Why Create an SCI?
Volume XIX, Issue 18
Very often we’re asked why a property buyer might consider purchasing the property in the name of an “SCI.” An SCI, which stands for “Société Civile Immobilière,” is a widely used instrument in French legal practice for managing and passing on family assets.
Its creation can be envisaged at any time, as soon as two people (minimum) wish to group together to carry out a civil activity (examples: spouses, cohabitants, brothers and sisters).
But, why create this kind of non-trading property company, anyway?
First, this kind of civil partnership is recommended to avoid conflictual situations of undivided ownership where the owners must learn to manage the property together. They must agree to make common decisions concerning the maintenance, improvement of their property. For example: it is imperative to obtain two thirds of the undivided rights in order to receive income, to carry out certain works or to conclude a residential lease. Decisions that are not related to the normal use of the property (such as the sale of a building, mortgages, commercial or rural leases) must be taken unanimously. The creation of a non-trading property company such as an SCI makes it possible, under certain conditions, to avoid these deadlocked situations.
The way it does that is by appointing one or more managers in the articles of association of the non-trading property company or by decision of the general meeting. Unless otherwise stipulated, these managers have broad powers of management and even disposal over the real estate. Majority rules and blocking situations are thus avoided by giving the power to one individual. However, the most important and heaviest decisions such as the acquisition of a building, the subscription of a loan, the taking of a mortgage on a real estate property, etc., are generally adopted in a general assembly, according to the majority fixed by the statutes.
Secondly, the non-trading company is used to arrange the matrimonial regime of the spouses so that when two spouses (married under the regime of separation of property or reduced community of acquests) want to modify their powers over the real estate they own. The contribution of a property to an SCI allows it to be subject to the rules set out in the articles of association. So, for example, if a spouse owns a property alone that both spouses wish to manage together, they contribute this property to an SCI of which they are both partners and managers. This is called “co-management.” Each manager will have the powers over the property that the articles of association or the general meeting of shareholders have given him/her. After the contribution, the property no longer belongs to the spouse but to the SCI.
Thirdly, the non-trading company can be set up to buy a property with a partner or partners. Two people living together (or more), not married and not in a civil partnership, generally buy their property in joint ownership. In case of death of one of them, the survivor finds himself in joint ownership with the heirs of his ex-cohabitant, which can cause problems to the survivor. To solve this problem, one of the solutions is to draw up a will by making the cohabitant a legatee of the property. However, the inheritance tax is 60% after application of an allowance of 1,594€. A second solution consists in contributing the real estate to an SCI, then in the dismemberment of the company’s shares or in the insertion of a tontine clause* in the company’s statutes.
* A tontine clause is used to avoid the entrenched inheritance rights of children in French law, so that no part of the property passes to them during the lifetime of any of the existing owners.
The Notaires warn you in this case: giving your partner an advantage may mean giving your children a disadvantage.
Fourthly, the non-trading company can be a tool for passing on one’s assets allowing one to optimize one’s inheritance for tax purposes. It is the SCI’s shares that are transmitted to the children and grandchildren and not the real estate. This implies certain tax advantages. If the children receive, by donation, shares in an SCI that has taken out a loan, the tax liability will be based on the value of these shares (and not the real estate) less the amount of the liability.
A company is always worth a little less than the sum of the assets it owns. Compared to the market value of the building, the shares of the SCI can be affected by a slight discount which is generally 10% (attention: simple tax tolerance). The taxes to be paid will then be lower than in the case of a donation of the building itself.
The donation of shares in a non-trading property company allows you to take advantage of the tax allowances in force by calculating the ideal number of shares to be transmitted in order to remain below the applicable allowances (currently 100,000€ every 15 years).
There are disadvantages to consider. There is the creation and expense to drafting of the statutes, the registration of the statutes with the tax service, the publication of the constitution of the SCI in a Journal d’Annonces Légales (JAL), the registration of the SCI with the registry of the Commercial Court, the declaration of the beneficial owners of the SCI…which can be drafted by the Notaire at a cost that could easily be 2,500€. The SCI cannot benefit from certain advantages intended for individuals such as the 0% loan or the home savings plan.
Another disadvantage is that you must respect the operating rules of the SCI such as the holding of an annual general meeting of the partners with the drafting of minutes or the keeping of accounts. The accounting is more rigorous if you have chosen to subject the SCI to corporation tax. The accounts must be submitted to the registry each year.
You must also take into account the fact that as a partner of an SCI, you have an indefinite liability vis-à-vis its debts. You commit your personal assets in proportion to your shares in the SCI. In addition, the sale of shares in an SCI can be complicated if an authorization clause is provided for in the articles of association. Indeed, if you want to sell, you will need the agreement of the other partners.
The real problems start when you generate an income from the property in the name of an SCI because it carries a heavy tax burden when it becomes a commercial entity by virtue of the rents. The SCI is considered as a fiscal “transparent” company, so, that the SCI owners are taxed as individuals. In a classic situation, the SCI income from long-term unfurnished rentals is subject to income tax. For residents of France, the income tax is calculated on a progressive scale from 14% to 45% and the social charges (Prélèvements Sociaux) of 17.2%. For non-residents, the income tax rate is 20% and the social charges, except in the case of the non-residents who are affiliated to the social security scheme in another state of the European Union.
If the property is rented out, then each shareholder is liable for French income tax in that part of the rental income to which he is entitled. His rental income is added to his other income and is indicated in the tax declaration for the individual. In this case the taxation is absolutely identical to the one when managing real estate directly without the SCI. Moreover, the taxation is applied even if incomes are not distributed among the shareholders and remain in the SCI to finance new acquisitions.
Keep in mind, too, that should you wish to transfer your shares of an SCI to someone else, it will cost you the Notarial transfer taxes and fees to do so. So once in place, you don’t want to make any changes, unless you have to…such as in the case of divorce where one spouse buys the other spouse’s shares.
The bottom line is this: If you are purchasing a property with someone or several people, other than your spouse, then I’d recommend an SCI so that you can control the distribution of the shares accordingly. If you have a complicated matrimonial situation with past spouses and children from those past marriages, then an SCI can clarify how the shares get bequeathed. You can also give shares to your children to avoid their having to pay inheritance taxes on the shares they own.
Our advice is to take advice before jumping into an SCI. We use this legal instrument to set up our Fractional Ownership properties so that the structure of the SCI never changes, while the shares are bought and sold via US non-profit corporations who are the members of the SCI. That makes sense, but in most normal cases, it doesn’t!
Download an official pamphlet published by the Chambre de Notaires (in French).
The Adrian Leeds Group®
P.S. We have developed relationships with a number of financial and tax experts to assist our clients. For more information, please visit our Global Money Services page today.