French Real Estate companies ("Sociétés Civiles Immobilières"): is it better to pay personal income tax or corporate tax?
Article up to date at 1st December 2021, drafted in accordance with French legislation in force, and applicable to individuals whose tax residence is in France.
A French real estate company (société civile immobilière – SCI) is a legal entity that owns and manages property. It is an effective means of holding, administering and transferring assets.
Its biggest advantages include:
Avoiding co-ownership ("indivision")(1), as the shareholders own shares in the SCI, which is the sole owner of the entire property;
Separating, or even protecting, real estate assets (such as business property);
Planning ahead for the transfer of property. SCIs offer great flexibility (gradual gifting of SCI shares with rights to full ownership(2) or bare ownership(3) if the giver wants to retain the income from the property). Furthermore, the tax base for transfer duties on shares in an SCI is based on the net value of said shares. Consequently, when an SCI has a liability such as a real estate loan, that liability must be subtracted from the value of the SCI’s shares.
Pay close attention to the procedures for establishing the SCI, ideally with assistance from your usual advisor (notary, lawyer, chartered accountant). The SCI's bylaws must be carefully drafted to set out its powers and establish specific provisions for contingencies such as the incapacity or death of one of its shareholders. In addition, you must decide which form of taxation is most appropriate: personal income tax or corporate tax.(4)
How do you know which one you should choose?
To analyse these issues, we must distinguish between two stages:
1) During ownership: the “income collection phase”
Under the personal income tax option, the asset is taxed the same way as a directly held asset. SCI partners declare net real estate income, prorated according to their share of ownership, that amounts to the rent collected, minus eligible expenses (primarily loan interest and the cost of maintenance and repair work). This income is taxed in accordance with the progressive income tax scale, up to a maximum of 45%, to which social charges of 17.2% are added. Households subject to the exceptional contribution on high income (contribution exceptionnelle sur les hauts revenus – CEHR) must pay an additional 3% or 4%. Consequently, they may be taxed as much as 66.2%. If the asset has been financed by debt, rent is often not enough to cover the cost of loan repayment and income tax. This means having to make a cash contribution, which in some cases is too high to make the personal income tax option worthwhile.
Under the corporate tax option, rent is not taxed as heavily. First, the tax base is smaller: in addition to eligible expenses, the SCI will be able to factor in depreciation, thereby reducing its tax base. Second, companies are taxed less than individuals (25% as of 2022). But keep in mind that any income generated belongs to the SCI: if the shareholder wants cash for personal reasons, the company must distribute dividends (if its accounting position allows), to which a 30% flat tax (prélèvement forfaitaire unique – PFU) and possibly the CEHR (3% or 4%) are applied. It's much better to capitalise income within the SCI.
At this stage, you could assume that paying corporate tax on an SCI is the better option. But let’s look further.
2) Upon selling the property: the “exit phase”
Under the personal income tax option, the SCI's owners must pay tax on real estate capital gains as individuals. The maximum charge for this tax is 36.2% (19% income tax + 17.2% for social charges). In addition to this, they may have to pay up to 6% additional tax on large capital gains and 4% for the CEHR. But being taxed as individuals also gives shareholders the right to tax reductions that increase based on the length of ownership. They are fully exempt from income tax if the property has been owned for at least 22 years, and from social charges after at least 30 years of ownership. In practice, shareholders do not have to wait that long for taxes to go down: after 15 years, the income tax on capital gains drops to 25% and after 20 years it falls to 15%.
The corporate tax option is less appealing. In fact, the capital gain is calculated based on the difference between the asset's sale price and its net book value: this means that past depreciation increases the realised capital gain. As a result, the more a company benefits from tax reductions due to depreciation while it owns the asset, the more tax it will owe once the asset is sold. And that will be corporate tax (25%), with no reductions. Finally, for shareholders to access the cash, the company must distribute dividends, if its accounting position allows, which are taxed at a rate of 30% to 34%. This could make selling the property a very expensive proposition!
In closing, when deciding between the personal income tax or corporate tax options for an SCI, there's no clear choice. That’s why it's important to base your decision on an examination of the asset's revaluation potential, projections over the period of ownership, and an analysis of cash flows. All of these parameters must be considered to make an informed decision that suits your individual circumstances.
Our experts at Societe Generale Private Banking work alongside your wealth advisors to assist you in making these decisions.
(1)A legal situation in which two or more persons own property together.
(2)In full ownership, the owner of the property may sell the property, occupy it or rent it out in order to receive rent.
(3)In bare ownership, the owner of the property does not have the use of it.
(4) For fiscal years ended before December 31, 2018, the corporate tax option was irrevocable. It's now possible to waive this option up to the fifth fiscal year after the last year that the option was used. Once that period is over, the option becomes irrevocable. Waiving the option will have tax impacts if the business is dissolved, which may be mitigated under certain conditions. When the SCI waives the option, it will no longer be able to opt for corporate tax at a later date.
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