EXPLAINED: The advantages and pitfalls of buying French property with an SCI
Owning property via SCI can offer certain advantages to property owners in France, but they also have drawbacks and complications. Here is what you need to know
An SCI - société civile immobilière - is a non-trading real estate company made up of at least two people. Essentially, it allows people to own property such as a second home through shares of a company, rather than under their own name.
There are more than one million properties in France that are registered as SCI's.
The Local spoke with experts on the French property law and taxation to understand whether SCI properties are useful for foreign property-owners in France, and the pitfalls they need to be aware of.
Who might benefit from an SCI?
Most people set up SCIs for one of two reasons; tax and inheritance.
Setting up an SCI for property ownership in France can be an advantageous way to share and pass down property between people, namely families with unique situations and non-married couples.
It can also offer certain tax benefits, depending on your situation.
However, creating an SCI can also involve several complex administrative procedures and may not be advantageous for everyone, so it is strongly recommended to consult a lawyer who has expertise in French inheritance and tax laws before setting one up.
Paris-based notaire, Laure Gaschignard, told The Local that the main profile that would benefit from an SCI would be couples who live together but are not married or pacsé (in a civil partnership).
"Especially for foreigners who are not looking to be married or PACS'ed (les concubins in French), an SCI can allow you to set up an inheritance structure for your property purchased together", explained the notaire.
READ MORE: EXPLAINED: How France’s inheritance tax system works
Setting up an SCI can allow partners to structure the inheritance process for their property so that the other person is able to remain either a full or partial owner. The key benefit to an SCI is that it sets up a very specific delineation of who owns what, which can make succession processes more clear.
Gaschignard went on explain that even though an SCI can allow several people to buy and manage a property together, it is most useful for those who have unique family situations and are in need of a more flexible way to structure their property ownership and inheritance.
She warned that in previous decades, many French families set up SCIs because they were popular at the time.
"That generation often ran into problems because they did not realise that an SCI involves many administrative tasks. These tended to fall to the wayside, especially if interpersonal problems arose or there was a death of one of the partners of the SCI.
"An SCI is a large commitment. It means you will agree to run a company, and that involves paperwork and meetings".
Inheritance laws
She explained that in years past, many foreigners opted for SCI properties because they seemingly offered a way to bypass strict French inheritance laws (that do not, for example, allow parents to disinherit their children).
However, in 2015, the European Union passed regulation that allows people to opt for the law of the country of their nationality to apply to their estate. This law applies to non-EU nationals (so still applies to Brits, despite Brexit).
As a result, it is no longer necessary to set up an SCI to structure the inheritance process for your property according to your personal situation - you can simply opt for your will to be dealt with under the laws of your home country - read more HERE.
"These days, I mostly recommend SCI properties for people who have a serious interest in running an SCI and want to use it for structuring a family property", Gaschignard explained.
The Local also spoke with tax attorney, Maître Edouard Pruvost, who works with both French nationals and English-speaking foreigners, explained that he often sees people opt to own property in France via SCI because of potential to optimise tax benefits, namely those seeking to earn money from renting out their property.
Nevertheless, notaire Laure Gaschignard cautioned that these benefits are very situational.
"For foreigners who only want to rent out their second-home for a couple of months when they are out of town, you may not need to set up an SCI, but for those who rent their property out for the full year and turn a profit, it might be more advantageous".
How do you set one up?
Tax attorney Pruvost told The Local that the process for buying property with the intention of setting up an SCI is "not that different from the general procedure for buying property in France".
"The research process is the same, reaching out to and working alongside a real estate company (agence immobilier) is the same. You can still finance an SCI with a loan, and you still need to sign final paperwork alongside a notaire", Pruvost said.
"The key difference is the name that is signed on the contracts. With an SCI, you sign as the company on all contracts, not with your personal name".
As such, the SCI will need to be created prior to the step where the Compromis de Vente, which is drawn up by a notaire and functions as the preliminary contract, is signed.
You can learn more about the general steps for purchasing property in France, as well as the estimated timeline for the process HERE.
Gaschignard said that some might be tempted to use an online template for building contracts for their SCI.
"These are less adapted, so you should work with a professional who can offer you specialised help. Oftentimes, these standard online templates have a lot that need to be fixed".
When creating the company, statutes will need to be drafted to determine methods for decision-making (whether done unanimously or by majority), and you will need to appoint a gérant - the person who will manage day-to-day tasks.
You'll also need to decide on the company's headquarters (the registered office), publish a notice of the creation of your company in a legal newspaper and register the company in the Trade and Companies Register (RCS) at the clerk's office of the Commercial Court, according to the French ministry of economy.
READ MORE: EXPLAINED: Time-frame for buying and selling property in France
What are the benefits of setting up an SCI?
