normally via an accountant, incurring fees. If the property is rented, the SCI will be subject to corporation tax. If the property is purchased using a mortgage, the bank must issue the loan in the name of the SCI, and the requirements by the lender are likely to be more restrictive.

An SCI can have no less than two members (associés), but there is no limit to the number of total members. It is managed by a “Gérant” or “Gérante” (for a woman), appointed by the members. There is capital required, but there is no minimum amount, and in many cases, the capital is equal to the price of the property.

The “Statuts,” or Articles of Incorporation, must be established in writing and signed and notarized, then registered by the Notaire within one month of the signature. An announcement about the creation of the SCI must be placed in a legal publication (“Journal d’annonces légales”) and registered with the “Centre de formalités des Entreprises.”

Because this is a permanent structure that cannot be easily or inexpensively altered, we highly recommend taking legal advice before creating your SCI structure — as it may or may not be to your advantage.

For complete information on an SCI (in French), download the Chambre de Notaire’s PDF. 

A bientôt and Happy New Year,

Adrian Leeds
Adrian Leeds Group

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P.S. Next week you’ll be getting FPI from South Africa with tales of our travel and what it might be like to live there!