French Riviera Lawyers

Investments in real or personal property through an SCI type company, a non trading partnership, has always been a very attractive option in France since it is conducive to a more effective management of the company’s assets and in certain cases can take advantage of a more favorable tax regime.

However, recent developments in case law as well as the Finance Act of 1999 has brought into question both the legal and tax advantages of investing through an SCI.

Before looking in more detail at these uncertainties, let us examine briefly the various circumstances in which the incorporation of an SCI can be advantageous.

 The incorporation of an SCI may be used as a means of holding private or professional real estate assets, shares, joint assets, a life interest, or as a means of transferring real estate assets or of avoiding French inheritance tax on real estate when the deceased resided outside France.

It is of crucial importance to take family as well as professional factors into consideration when incorporating an SCI, so as to adapt the company to these requisites and to avoid legal sanctions for infringements, when tax evasion is the real aim of the SCI, albeit not admitted.

Nevertheless, the creation of an SCI is often a way of reducing the burden of taxation by methods and legal techniques best illustrated by several examples.

The SCI allows a reduction of the base tax level by numerous methods, e.g. by breaking up real estate property and thus transferring more easily the company shares, and at a lower cost (4.8%) than by transfer with or without consideration of directly held real estate.
Moreover, by breaking up the property, the SCI will allow parents to keep the life interest in the property while transferring bare ownership to the company, whose shareholding partners will be their children.
Furthermore, by holding shares instead of holding the real property, the partners will be able to transfer the shares more easily and distribution on succession will be simplified. In fact, in the case of a large and unwieldy estate, the SCI will facilitate a very simple distribution between the beneficiaries as well as assuring management with little joint-stock.

As far as the taxation is concerned, the SCI is not usually subject to corporation tax, but may elect to be subject to it. This choice, which is definitive, will bring about a certain number of tax advantages :

First of all, the burden of taxation will be lighter since corporation tax amounts to 33% whereas income may be as high as 65%. The SCI, which will be the real owner of the assets, will also be taxed at a lower level and will provide suitable management of the rented property and of the shares.
In fact, when rented property is held directly, the rents will have the benefit of a tax break of only 14% and will be subject to corporation tax. Whereas the SCI will be able to gradually write-off the property by reducing by 2 to 4% the cost of acquisition each year.

Furthermore, the distribution of profits is not mandatory with an SCI, thus avoiding immediate taxation.

Amongst other advantages, this option allows an amortization allowance of the benefits subject to the corporate income tax. This possibility is often an essential criteria when opting for the SCI company structure.

Moreover, with regard to the basis for imposition, the transfer of shares will concern net assets and will thus generally be inferior to the value of the shares since the running accounts of the shareholders, loans and other liabilities may be deducted. Without the SCI (directly held), the basis for imposition is the gross market value of the property as the liabilities are not deductible.

The SCI may also have advantages in the management of stocks and shares. Indeed, the SCI is often recommended when the shares are sold in order to facilitate their administration between the life tenants and the residuary interests.

However, a decision by the supreme court in France (Cour de Cassation) delivered on 12th November1998, has to an extent brought into question the advantages offered by the SCI.
The court went against its own previous case law by considering the holder of stocks an absolute owner, the court allowed the life tenant to manage his shares by transferring them, insofar as they were replaced assets of the same nature.
Therefore, the holding of stocks and shares no longer causes management problems where no agreement has been reached between the heirs.
The life tenant may act alone in selling, with the potential gains being attributed to the residuary owners.
In turn, the residuary owners have the right to be informed of the life tenant’s activities in order to make sure that he does not undermine the substance and the value of the stocks and shares.

The incorporation of an SCI in order to facilitate the management and the administration of stocks and shares distributed after a death is no longer advantageous unless when the company is set up before the death. In such a case, it is an effective means of managing personal properties and will also facilitate a better organization of the tranfer and the future management of the personal estate.

Another development concerning professionals should be mentioned.

Until recently, the renting of real estate property held privately and thus not registered in the assets of the balance-sheet did not allow for expenses to be attributed to the property.

However, the situation has changed since the Conseil d’Etat’s decision delivered on 7th July 1998 reasserted the fiscal principle that private and professional assets should be regarded as autonomous.
From that point on, the amounts appropriated constitute an expense deductible from total income. The professionals will no longer have to pass by the intermediary of an SCI to deduct the rents and they will thus avoid the pitfalls of managing a company.

Further, the 1999 Finance Act has profoundly amended the registration tax system which applies to the transfer of property and to the similar operations.
For the acquisition of professional premises there has been a decrease from 15.40% to 3.60%, largely due to European tax harmonization.

Today, any transfer of professional premises will be taxed at a fixed rate of 3.60% (plus the additional tax), however the premises are held.

Concerning the investments of non-residents on the French territory, the SCI was very attractive, mainly for the transfer of real or personal property to the children.

But the new Finance Act of 1999, which changed imposition on transfers made without consideration being exchanged of shares in property located in France and held by non-residents, has removed any possibility of tax evasion in this area.

Indeed, with the new article 750 ter 2° of the "Code général des impôts" it is now possible to take into account the shares directly or indirectly detained by non-residents in companies such as the SCI who own real estates in France.
As soon as the deceased detains - alone or jointly - more than 50% of the shares or rights, directly or through a "participation chain", the transfer that was free of charge will be taxed.

Thanks to the new concept of indirect possession, which is very wide and does not distinguish between real or personal property companies, the tax administration limits tax avoidance through a distribution of shares of an SCI within one family. It takes into consideration all the shares held by the near relations (wife, husband, descendants, ascendants, …). The only requirement is for the person to hold real estate property or a property right in France, whatever the value of the estate or the right in the total assets of the current structure provided that he holds 50% of the property rights over the property.
This notion also makes it possible to take into consideration the incorporation of companies and structures such as trusts, which are not well known in France.

With this new provision (750 ter), the tax administration no longer distinguishes between the various ways of holding real estate.

As far as corporation tax is concerned, the taxpayer will be taxed if he detains more than 50% of the company's shares (including his shares of his near relations). However, he will pay the tax only on the value of his own shares.

France has concluded tax treaties with many countries in order to avoid double taxation when assets located in France are held by aliens. These treaties are applicable here.

As for the taxation of the transparent real estate company shares (provision 1650 ter of the Code Général des impôts) provides that the members of these companies be treated as if they were owners. The treaty with the Netherlands is the only one to stipulate that these rights be assimilated to personality.

As for the taxation of the shares of non-transparent companies mainly dealing with real estate (SCI), the tax regime for real estate for 10 treaties is applicable (Germany, Austria, Canada, Cyprus, the USA, Hungary, Mauritius, Italy, Norway, Switzerland and Sweden).

As far as Switzerland is concerned, it is only applicable since the first of August, 1998, which is the date of the additional clause to the 1966 convention under which the real estate scheme was only applied to the shares of partnership (Managing or "construction vente" type of SCI).
Finally, for the Swiss residents, the rights in an entity, whose assets are mainly made of real estates, will now be subject to capital tax.

In the Franco-American treaty, only the companies with real estate assets are subject to taxation in France.

We recommend before incorporating a company to consult an expert specialising in international affairs, who will be able to advise you and inform you of the consequences of you final choice.

EUROLAW, June 1999

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