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Foreign investors in France (non-residents): making proper use of the French SCI
The French société civile immobilière (SCI) is one of the most commonly used legal vehicles in France for holding, managing and transferring real estate assets.
Its flexibility makes it particularly attractive: tailor-made articles of association, joint ownership, facilitated transfer of shares, and a clearer patrimonial structure. For foreign investors wishing to acquire real estate in France, the SCI is therefore often perceived as a simple, efficient and reassuring solution.
That apparent simplicity may, however, prove misleading.
Behind its flexibility, the French SCI is governed by strict legal, tax and patrimonial rules, recently reinforced by the case law of the French Cour de cassation. Approximate management, insufficient accounting records, or unsuitable decisions regarding the occupation of the property held by the SCI may lead to significant — and sometimes irreversible — tax consequences.
The purpose of this article is to draw the attention of Swiss non-resident investors, and their advisers, to the main points of vigilance required for the proper use of an SCI.
1. Furnished lettings: an often underestimated tax risk
As a matter of principle, an SCI is subject to income tax. It then benefits from a so-called “tax transparency” regime: the company’s profits are taxed directly in the hands of the shareholders, in proportion to their respective interests in the company.
This regime, however, presupposes that the SCI carries out a strictly civil activity. In practice, this mainly means the mere holding of real estate or its unfurnished letting.
The difficulty arises when the property held by the SCI is let furnished.
Even on a one-off, seasonal or occasional basis — for example through a short-term rental platform such as Airbnb — such activity is treated, under French tax law, as a commercial activity.
The tax consequence may be costly: the SCI may then become subject to corporation tax. This change in tax regime profoundly alters the fiscal logic of the structure and may become irreversible.
Admittedly, the corporation tax regime notably allows the purchase price of the property to be depreciated.
However, it also entails significant constraints. The SCI will then be subject to obligations applicable to commercial companies and, for instance, the free occupation of the property by the shareholders may become problematic, both from a tax perspective and under company law. Such free occupation may, in certain cases, be regarded as an abnormal act of management.
In practice, the shareholders will then either have to pay market rent to their own company, or accept that a notional market rent — determined according to specific rules which are beyond the scope of this article — be included in the SCI’s taxable base.
Furnished letting, even when presented as ancillary or exceptional, must therefore be approached with great caution. Before any seasonal letting is contemplated, a prior tax analysis is essential.
2. Gifts and inheritance: the central issue of share valuation
The SCI is frequently used as a wealth transfer vehicle. It makes it possible to transfer shares progressively, rather than transferring a directly held real estate asset, which may be of real interest in a family or international estate planning strategy.
However, such a transfer requires the value of the shares to be determined reliably.
The value of the shares must reflect the company’s net assets, namely the value of the real estate held by the SCI, less its liabilities. In the absence of regular accounts, balance sheets or sufficient supporting documentation, the French tax authorities may challenge the valuation adopted by the shareholders.
Such a challenge will generally result in an upward reassessment of the value of the shares, thereby increasing the taxable base and, consequently, the gift or inheritance tax due.
The risk is even greater where the SCI has undocumented shareholders’ current accounts. In practice, it is common for shareholders to advance funds to the company in order to finance the acquisition of the property, works or expenses. These advances then constitute receivables held by the shareholders against the SCI.
But they must be capable of being proved.
In the absence of a loan agreement, bank evidence or clear accounting records, these financial movements may be challenged by the tax authorities. In certain cases, they may be recharacterised as disguised gifts or hidden distributions, with the corresponding tax consequences.
It should also be recalled that, in the context of an inheritance involving a non-resident shareholder, the receivable held by the deceased against the SCI may constitute an asset taxable in France for inheritance tax purposes.
Rigorous accounting and the proper formalisation of shareholders’ current accounts are therefore not mere formalities. They are an essential condition for legal and tax security.
3. Good practices to be adopted
The SCI is a flexible structure, but it remains a company in its own right. It has its own assets, interests distinct from those of its shareholders, and must be managed accordingly.
A number of sound management principles should therefore be observed.
First, the SCI should have a dedicated bank account, separate from the personal accounts of its shareholders. This separation ensures the traceability of financial flows and avoids any confusion between the company’s assets and those of its shareholders.
Secondly, the SCI should keep accounting records, even if relatively simple, enabling its assets, liabilities, expenses and any shareholders’ current accounts to be identified each year. These accounting records are essential in order to justify the value of the shares, in particular in the event of a gift, inheritance or sale.
Where the property is made available free of charge to a shareholder or to a member of his or her family, this arrangement must be formalised. A shareholders’ resolution or a written agreement makes it possible to demonstrate that the arrangement was decided within a clear framework and was properly assumed by the company.
Finally, shareholders’ current accounts should be systematically documented. Advances made to the SCI should be supported by identifiable bank movements and, ideally, governed by a loan agreement specifying their amount, origin, repayment terms and, where applicable, remuneration.
Conclusion
Investing in France through an SCI can offer genuine advantages, particularly when structuring the holding and transfer of real estate assets.
However, flexibility should not be confused with complete freedom.
The SCI must be administered with rigour, especially where its shareholders are non-residents or where several tax jurisdictions are involved. Decisions made at the time of acquisition, letting, transfer or financing may have lasting effects which can be difficult to correct.
It is therefore strongly recommended to seek advice from professionals with expertise in both French business and property law, as well as in the tax regime of the investor’s country of residence. Such advice makes it possible to anticipate risks, secure the structure and preserve the long-term patrimonial efficiency of the investment.
In certain complex international circumstances, applying for a tax ruling may also prove prudent before any decision is made to dispose of the property or of the SCI shares.
Thierry Ygouf de Varese
French Attorney at Law, Avocat (Caen, Paris, Lausanne)
