SCI, those three little letters that many have heard of but often struggle to define. In this article, we aim to demystify the concept of SCI and provide insights into what it entails.
What is an SCI?
An SCI, or Société Civile Immobilière, is a type of company established for the purpose of acquiring and managing real estate in France. It’s required to have at least two partners, who can be individuals or legal entities. The primary activity of an SCI is considered to be civilian, meaning it cannot engage in commercial activities unless it chooses the corporate tax option, which we’ll discuss later. The share capital is flexible and is divided into shares allocated among the partners based on their contributions.
The purpose of an SCI
SCIs are typically established for various reasons, including:
- Investment in real estate with multiple partners, whether they are family members or not.
- Managing a property portfolio with the flexibility of transferring shares between partners, which is more convenient than traditional joint ownership.
- Facilitating the transfer of property assets, including the option to dismember ownership (consult your notary for details).
- Managing property assets for a professional activity while keeping them separate from the operating company. This is especially useful in the event of relocating or selling the operating business.
Tax implications for an SCI
It’s crucial to note that an SCI can be subject to income tax (impôt sur le revenu or IR in French) or corporation tax (impôt sur les sociétés or IS in French), and this choice has significant tax consequences.
SCI subject to Income Tax:
When an SCI is subject to income tax, it is fiscally transparent. Profits or losses are directly attributed to the income of its partners, based on their capital contributions. The activity of such an SCI is restricted to non-commercial activities, typically involving unfurnished property rentals. For example, in an SCI with two partners, each holding a 50% share, a profit of 10,000 euros would be individually taxed as rental income, with each partner being responsible for 5,000 euros.
SCI subject to Corporation Tax:
An SCI subject to corporation tax is fiscally independent. Profits are taxed internally at the corporate tax rate, and the profits remain within the company without affecting the taxation of its partners. This option allows the SCI to engage in both furnished and unfurnished property rentals, as it acquires commercial capacity. Using the same example as above, in an SCI with two partners, each with a 50% share, a profit of 10,000 euros would be taxed at a rate of 15% (1,500 euros), and the net profit would remain within the company, without any obligation to distribute it to the partners.
Please note that the choice between these two tax options leads to significant differences in tax treatment, and it’s particularly important to be aware that furnished property rentals automatically trigger the corporation tax option, which can have profound implications on taxation, both during operations and upon resale.
Accounting and tax obligations of an SCI
As a separate legal entity, an SCI has specific legal obligations:
- The company must be created and registered in the Trade and Companies Register.
- An annual tax return must be submitted to the tax authorities, even when the SCI has no activity or the property remains unrented.
- When the SCI no longer serves a purpose, it must be dissolved and liquidated.
Impact of an SCI on capital gains
The presence of an SCI can have a significant impact on capital gains, which may be confusing to property owners if they are unaware of the implications. While an SCI is subject to income tax, the impact on capital gains is minimal, as the calculation remains similar to individual property ownership.
However, choosing the corporation tax option drastically alters the calculation of capital gains. Key points to consider include:
- Property depreciation over a period of 25 to 50 years, affecting the final capital gain calculation.
- Proceeds from property sales are subject to corporation tax at rates of 15% and 25%.
- Proceeds from property sales remain within the SCI, and if partners wish to access the funds personally, they must distribute dividends, which are also subject to taxation.
Let’s illustrate this with an example:
Property purchased for 300,000 euros a decade ago. Property sold for 300,000 euros ten years later.
At first glance, it appears there is no capital gain. However, depreciation must be considered, particularly in the “construction” portion of the property:
Depreciation: 300,000 * 75% * 10/30 = 75,000 euros (deducting 25% for land valuation)
For accounting purposes, the capital gain is calculated as 300,000 – 300,000 + 75,000 = 75,000 euros. The SCI would have a profit of 75,000 euros, leading to a corporation tax of 14,524 euros.
It’s important to understand that this example is simplified, but it reflects the unique calculation of capital gains for SCIs subject to corporation tax, which significantly differs from the capital gains of individuals. Such implications should be anticipated by property owners.
In conclusion
Establishing an SCI can be a valuable tool for tax and asset optimization when purchasing property with family, friends, or investors. However, it comes with serious financial consequences, particularly if not well understood. We strongly advise readers to seek guidance and fully comprehend the implications before creating an SCI, especially when dealing with a second home that may not be rented out or only partially rented.
For more information on this topic, feel free to contact us at tr@frenchtaxonline.com. We are here to help you explore the best option for your specific situation.