In our YouTube videos, we often discuss the implications of capital gains tax when owning property through a corporate tax company. To provide more clarity, we’ve decided to write this detailed article. Investing in real estate through corporate tax companies comes with both unique opportunities and challenges. Let’s dive in!
What Is a Corporate Tax Company?
A corporate tax company is a distinct legal entity, separate from its shareholders. Unlike companies taxed under personal income tax (IR), corporate tax companies pay taxes on their profits directly. Shareholders only face taxation when dividends are distributed.
For real estate investment, common structures include the SCI (Société Civile Immobilière), SAS (Société par Actions Simplifiée), and SARL (Société à Responsabilité Limitée) under corporate tax rules (IS).
Corporate tax is based on net profit—calculated after deducting expenses and depreciation. The standard tax rate is 25%, with a reduced 15% rate for the first €42,500 of profit.
Individual vs. Corporate Tax Capital Gains Calculations
The calculation of capital gains on real estate for an individual fundamentally differs from that for a CT company:
For Individuals
Capital gains are the difference between the sale and purchase prices, adjusted for costs and ownership duration allowances. After 22 years, individuals gain full exemption from income tax and, after 30 years, from social contributions.
For income tax, the rate is 19%, with social charges at 17.2% (or 7.5% in specific cases).
For Corporate Tax Companies
Real estate is recorded as a company asset. Its value is depreciated annually, reducing taxable profits. The capital gain is calculated as the difference between the sale price and the net book value (purchase price minus accumulated depreciation).
Companies do not receive ownership duration allowances. The entire capital gain is taxed at corporate rates—15% and 25%.
Example of Capital Gains Taxation
A company purchases a building for €500,000, depreciating it by €50,000 annually over 10 years. After 10 years, the net book value is €0. If sold for €700,000, the taxable gain is €700,000.
Tax Breakdown
- 15% on the first €42,500 = €6,375
- 25% on €657,500 = €164,375
- Total tax liability = €170,750
Shareholders face additional withholding tax (12.8%) on dividends distributed from the proceeds.
Pros and Cons of Corporate Tax Companies for Real Estate
The decision to invest in real estate through a CT company rather than as an individual depends on several factors, including investment strategy, holding period, and capital gain prospects.
Advantages
- Tax Optimization: Depreciation reduces taxable profits annually.
- Reinvestment Potential: Post-tax profits can fund new acquisitions, increasing the company’s assets without added shareholder tax burdens.
- Management Flexibility: Allows for professional oversight and inclusion of external investors.
Disadvantages
- High Capital Gains Tax: No allowances for holding periods can increase tax liabilities on long-held properties.
- Administrative Complexity: Requires professional accounting and higher costs.
- Dividend Taxation: Double taxation—first on profits, then on shareholder distributions.
- Benefit in Kind: The property must be rented year-round unless accounted for, adding costs.
Is It Worth It?
Using a corporate tax company can be beneficial for experienced investors with specific goals, such as reinvestment or estate planning. However, the complexities require careful management and expert guidance.
At French Tax Online, we specialize in helping investors navigate these challenges. Contact us for personalized advice tailored to your investment plans.