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Money Matters and Legal / Your Money

Setting up a Société Civile Immobilière (French civil property company): how does it work and what are the pros and cons?

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The French Société Civile Immobilière (SCI) is a popular vehicle for purchasing real estate in France. We asked Kathryn Brown of Paris Property Group about it, to get an overview of this structure and some of the pros and cons associated with it.

What is an SCI and when is it a suitable vehicle for buying and managing French property?

An SCI is a property company set up to own, manage and lease real estate. SCIs are considered civil in nature with a primary purpose is related to real estate; ordinarily, they do not have a commercial or trading purpose and are not subject to corporate taxes. If the SCI rents out its property furnished, it loses its civil status and is then considered a commercial structure, subject to the more onerous filings and tax requirements required of all French companies.

The SCI must have at least two shareholders (there is no maximum number), who can be residents or non-residents of France, individuals or companies. The shareholders’ liability is limited and is assigned according to their proportional stake in the SCI. The SCI is managed by one or more managers. They do not have to be shareholders but must be individuals, not companies.

The most common reason to set up an SCI is when several purchasers are buying real estate together. The other option, joint ownership, is more difficult to manage under French law. This is especially so if one or more purchasers are assisted parties, such as minor children or adults under legal supervision. Therefore, many families buy properties through an SCI.

An SCI can be set up relatively quickly and at a moderate cost. It can even be created after signature of the promesse de vente – the preliminary purchase contract – and prior to the title deed, provided that the promesse contains a clause allowing for another name to substitute for the named buyer. The SCI then becomes the vehicle purchasing the property. The individuals own the property indirectly through their shareholding in the SCI.

What are the advantages of buying using the SCI structure?

The principal benefit of an SCI, as set out above, is that it offers an alternative to joint ownership where several purchasers are buying a property.

A joint ownership property is currently subject to French inheritance law, whether the owners are residents of France or not; whereas, if a non-resident SCI shareholder dies, the probate laws of his/her country of residence apply. This is because the estate contains securities rather than fixed assets. The latter are governed by the laws of the country where the property is located.

An SCI therefore avoids the application of the French inheritance laws, including the obligatory division of a percentage of the inheritance among any children. It also avoids the involvement of a French notaire (official who handles property transactions) in the estate.

In addition, it is easier to transfer the ownership of real estate later on by selling the shares of the SCI rather than the property itself. The transaction does not require the intervention of a French notaire and, for the buyer, saves costs on stamp duty.

The transfer of shares to a third party requires the non-transferring shareholders, if any, to give prior consent. They may veto a purchaser as a shareholder. Share purchase agreements therefore usually contain a condition stipulating prior approval for the sale of shares. This prior consent can be set up to exclude related parties such as spouses, partners or children of shareholders. Ownership of the SCI’s shares can therefore be restricted according to the original shareholders’ wishes.

With respect to taxes, the SCI is a flow-through entity and is not subject to corporate income tax. As such, any tax loss incurred or profit made on the property is passed on to its shareholders in accordance with their respective stakes in the SCI, and the shareholders declare those amounts on their individual tax returns. Note that this tax flow-through is automatic and it is not possible to opt out of it.

The SCI, as an entity, is authorized to deduct most operating expenses it incurs in maintaining the property, which lowers its net profits.

What are the disadvantages of buying a property using an SCI as a vehicle?

When an SCI signs the purchase contract for a property, it does not benefit from the seven-day cooling-off period enjoyed by individual purchasers. Nor do SCIs have the right to the statutory diagnostics (surveys) that are required when the property is sold to individuals. It is possible to avoid these drawbacks, as stated above, by signing the promesse de vente in the names of the individual purchasers and including a clause allowing the SCI to substitute as the purchaser at the signing of the deed of sale.

Mortgages for SCIs are typically more costly and subject to harsher provisions.

The management of an SCI has an obligation to hold annual general meetings. It must approve its annual accounts, although it is not required to file and publish them as other French companies must do.

The identities of the SCI’s underlying individual owners must be disclosed to the French tax authorities; otherwise the SCI will be subject to an annual tax of 3% of the market value of the real estate it holds. If the shareholders decide to sell the SCI later on, the market for SCIs is smaller than that for real estate sold directly. Of course, the owners can sell the underlying property instead, and then dissolve the SCI.

What are the pros and cons of buying an existing SCI?

The main advantage of buying an existing SCI instead of setting one up at the time of purchasing a property is that the purchase does not require the intervention of a notaire as it does in an ordinary sale. The transfer process is quicker and less expensive, as it is considered a transfer of shares, not a purchase of real property.

The major downside is that the purchaser is not only purchasing the property that is held by the SCI but also all of its liabilities, whether latent or not. This requires a thorough due diligence by the buyer and protection via representations and warranties from the sellers on the assets and liabilities. This is particularly important since the SCI is not a limited liability company. A purchaser will therefore be liable to third parties for all accrued liabilities.

Taking a decision about whether to set up or buy an SCI

The optimum buying strategy will depend on factors unique to each buyer, including family situation, tax situation and intentions about future residency. Where there are children from a previous marriage and no intention to become a French resident, an SCI may be the right vehicle. Before going down this route, it is always advisable to seek professional advice.

3% annual tax rule

Any entity – French or foreign, SCIs included – that owns property in France is subject to an annual tax of 3% of the market value of the property. The objective of the law is to ensure that French taxpayers do not evade inheritance and gift taxes by owning their property through intermediary entities domiciled in foreign countries.

If the stakeholders in an SCI are individuals (as opposed to foreign companies), the 3% tax doesn’t apply. Otherwise, to avoid the 3% tax, the company must disclose the identity of the individual members/stakeholders in the entity. Certain entities are exempt by their nature, such as NGOs, pension funds and the like.

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