For Maître Gaschignard, the main benefit is for people with a complicated family structure who want to secure the inheritance of the property.
The other, less tangible, benefit to setting up an SCI would be setting up a clear management system for your property, which can be helpful for families. An SCI also means that debts and profits incurred on the property are divided amongst partners based on shares, so if work needs to be done on the property, that cost can be divided based on proportion of shares held.
There are potential tax benefits for setting up an SCI, but Gaschignard warned that French financial authorities have done more in recent years to stay on track of all property ownership and you can be certain that you will still owe taxes on your SCI property.
Nevertheless, some benefits are possible, but just how advantageous they are will depend on choosing the proper tax regime for your situation. In France, property can be taxed either sur société (corporate tax regime) or sur revenu (income-based tax regime).
One key difference is that on the impôts sur revenu regime, the SCI partners are subject to income taxes at the standard proportional rates, as well as social security deductions.
"This is something that has changed for British people with SCI properties in France. As a result of Brexit, British people with property in France now have to pay French social security contributions at the full rate (17.2 percent) like other non-EU nationals".
When deciding on which tax regime to choose, you will need to consider your reasons for purchasing an SCI property.
"For foreigners who spend half the year in their second home and occasionally rent it out for the other parts of the year, they likely are earning enough to help with bills, but they are not engaging in commercial activity. In this scenario, it is probably best not to stick with impôt sur revenu", Gaschignard explained.
"Most of the time, I would recommend impôt sur société for very high earners who plan to keep the house for a long time. This would also work for those who rent out their home all year-long and earn a profit from the rental".
The notaire also explained that when selling an SCI, there can be different fees depending on the tax regime you choose.
Tax attorney Pruvost summarised his rule of thumb when advising clients regarding SCI tax regimes: "If you have a monthly income lower than €10,000 per month, then it tends to be best to stay on the income-based tax regime. For those who earn more than that - or turn a profit renting out their property for long periods - then it might be more financially beneficial to use the corporate tax regime".
What are the drawbacks?
"There is a lot of paperwork", Gaschignard warned, adding that foreigners unfamiliar with the French language or legal apparatus would likely find the process to be complicated.
In order to make the best choice, both Gaschignard and Pruvost recommend seeking legal counsel - which can be expensive - before opting to set up an SCI and prior to deciding on the taxation regime.
"Whenever I offer services to UK nationals, I work alongside senior tax associate and lawyer Marie Bich, who is based in London", Gaschignard explained, adding that building a team with a representative familiar with UK law can be beneficial for Brits.
As for Pruvost, he warned that "oftentimes people will set up an SCI under the wrong taxation regime for their financial situation. For some people, it can be a tool to owe less in taxes on your French property, but you need to be very careful when setting one up. It is easy to make serious mistakes".
What should you do if you have an SCI property and you want to convert it back?
SCIs have become less popular as time has gone on and several tax loopholes have been closed.
For foreigners who own second-homes in France, the 2015 EU ruling on inheritance means that for many people their rationale for having an SCI - bypassing French inheritance laws - no longer applies.
It is possible to dissolve an SCI and get the property back under your own name. However, it might be more costly to dissolve the SCI rather than to maintain it.
READ MORE: What should I do if I want to dissolve my French property SCI?
The dissolution of a Société Civile Immobilière must be decided on via a general meeting with shareholders, where partners would vote whether or not to dissolve the company.
You should be aware that if the SCI has appreciated in value significantly, then you will likely be taxed on liquidation. While it would be possible to recover your assets, depending on the situation, you could lose out on funds in the process.
According to Pruvost, the best option for those looking to dissolve would be to meet with legal counsel and find out approximately how much you stand to gain or lose in the dissolution process.
How should people with SCI properties fill out the new property declaration form?
A further problem with SCIs has recently become apparent, as France has introduced a new requirement for all property owners in France to fill in a property tax declaration - find full details here.
This obligation concerns all owners, but many SCI property owners have found themselves perplexed to not see their property show up after logging onto their personal space on the impots.gouv.fr website.
READ MORE: EXPLAINED: The new French property declaration form for SCI owners
This is because, according to French tax authorities, owners of SCI properties should carry out the procedure on their "professional" space, rather than their personal space.
Anyone who runs a business in France will already have a 'professional' tax account, but SCI property owners will need to set one up in order to make the legally-required declaration.
You can set one up by going to the website impots.gouv.fr and clicking "Votre espace professionel".
Next, you will click "Créer mon espace professionel". Fill out the required information, keep in mind you will need access to the SCI's SIREN number and the company's official email address.
The tax office for your département will send you an activation code by post as soon as your space creation request has been validated. You will then have 30 days to activate your space and fill in your bank details. Once this is finished, you ought to be able to access the online service immediately.
