You are wondering whether you should set up an SCI (Société Civile Immobilière), but you would like to know the advantages and disadvantages in terms of taxation, rights, protection, rental investment, assets, etc. Indeed, an SCI is an interesting strategy but is not always the best choice. We take stock of SCIs, to invest and to have an enlightened eye on your assets.
What is an SCI?
A Société Civile Immobilière is a company set up with the aim of operating and holding real estate (you can only set up an SCI to buy and hold real estate), as opposed to commercial companies (SARL and SAS for example, which are also authorised to invest in real estate). People unite and are linked within the framework of an SCI: a minimum of two people are required for this association, whether natural or legal persons (with understanding, friendliness and a smile, of course).
The aim of an SCI is, therefore, to take advantage of the rents of the property you have bought! Thus, the SCI excludes any commercial activity. As a result, you cannot buy an apartment with the sole aim of reselling it, as this is a commercial activity.
The SCI: how does it work?
An SCI is made up of partners and is administered by a manager :
The partners appoint and dismiss the manager, they are required to participate in general meetings and receive shares in exchange for contributions in kind or in cash. They thus receive dividends in the event of profits made by the company. Conversely, in the case of debts, the distribution is made in proportion to the shares of the partners as well.
The SCI may be managed by one or more managers, real persons or legal entities. The manager is responsible for the day-to-day management of the SCI(collection of rents, payment of service charges, taxes, etc).
What are the costs to create and run an SCI?
The biggest disadvantage with an SCI is its registration. You must perform several formalities to register it, like:
– the drafting of the statutes,
– registration of statutes in the tax department,
– the publication of the constitution of the SCI in a Journal of Legal Announcements (JAL),
– the registration of SCI with the Registry of the Commercial Court,
– the declaration of the beneficial owners of the SCI.
These operations have a cost especially if you go through a lawyer/notaire to write the statutes (this is recommended as each investor is different). As for legal registration, it costs about 200 €.
There are two types of SCIs:
The SCI taxed as personal income tax:
This is fiscally “transparent”. You hold shares in a company which itself owns assets, but for tax purposes, it is as if you owned the shares yourself. Rents or resale will be taxed as if it were your own. The taxation of rental income at French Revenue (income tax) for the partners of an SCI is the default regime for non-furnished lets (for furnished lets, you are automatically taxed following the personal income tax). In an SCI with income tax, the partners of the company are taxed personally, in the same way as individuals who are direct owners of a property.
The SCI taxed as corporation tax:
In the case of SCIs, taxation is said to be “opaque”, i.e. it is independent of the individual who holds the shares in the SCI. In a tax-exempt SCI, the partners tax the profits and capital gains directly on the SCI. The shareholders are taxed only on the dividends paid to them. Corporation tax operates with reduced taxes.
Two taxes are payable for this type of SCI:
– 15% on the bracket of net income (rents – charges less than €38,120)
– 28% on the portion of net income (rents – charges less than €500,000)
– 33% over this amount
2) Taxation of dividends distributed to partners:
– 30% if they have opted for flat tax (introduced in 2018). For information, the flat tax, also known as the “single flat-rate levy” (PFU), applies to capital income. Indeed, a single rate (30%) is applied to all capital income (dividends, capital gains).
– 17% social security contributions + your marginal tax bracket if you prefer to remain on the progressive scale.
However, it is not possible to compare only the tax rates between SCIs at corporation tax and SCIs at income tax, because if the rates are different, the tax base of these two schemes is also different.
Reducing the tax base by deducting expenses:
Thus, the option for corporation tax of the SCI also makes it possible to reduce the tax base. Certain charges, or even the accounting depreciation of the asset, are deductible and reduce the taxable profit of the SCI subject to corporation tax, whereas these same charges are not all deductible in the case of a non-trading company subject to income tax (IR).
In SCIs with personal income tax, deductible expenditures and costs are strictly defined by law.
It is therefore interesting to set up an SCI in the SI in the following cases:
The strategy of strong asset development, without wanting to pay personal tax right away (if you are for example in a large tax bracket).
A longer-term investment in a rent-geared-to-income logic and for transmission, as the exit of goods under a CIS to the SI is more complicated. Thus, give preference to personal assets if you wish to benefit from your assets in more or less 10 years, in order to benefit from the capital gain of private individuals on resale with an allowance.
If you don’t need to cash the rents right away, and you prefer a long-term investment.
Be careful, it is nevertheless necessary to qualify the advantage of the SCI for corporation tax compared to the SCI for income tax, because the option for the SCI for corporation tax when it comes to exploiting assets is interesting, but it is less favourable when it comes to selling the properties or recovering dividends.
The civil society for corporation tax is subject to taxation where the civil society for income tax is exempt:
The sale of an asset held by the civil society to the corporation tax leads to the taxation of a capital gain. It depends on the value of the property, but also on the amount of depreciation made since its acquisition. This capital gain representing the amount of depreciation is taxable at 15% up to €381,20 and 33.33% thereafter.
