Purchasing a property through a French family company
One efficient and sometimes little known way of owning real estate in France is through a company named a “Société Civile Immobilière” (SCI).
What may be the advantages of purchasing a property through such an entity, and what is an SCI in the first place?
An SCI is a civil company (as opposed to a commercial one), which is tax transparent (ie: any income it makes is taxed in the hands of the shareholders under French income tax), the purpose of which is to purchase and hold real estate property among several people, to put it at the disposal of the shareholders, to rent it and share the rental income and even, exceptionally, to sell it.
An SCI requires a minimum of two shareholders (no maximum) and there is no minimum share capital, although in practice, the capital will consist in the market value of the property (plus any advances in cash by shareholders in current accounts).
It requires at least one annual general meeting to approve the accounts, to prepare such accounts (this can be a fairly simple exercise depending on the activity of the company), which do not need to be certified by a chartered accountant. A balance sheet must be prepared along with a profit and loss account yearly, as well as a report by the manager to the shareholders on the company’s activity once a year. A number of companies in France can assist with taking care of such service at a reasonable cost.
An SCI is a tax transparent civil company, which means that any income derived from it is taxed directly in the hands of the shareholders under French income tax. Because its purpose is civil as opposed to commercial, it can rent the property it owns, but on a long term unfurnished basis. If short term furnished letting is contemplated, it is best to opt for corporation tax (such option is irrevocable).
Turning to the advantages:
– Avoiding the rules of indivision:
A straightforward purchase of real estate in France, say by an English couple, will take place under the rules of the Civil Code regarding indivision. In a nutshell, pursuant to such rules, one can request to be bought out or force the sale of the property in auction sale, but more importantly, the majority required to make any decisions regarding the property is often two thirds (after a fairly recent reform, prior to which unanimity was often the rule). This can be a major hurdle, in particular in the scenarios of a large number of heirs inheriting a property, of a property being purchased by a group of friends or two couples, etc. In France, a fairly large number of properties are left empty to decay simply because of lack of agreement between members of an indivision.
On the other hand, the SCI offers a large amount of flexibility in decision making, which can be organised in the bylaws. It is possible therein to appoint one or more managers (“gérants”) with large decision powers, including day to day management of the property, decisions regarding works or even the sale of the property.
In addition, the majority required for decisions made by shareholders is often a simple one.
As regards the transfer of an interest in the property, the process is also simpler in the case of an SCI. As a matter of fact, this can take the form of a transfer of shares under private signatures (although a notarised deed can be recommended for publication purposes and opposability to third parties in certain cases), while a transfer of a share in a title held in indivision will invariably be more complicated and required a notarised deed. It is of course possible to prevent the entry into the company of unwanted people thanks to an appropriate approval clause in the statutes (with right of first refusal in case on intended transfer of shares).
The company’s bylaws can organise the rights of occupation of the property or how it is to be run. It is possible for members of an indivision to enter into an agreement achieving the same, but again, it is heavier, and will need to be notarised. It is also only valid for five years (although renewable).
– Facilitating the transfer of the underlying asset:
It is quite common for a married couple to gradually gift shares in an SCI to their children with a view, ultimately, to transfer all of the underlying asset to them. Children enjoy a tax allowance of over 156,000 € on the death of each parent, but also upon a gift from them, provided that the donor survives six years, after which the allowance is reconstituted in full.
A word of caution though: an SCI must not be set up solely for the purpose of obtaining a tax advantage, as it could otherwise fall under the tax administration’s doctrine of abuse of right. It is therefore advisable to bring the children gradually into the share capital, initially with a small shareholding, and later to gift them larger amounts of shares. Provided such gifts do not exceed the tax allowance, they should not give rise to any re-qualification by the tax authorities.
Another advantage of a gift of shares in an SCI is that debts of the company will be taken into account in order to assess the value of the gift (provided that the donee accepts to take over the indebtedness), in particular mortgages, while this is not the case for an outright gift made by an individual. Also, it is accepted that the property’s market value taken into account for the purpose of a gift can be reduced by up to 15% to reflect the fact that there is no market for the sale of shares in SCIs.
It is also possible to transfer the bare title to the shares in the SCI and for the donors to keep the usufruct thereof (ie: the right to use the property and to receive any income from it). The usufruct holder is deemed to be the full owner for tax purposes, which can be convenient in cases where parents want to benefit their children without imposing a tax burden on them.
– Overcoming the rules of French law on forced heirship:
Under French law, children have a right to a share in both their parents’ estates, which cannot be taken away from them even by will.
However, in the case of an SCI, provided that the family remains domiciled in the UK for inheritance purposes, the shares in the SCI, as chattels (as opposed to real estate), can be dealt with as the testators see fit in their UK wills, while the real estate property remains owned by the company.
The death duties, if any, will remain the French ones, as the SCI is a company with French real estate preponderance, but the shareholders can transfer the title to the shares freely. This possibility makes the SCI very attractive to many British buyers.
A lot more could of course be said about the SCI, but it should be considered as an option in any purchase of real estate property in France.
Hervé Blatry
Avocat
TEE FRANCE
STANLEY TEE LLP
High Street
Bishops Stortford
Herts CM23 2LU
Tel 01279 710621 and 01279 710654
[email protected]