Things to know about the taxation of SCIs
- Accounting expertise
The crisis of Covid 19 has only accentuated the appetite of the French for investment in stone. Beyond the investment in LMNP or the classic PINEL investment, this investment can be made in what is called “paper stone”. The stone-paper allows to invest in the real estate through a fund or shares of company. There are different types, SCPI, OPCI, SIIC but the most common and known by all, remains the SCI (Société Civile Immobilière). This type of investment has a number of advantages, particularly in terms of asset management. However, if the SCI is indeed a simple solution to invest in real estate, it also has some constraints, especially in terms of taxation.
Purchase and management of a property in SCI
To begin with, it is important to understand that it is the company that owns the property and not the partners, who only own the shares in the company.
This makes it possible to separate the private assets from the company’s assets, and can have many advantages, particularly in terms of :
- personal taxation
- management of private assets
- the transmission of heritage
However, beware, the “sale to oneself”, or the acquisition by an SCI of which one is a shareholder of a private property, can in certain cases be considered as an abuse of right, in particular if the operation is made with the aim of escaping creditors or of reducing one’s taxation
Acquisition of a property via an SCI
After creating an SCI and defining its statutes, the purchase of a property by this same SCI proceeds in the same way as for any real estate transaction:
- This must be done with a notary
- Financing may come from equity or from loans taken out with a banking institution, in the name of the company
It is worth remembering that the SCI, as a company, does not have the same borrowing facilities as private individuals (zero interest loans, PEL, etc.). In addition, the bank often requires additional guarantees from the partners, even though legally, the partners of an SCI are indefinitely responsible for the liabilities not paid by the company.
Dismemberment of ownership of SCI shares
The dismemberment of ownership of the shares of an SCI implies the division between :
- The usufruct, or the use of the property, whether to live in it or to receive rental income from it
- Bare ownership, which is the right of ownership of the property without being able to enjoy it.
A common example is a gift within a family. The parents set up an SCI in which they contribute their property, of which they retain the usufruct (they live there), but give the bare ownership to the children. At the death of the usufructuary, the children enjoy full ownership of the property without inheritance tax.
This dismemberment implies rights, but also different duties for each person. A tax analysis or an analysis by an estate expert (notary, tax specialist, accountant, etc.) can be useful in preparing your estate.
SCI and taxation
An SCI offers two taxation methods: income tax (basic system) or corporation tax (available on option).
SCI with corporate income tax
Often presented as the best option, a SCI à l’IS does have some important advantages:
- Tax depreciation of the property reducing the taxable income
- Deduction of expenses (work, but also notary fees and registration fees)
- Management of the taxable income of the partners, deciding on the amount of dividends distributed
- Taxed by the partners on the basis of the income they actually receive (dividends at the 30% tax rate)
But, before choosing the SCI with IS, it is important to take into account its disadvantages:
- Higher real estate capital gain due to the deduction of depreciation, generating a high taxation of the capital gain on the sale of the property
- Deficits not deductible from partners’ income
- Higher accounting costs, as the SCI is subject to commercial accounting
- CRL on rental income of 2.5% (Cf. § CRL)
SCI for income tax purposes
The SCI in IR is on the other hand similar to the holding of a property directly in terms of taxation, being subject to the rules of land income:
- Each partner is taxed personally, which benefits low-income earners, according to the tax schedule.
- Any losses incurred by the SCI can be deducted from the net tax income of the SCI’s partners, up to a limit of 10,700 euros per year.
- Capital gains on real estate are subject to %.income tax and 17.2% social security contributions %. A progressive deduction applies after the 6th year of ownership of the property (and not of the shares of the SCI), leading to a total exemption after 22 years for the IR and 30 years for the social levies.
Nevertheless, the SCI with the IR also has disadvantages to be well anticipated and in particular:
- Non-deduction of depreciation, which generally leads to a taxable property result much higher than that calculated in a non-trading property company subject to corporation tax;
- Natures of the deductible expenses more restricted than in a SCI with the IS;
- The income taxed at the partners’ may be totally unrelated to the income actually received by the partners. This is particularly the case when there is a loan to be repaid and the income only covers the monthly loan payments and the expenses. This point must be anticipated, as the impact in terms of cash flow and taxation is not neutral and can cause real difficulties if not correctly anticipated;
- It is not possible to rent out a property as furnished accommodation, if this income exceeds 10% of the SCI’s total income, the latter must then opt for the IS. Please note that the option to pay the corporation tax is revocable for 5 years, after which time it becomes definitive.
SCI subject to IR or IS
In the end, it appears that there is no “best option” and that it is necessary to study each particular case to decide whether it is more interesting to create a SCI with IR or a SCI with IS. In general:
- The SCI à l’IS is more interesting for people with a high income, and if the objective is not to resell the property in the short to medium term by generating a capital gain;
- The SCI à l’IR is advantageous for people with low taxable income (0 or 11% bracket) as well as for those who wish to make capital gains on real estate.
Taxation: Contribution tax on rental income in SCI
The contribution on rental income, or CRL, applies to income not already subject to VAT from the rental of buildings completed more than 15 years ago, owned by a legal entity subject to corporate income tax or a non-profit association.
In the case of an SCI that has not opted for the corporate income tax, it is sufficient for a partner to pay corporate income tax for the SCI to be liable for the CRL.
The amount of the tax on rental income is 2.5% of the net income over the tax period (accounting year). This therefore concerns the rents actually received, but also all possible premiums and subsidies.
However, there are some cases of exemption from this LRC, including
- Low rents (less than 1830 € over the tax period) per premises ;
- Rent subject to VAT;
- Rental of dwellings on a farm ;
- Rental of real estate in a holiday village ;
- When the building has undergone major renovation/conversion work likely to be considered as a new construction within the last 15 years;
VAT liability of non-trading companies
An SCI may be liable for 20% VAT depending on the property rented (furnished or not) and its use (residential, agricultural or professional)
SCI for residential use
The SCI is never subject to VAT, unless the furnished rental is accompanied by 3 additional services (cleaning, reception of customers, breakfast…). It should also be noted that short-term furnished rental is only possible through an SCI subject to corporation tax.
SCI for agricultural use
The SCI is exempt from VAT, but can choose this option if the lessor is himself subject to VAT
SCI for professional use
The SCI renting out equipped or fitted out goods for professional use is subject to VAT. It is exempt from VAT in the case of bare rental, but can opt for a VAT liability
Conclusion on the taxation of SCI
The taxation of SCIs is a vast field in which the uninitiated can easily get lost. It is therefore recommended to get information from qualified professionals who are able to understand each situation and propose appropriate solutions. It is therefore essential to prepare your investment well so that it is consistent with your personal objectives.