As indicated above, when the partner wishes to recover the money from the exploitation of the property or its sale, he will have to pay a tax on the dividends paid.
Capital gains :
For the SCI with personal income tax status:
In the case of capital gains on the sale of property, the partner is taxed according to the capital gains rules for private individuals, i.e. according to his share in the SCI. Capital gains on real estate are subject to income tax at a rate of 19% and to social security contributions at a rate of 17.2%. In the event of taxable capital gains in excess of 50,000 euros, an additional tax will be applied.
However, it should be noted that the capital gain on real estate is reduced by an allowance which is calculated according to the length of time the property has been held:
For income tax: it should be noted that a progressive allowance is applied from the 6th year of ownership. After 22 years of holding the property, the capital gain is completely exempt.
As far as social security contributions are concerned, a progressive deduction is applied from the 6th year of ownership. Beyond 30 years of ownership, the capital gain is totally exempt.
And for the SCI at the corporation tax:
For capital gains on the sale of real estate assets, here the rules for professional capital gains apply. The capital gain must therefore be added to the amount of the taxable profit at corporation tax. Taking into account the depreciation of the real estate, the capital gains can be high, so the taxation will also be high.
Finally, if a partner sells shares in a SCI at corporation tax, he will be taxed according to the rules for capital gains on securities (natural person partner) or professional capital gains (legal person partner). In the first case (individual shareholders), it should be noted that a capital gains deduction is possible if the securities have been held for at least two years:
50% allowance for securities held between 2 and 8 years,
65% discount for securities held for more than 8 years.
Capital gains taxes are relatively complex to calculate, to help you the simulator automatically determines them for you. To do this, you just need to fill in the year in which you wish to resell your property and at what price.
The main interest of an ICS, whatever its nature, lies in the transmission, which then becomes completely optimized. For example, if you have two assets but three children, you can define equal shares for each of them. Furthermore, given the high tax burden in the event of death (high inheritance tax in France), the SCI allows you to transfer by thresholds, for example in France it is possible to give a tax-free tranche of 100,000 euros every 15 years, per child and per parent, which is very interesting when you have a large estate. Enough to make all our children smile again and make them jump for joy.
This is therefore only possible within the framework of an ICS (if you have two houses of your own, for example, this will not be possible).
Limitations and disadvantages of ICS
Considered a professional buyer, you do not have a 10-day right of withdrawal in the case of a purchase via an SCI at the SI, unless you insert a constitution clause. The costs can also be significant (incorporation costs, need for balance sheets, calling in a chartered accountant, etc.). Indeed, the costs must always be calculated in relation to the income generated, and it is not always useful to have a status of SCI à l’IS for small assets (look closely at your return and net profitability). It will be more advantageous on larger transactions (300 or 400,000 euros). You can compare the profitability of this scheme with another one thanks to our simulator.
Finally, borrowing via an SCI can be complicated, especially if it is not a family SCI (a non-trading property company in which some members of the same family manage an estate, be it an apartment or a larger park). The financing part must, therefore, be taken into account.
To sum up, what are the advantages and disadvantages of a SCI?
We have prepared a few key points on the advantages and disadvantages of setting up a SCI.
Flexibility: different possible set-ups, possibilities of “opening up” to other options in the longer term (holding company for example). Low legal framework (partners organise themselves as they wish).
Financial aspect: mutualisation of charges, allowing to invest in real estate with also a distribution of risks (proportional to the amount of the contribution). Protection of the partners’ assets (partners’ liability indefinite, but proportional to the amount of their contribution).
Tax advantages: reduced taxation by the current government. Freedom of choice in the taxation of the profits of the SCI: income tax (IR) (property income category) for individual partners or corporate tax (IS). A wealth analysis allows you to choose between the two possible solutions according to your objectives in the longer or medium term.
Protection of children and the couple: easier transmission for children, but also within a couple, equal shares, less inheritance tax thanks to the system of instalments (possibility of giving every 15 years). Possibility of direct transmission to the surviving spouse in the event of death.
Notable limitations and disadvantages: compulsory formalities for the creation of the SCI. Obligations linked to Annual General Meetings. Accounting burdens under the SI. Complexity of borrowing and financing in certain situations. Disposal of assets in a SCI under SI is more complicated.
In conclusion, is it necessary to create an ICS?
The ICS can be interesting, but it is not always the best choice as we have indicated. Thus, one should always ask the question: why create an ICS? You can also start with a simple purchase in your own name, with a real LMNP status for example, which can sometimes be more advantageous than going through a SCI. Then, once your assets start to grow, you can switch to a SCI at SI or IR (there must be a real interest). A SCI will also allow you to consider other and numerous possible set-ups (holding, etc.) for a completely flexible future.