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An SCI - société civile immobilière - is a non-trading real estate company made up of at least two people. Essentially, it allows people to own property such as a second home through shares of a company, rather than under their own name.
There are more than one million properties in France that are registered as SCI's.
The Local spoke with experts on the French property law and taxation to understand whether SCI properties are useful for foreign property-owners in France, and the pitfalls they need to be aware of.
Who might benefit from an SCI?
Most people set up SCIs for one of two reasons; tax and inheritance.
Setting up an SCI for property ownership in France can be an advantageous way to share and pass down property between people, namely families with unique situations and non-married couples.
It can also offer certain tax benefits, depending on your situation.
However, creating an SCI can also involve several complex administrative procedures and may not be advantageous for everyone, so it is strongly recommended to consult a lawyer who has expertise in French inheritance and tax laws before setting one up.
Paris-based notaire, Laure Gaschignard, told The Local that the main profile that would benefit from an SCI would be couples who live together but are not married or pacsé (in a civil partnership).
"Especially for foreigners who are not looking to be married or PACS'ed (les concubins in French), an SCI can allow you to set up an inheritance structure for your property purchased together", explained the notaire.
READ MORE: EXPLAINED: How France’s inheritance tax system works
Setting up an SCI can allow partners to structure the inheritance process for their property so that the other person is able to remain either a full or partial owner. The key benefit to an SCI is that it sets up a very specific delineation of who owns what, which can make succession processes more clear.
Gaschignard went on explain that even though an SCI can allow several people to buy and manage a property together, it is most useful for those who have unique family situations and are in need of a more flexible way to structure their property ownership and inheritance.
She warned that in previous decades, many French families set up SCIs because they were popular at the time.
"That generation often ran into problems because they did not realise that an SCI involves many administrative tasks. These tended to fall to the wayside, especially if interpersonal problems arose or there was a death of one of the partners of the SCI.
"An SCI is a large commitment. It means you will agree to run a company, and that involves paperwork and meetings".
Inheritance laws
She explained that in years past, many foreigners opted for SCI properties because they seemingly offered a way to bypass strict French inheritance laws (that do not, for example, allow parents to disinherit their children).
However, in 2015, the European Union passed regulation that allows people to opt for the law of the country of their nationality to apply to their estate. This law applies to non-EU nationals (so still applies to Brits, despite Brexit).
As a result, it is no longer necessary to set up an SCI to structure the inheritance process for your property according to your personal situation - you can simply opt for your will to be dealt with under the laws of your home country - read more HERE.
"These days, I mostly recommend SCI properties for people who have a serious interest in running an SCI and want to use it for structuring a family property", Gaschignard explained.
The Local also spoke with tax attorney, Maître Edouard Pruvost, who works with both French nationals and English-speaking foreigners, explained that he often sees people opt to own property in France via SCI because of potential to optimise tax benefits, namely those seeking to earn money from renting out their property.
Nevertheless, notaire Laure Gaschignard cautioned that these benefits are very situational.
"For foreigners who only want to rent out their second-home for a couple of months when they are out of town, you may not need to set up an SCI, but for those who rent their property out for the full year and turn a profit, it might be more advantageous".
How do you set one up?
Tax attorney Pruvost told The Local that the process for buying property with the intention of setting up an SCI is "not that different from the general procedure for buying property in France".
"The research process is the same, reaching out to and working alongside a real estate company (agence immobilier) is the same. You can still finance an SCI with a loan, and you still need to sign final paperwork alongside a notaire", Pruvost said.
"The key difference is the name that is signed on the contracts. With an SCI, you sign as the company on all contracts, not with your personal name".
As such, the SCI will need to be created prior to the step where the Compromis de Vente, which is drawn up by a notaire and functions as the preliminary contract, is signed.
You can learn more about the general steps for purchasing property in France, as well as the estimated timeline for the process HERE.
Gaschignard said that some might be tempted to use an online template for building contracts for their SCI.
"These are less adapted, so you should work with a professional who can offer you specialised help. Oftentimes, these standard online templates have a lot that need to be fixed".
When creating the company, statutes will need to be drafted to determine methods for decision-making (whether done unanimously or by majority), and you will need to appoint a gérant - the person who will manage day-to-day tasks.
You'll also need to decide on the company's headquarters (the registered office), publish a notice of the creation of your company in a legal newspaper and register the company in the Trade and Companies Register (RCS) at the clerk's office of the Commercial Court, according to the French ministry of economy.
READ MORE: EXPLAINED: Time-frame for buying and selling property in France
What are the benefits of setting up an SCI?
