Investing in Real Estate: The advantages of buying through a company
When purchasing real estate in France, you have the option to purchase property either in your own name or in the name of a Civil Real Estate Company. [The french translation “la société civile immobilière,” thus, the acronym SCI.]
An SCI serves as a real estate management tool and, like any other company, is subject to registrations and statute formalities.
Its purpose is the administration of real estate and it is used in many tax and legal arrangements to benefit from numerous tax, property and succession advantages.
So, what exactly are civil real estate companies? What is their purpose? What taxes are applied to them? What are the next steps to create one?
A civil real estate company (SCI) is a legal entity that serves to administer real estate. It allows several people to own a property and manage it together. It can either be used for the purchase, management, and rental of real estate, or the construction of a property with the goal of rental.
The creation of an SCI can be considered when there are at minimum two people who own the same property. Once the SCI is created, these two or more owners will become partners, each holding a share of the company proportional to the share capital they have contributed.
From this point onwards, an SCI can be utilized to make real estate purchases. In this case, the SCI as a whole would then be responsible for all further steps, such as taking out loans, as it becomes a company. Any acquisitions of property can also be made for division, or even construction, resulting in an SCI of attribution.
There are three possible types of SCIs, differing depending on the goal in mind ;
– The Professional SCI: To acquire the property of your business or the headquarters of your company.
– The Family SCI : To organize the acquisition or management of real estate assets amongst family members.
It is important to note that under this legal status, it’s illegal to exercise commercial activity and purchase with the intent of resale regularly. This is where members of an SCI differ from realtors.
What is the purpose of an SCI?
In certain cases, an SCI can facilitate the transfer of real estate.
For example, in the unfortunate case of a death, several people can find themselves owners of the same property. In cases like these, those who are in joint ownership must reach an agreement on any decisions to be made about the property. An SCI would minimize any obstacles related to decision-making concerning the company.
Additionally, SCI makes it possible for a partner to sell their shares of the SCI and recover their share in money, without leading to the sale of the entire property.
An SCI may also allow for the transfer of property under advantageous tax conditions. For example, if the donation of shares of an SCI results in the payment of gift tax, the debts of the SCI will be taken into account. Thus, the gift taxes will be lower than if the debts were not considered. Keep in mind that it is even possible to split SCI shares.
In addition, every 15 years, these share donations benefit from tax deductions. Due to this regulation, it is possible to transfer real estate while paying extremely low gift tax, if any at all, by donating shares every 15 years.
As a foreigner, an SCI provides an easygateway to accessing and financing French real estate. As a foreigner in France, it is often complicated to purchase property under your own name. With an SCI, you can avoid the many potential obstacles and access the real estate market through a french company domiciled for tax purposes. (See the article about the opportunities to seize in France).
The income of every SCI is taxed according to the tax system originally chosen by the partners at the time of creation (It is subsequently possible to change the tax regime, but would require further procedures and costs).
There are two main types of tax systems in France, the corporate tax [the french translation, “impôt sur les sociétés,” thus, the acronym: IS] and the income tax [or, “impôt sur les revenus,”IR].
An SCI subject to corporate tax (IS) can deduct the depreciation of the property as well as the acquisition costs, including notary fees or any agency fees, from its revenue. Thus, for equivalent income, an SCI with IS will show a lower net taxable income than an SCI with IR.
Furthermore, the partners do not have to pay income tax (IR) on these profits until the year in which they are transferred to each other. They are therefore exempt for the time they are accumulated in their associate’s current account. However, it should be kept in mind that an SCI with income tax (IR) has the advantage of benefiting from the tax regime for capital gains on real estate which applies to the holding of real estate directly.
In the event of resale within the framework of an IS, the company will have to pay the tax on the capital gain taking into account the depreciation of the property. In this case, the taxation is quite heavy, while the capital gain of the IR would benefit from an almost total exemption from taxes.
In short, when an SCI is subject to income tax (IR), it works similarly to taxation on your individual income, while when an SCI is subject to corporate tax (IS), it is the company that is taxed altogether.
What are the next steps?
The first requirement of an SCI is to be comprised of at least two partners, either a physical person or legal entity. No particular link between partners of an SCI is mandatory – it is possible to create an SCI between friends, siblings, cohabitants, or even as a couple – with or without children.
The law does not set any maximum number of partners, nor any condition of nationality,
diploma or age limit to be a manager – even minor children can become partners.
A manager, or managers, are then chosen, regardless of employee status. If they are chosen from amongst the partners, they become an associate manager. If chosen from amongst non-associate persons, the managers are then called non-associate managers.
It is important to note the limitations regarding the management of an SCI. For example, people who exercise certain professions such as lawyers, legal advisers, notaries, accountants, etc. are prohibited from being managers of an SCI. However, there are exceptions to these cases that allow people under these professions to manage an SCI – exclusively for rental purposes – if it regards the management of a family or professional assets.
As for the procedures, you will need to:
–Drafting the company’s articles of association, the most important formality. It is a text that describes the functioning of the company.
–Deposit the share capital. This amount has no minimum. It is suggested to open a professional bank account as it allows you to separate the activity of the SCI from your personal finances. It also serves as a financial guarantee for the partners of the company, making it easier to settle potential debts in the event of financial difficulties.
– Publish a legal announcement. The purpose of this document is to inform third parties of the birth of your company.
–Put together a registration file. It is necessary to submit this form to the Center for Administrative Procedures (“Infogreffe” or the “Greffe du Tribunal de Commerce”) to obtain your K-BIS, which is the document attesting to the legal existence of the SCI. You will also receive your Siren number, which is the identification number of the enterprise.
These are all of the necessary steps to take to create an SCI. The MR Agency Real Estate accompanies you throughout any real estate purchase process with our network of professionals available to help you every step of the way. Please, do not hesitate to contact us for information about our Feasibility Pack in France.
Creating an SCI generates certain fees, in particular, those related to the drafting of the statutes and other administrative procedures.
In addition, its formal function entails numerous administrative obligations which can prove to be a little time-consuming, such as the publication of an annual report.
These remain significant points to consider before entering the world of real estate through an SCI.