Société Civile Immobilière (SCI)

1. What is an SCI?
2. Multiple Ownership of French Property
3. Transfer of French Property
4. French Inheritance Laws/Taxes
5. Tax Implications
6. Business Use
7. Setting Up an SCI
8. Running an SCI

7. Setting Up a SCI

Setting up an SCI is like setting up any other company in France or elsewhere; there are certain formalities to undertake and there is a cost to these formalities.

However, one of the great advantages of an SCI is that the shareholders are permitted to structure the company in any way they wish, subject to very few legislative constraints.

7.1. Shareholders

The company must have at least two shareholders who may be man and wife, civil partners or those in free union, friends and relatives, children and parents.

There is no maximum number of shareholders, although for the purposes of managing the company some restriction is desirable.

There are no rules on the nationality of the shareholders, who can, therefore, be of any nationality.

Children under eighteen years of age can hold shares in the company, provided they receive separate legal advice about their rights and obligations. It would also be normal, within the articles of the company, to limit in some manner the liability of any minors in the company.

It is also possible for new shareholders to join the company, subject to the agreement of the existing shareholders. An existing shareholder may also sell their share to an existing or new shareholder.

Normally, on the death of one of the existing shareholders the articles of the company provide for a right of purchase of the shares to existing shareholders. The articles may also state the basis on which the shares are to be valued, so as to ensure that disputes and deadlock does not arise over the purchase price.

7.2. Share Capital

The share capital structure of the company needs careful consideration.

The company can be established with as little as €1 initial capital, but where the SCI is being set up at the same time as the purchase of the property, then it is normal to subscribe to the value of the purchase price.

There is no real interest in having a minimal level of capital, if only because it could lead to difficulties with obtaining bank finance, and the later sale of shares would lead to a higher liability to capital gains tax

The issued level of capital need not be paid up in full by the shareholders.

The articles of the company can state whether the amount of the capital in the company is fixed or variable. In practice the capital of all companies is variable, but establishing a company from the outset on this basis makes it easier to later increase the capital base of the company, either through the admission of new shareholders, or an increase in the share capital of existing shareholders.

If you consider that the shareholders of the company are going to change on a frequent basis, or that the capital in the company will later be increased, then best opt for a company with a variable level of capital, as there are reduced formalities and registration fees.

A company with a variable level of capital also permits a new shareholder to join the company in greater discretion from the tax and other regulatory authorities, as no notification procedures are necessary.

However, the lack of formalism to the entry of new capital also implies a similar facility in relation to the withdrawal from the company by one of the shareholders, with potential implications for others, particularly if there is debt in the company.

Clearly, there needs to be careful drafting of the articles of the company to ensure as much protection as possible to all of the shareholders.

7.3. Mortgage Finance

If you are proposing to purchase the property using a mortgage, then you need to discuss with your bank the terms on which they are prepared to lend through an SCI.

You may find they are reluctant to do so, or impose tougher terms.

The evidence suggests that mortgage rates are higher to an SCI, and that banks frequently demand a personal guarantees from the shareholders, to take account of the greater risk.

The shareholders would than also be required to take out mortgage protection insurance, which may cost circa 0.5% of the loan.

There are also banks who are not prepared to grant loans against a property held in an SCI.

Accordingly, if you think you might later want to use capital tied up in the property to do improvements or use for other purposes, it would be best to stay clear of an SCI.

It should also be noted that an SCI cannot benefit from subsidised mortgages that are available to certain groups, although this is likely to be of less relevance to international buyers of French property.

7.4. No Limited Liability

Like any other company the SCI is a separate legal entity from those who own it. However, in the case of an SCI it affords no limited liability to the owners. Shareholders of the company are, therefore, liable for the debts of the company in the proportion in which they hold shares.

Shares can be held in proportion to the amount of capital that each party brings to the company, e.g. 70% / 20% / 10%. Normally, it would then follow that those who held the largest stake in the company would also hold voting power commensurate with their capital participation.

7.5. Business Registration

The registered office of the SCI must be located in France, whatever any expensive international lawyer may tell you.

Under no circumstances should you try to constitute the company ‘offshore’ as this does raise potential tax liability in France and is unlikely to be accepted by the French legal and tax authorities.

A formal legal registration notice has to be published and the company has to be registered with the local French commercial court. Unless the company is formally registered in this way it has no proper legal identity as an SCI.

If a property is also being transferred into the company, then it will be necessary to register this transfer with the French land registry, in the normal manner as for any property conveyance.

7.6. Costs and Professional Assistance

If you set up a new SCI at the same time as the purchase of a property then expect to pay €1,500/€2,500 in additional taxes and notaire fees over the amount that would be payable by buying indivision or en tontine.

This figure is likely to increase substantially if you also seek advice from an avocat or specialist lawyer.

If you already own the property and you wish to transfer it to an SCI then expect to pay fees and stamp duty, charged as a percentage of the value of the property. This is likely to be an expensive exercise.

If you initially purchased the property using a mortgage, it is also possible the bank would refuse the transfer of the property into the SCI.

In addition, if you decided to transfer an existing property in your ownership into an SCI you have set up, then if the property is not your principal residence you will need to pay capital gains tax on the difference between the purchase cost and sale value to the company!

Beware also that if you are purchasing a property through an SCI, you do not have the normal cooling off period of ten days after you sign the contract, and neither do you have the right to benefit from the statutory surveys that are required as part of the sale of a property to individual buyers.

It is possible to get around this problem by signing the sale contract in the names of the purchasers, but including a substitution clause in the contract, that would enable the SCI to actually become the legal owner when the conveyance is drafted.

However, if you are buying the property with a mortgage, then you need to discuss this arrangement with your mortgage lender, as substitution of the purchaser would lead the bank to normally withdraw the mortgage offer.

The advice of a good specialist French property lawyer, French accountant, avocat, or notaire, who has an understanding of international law as it relates to an SCI is imperative. You can contact us at [email protected] if you need assistance with finding a suitable advisor.

Be careful about fees, as it is not difficult to spend a lot of money using a professional advisor.

There are 'do-it-yourself' kits for an SCI available on-line, or from good bookshops in France. You could even visit a local commercial court and it is quite possible one of the court officials will provide a copy of the articles to you for a small fee.

Given the investment you are making in the purchase of a property, we think you need to take professional advice commensurate with the importance of the investment being made.

However, while we do not recommend a DIY approach it is easy to be misled into thinking that the whole process is rocket science, and that you need to spend a small fortune to get good legal advice and assistance. You do not.

Even if you decide to set up an SCI on a DIY basis, the purchase or transfer of any property into the SCI will need to take place through a notaire, who will undertake the usual conveyance formalities.

The creation of a SCI for man and wife is also best carried out through a notaire, to avoid the risk of the tax authority declaring the creation of the company to be a disguised gift designed to avoid gift tax.

Interestingly, there is actually no need to go through a notaire if you later sell the company, with the property in it, although the market for such transactions is smaller than for the direct purchase of the property.

Of course, by the same principle, you can buy an SCI with a property in it, without actually going through a notaire.

We would strongly advise against doing either of these options, and that good professional advice be taken at all times.

We recommend you ensure all discussions with your advisors are recorded in writing, as advice is easily given if professionals do not feel they can be held to account for it!

Next: Running an SCI

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