For Maître Gaschignard, the main benefit is for people with a complicated family structure who want to secure the inheritance of the property.
The other, less tangible, benefit to setting up an SCI would be setting up a clear management system for your property, which can be helpful for families. An SCI also means that debts and profits incurred on the property are divided amongst partners based on shares, so if work needs to be done on the property, that cost can be divided based on proportion of shares held.
There are potential tax benefits for setting up an SCI, but Gaschignard warned that French financial authorities have done more in recent years to stay on track of all property ownership and you can be certain that you will still owe taxes on your SCI property.
Nevertheless, some benefits are possible, but just how advantageous they are will depend on choosing the proper tax regime for your situation. In France, property can be taxed either sur société (corporate tax regime) or sur revenu (income-based tax regime).
One key difference is that on the impôts sur revenu regime, the SCI partners are subject to income taxes at the standard proportional rates, as well as social security deductions.
"This is something that has changed for British people with SCI properties in France. As a result of Brexit, British people with property in France now have to pay French social security contributions at the full rate (17.2 percent) like other non-EU nationals".
When deciding on which tax regime to choose, you will need to consider your reasons for purchasing an SCI property.
"For foreigners who spend half the year in their second home and occasionally rent it out for the other parts of the year, they likely are earning enough to help with bills, but they are not engaging in commercial activity. In this scenario, it is probably best not to stick with impôt sur revenu", Gaschignard explained.
"Most of the time, I would recommend impôt sur société for very high earners who plan to keep the house for a long time. This would also work for those who rent out their home all year-long and earn a profit from the rental".
The notaire also explained that when selling an SCI, there can be different fees depending on the tax regime you choose.
Tax attorney Pruvost summarised his rule of thumb when advising clients regarding SCI tax regimes: "If you have a monthly income lower than €10,000 per month, then it tends to be best to stay on the income-based tax regime. For those who earn more than that - or turn a profit renting out their property for long periods - then it might be more financially beneficial to use the corporate tax regime".
What are the drawbacks?
"There is a lot of paperwork", Gaschignard warned, adding that foreigners unfamiliar with the French language or legal apparatus would likely find the process to be complicated.
In order to make the best choice, both Gaschignard and Pruvost recommend seeking legal counsel - which can be expensive - before opting to set up an SCI and prior to deciding on the taxation regime.
"Whenever I offer services to UK nationals, I work alongside senior tax associate and lawyer Marie Bich, who is based in London", Gaschignard explained, adding that building a team with a representative familiar with UK law can be beneficial for Brits.
As for Pruvost, he warned that "oftentimes people will set up an SCI under the wrong taxation regime for their financial situation. For some people, it can be a tool to owe less in taxes on your French property, but you need to be very careful when setting one up. It is easy to make serious mistakes".
What should you do if you have an SCI property and you want to convert it back?
SCIs have become less popular as time has gone on and several tax loopholes have been closed.
For foreigners who own second-homes in France, the 2015 EU ruling on inheritance means that for many people their rationale for having an SCI - bypassing French inheritance laws - no longer applies.
It is possible to dissolve an SCI and get the property back under your own name. However, it might be more costly to dissolve the SCI rather than to maintain it.
READ MORE: What should I do if I want to dissolve my French property SCI?
The dissolution of a Société Civile Immobilière must be decided on via a general meeting with shareholders, where partners would vote whether or not to dissolve the company.
You should be aware that if the SCI has appreciated in value significantly, then you will likely be taxed on liquidation. While it would be possible to recover your assets, depending on the situation, you could lose out on funds in the process.
According to Pruvost, the best option for those looking to dissolve would be to meet with legal counsel and find out approximately how much you stand to gain or lose in the dissolution process.
How should people with SCI properties fill out the new property declaration form?
A further problem with SCIs has recently become apparent, as France has introduced a new requirement for all property owners in France to fill in a property tax declaration - find full details here.
This obligation concerns all owners, but many SCI property owners have found themselves perplexed to not see their property show up after logging onto their personal space on the impots.gouv.fr website.
READ MORE: EXPLAINED: The new French property declaration form for SCI owners
This is because, according to French tax authorities, owners of SCI properties should carry out the procedure on their "professional" space, rather than their personal space.
Anyone who runs a business in France will already have a 'professional' tax account, but SCI property owners will need to set one up in order to make the legally-required declaration.
You can set one up by going to the website impots.gouv.fr and clicking "Votre espace professionel".
Next, you will click "Créer mon espace professionel". Fill out the required information, keep in mind you will need access to the SCI's SIREN number and the company's official email address.
The tax office for your département will send you an activation code by post as soon as your space creation request has been validated. You will then have 30 days to activate your space and fill in your bank details. Once this is finished, you ought to be able to access the online service immediately.
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