Property: understanding SCIs

Managing property can prove complicated, especially when there are several owners involved. In this case, creating a property investment company (Société Civile Immobilière – SCI) can help make it easier to manage and transfer property. myLIFE explains the primary advantages and constraints of SCIs.

SCIs are legal structures that enable several people to own one or more properties and manage them. This company form may be used when several people want to invest in a real estate project, for example. It is also a way of simplifying how rental properties are managed and arranging the transfer of property assets.

Let’s take the example of François. François has owned the family home where he lives with his three children for a few years. He now intends to invest in an apartment in the city and rent it out. Given his circumstances, going through an SCI might be a good option, particularly when it comes to organising his estate and preventing any disputes among his heirs. But before taking the plunge, François would like to learn more about how SCIs operate, and their advantages and disadvantages.

What are the advantages of SCIs?

SCIs are attractive for a number of reasons. They offer a more flexible way of managing property and can help prevent the stumbling blocks caused by joint ownership.

⇒ Reminder: joint ownership is a situation in which different people are owners and hold the same rights in respect of one or more properties. It is either voluntary – when a property is purchased – or involuntary – in the case of inheritance or divorce.

Simplified real estate management

Using a Société Civile Immobilière is more flexible than joint ownership, because the rules governing SCIs are defined in the company’s articles of association when it is created. As such, even if the SCI has several owners, there can be a sole manager with extended powers, who is responsible for day-to-day management. The assets are therefore governed consistently within the SCI.

In addition, it is possible to insert specific clauses that determine the way in which a partner can leave the SCI, sell their shares or transfer them in the event of death for example.

This option would be particularly useful if François got into a relationship and started cohabiting. The interests of both parties could be protected by the SCI in the event of their separation or death.

Finally, in the case of joint ownership, decisions must be unanimous or at least approved by two-thirds of the partners, but this is not the case for SCIs. The majority prevails. This means that, if there is a disagreement among the partners, any stalemates can be prevented and the SCI’s assets can continue to be managed.

In the event of inheritance or if one of the partners wishes to leave the SCI, only the shares can be transferred or sold. The assets themselves remain whole.

Property assets that remain whole

SCIs make it possible to avoid dividing the property assets. When the assets are held by the company, the partners become owners of shares and not of the property. In the event of inheritance or if one of the partners wishes to leave the SCI, only the shares can be transferred or sold. The assets themselves remain whole.

In the case of joint ownership, the assets may need to be divided and this could lead to all or part of the property being sold. For example, if François were to die and two of his children wanted to keep the family home and the apartment in Luxembourg, but the third child wanted to receive his share in cash owing to financial difficulties, everything would have to be sold. However, with an SCI, the person wishing to sell their share can do so (subject to the agreement of the other partners) without the assets needing to be broken up, since the SCI is the property owner.

SCIs must have a civil object and not a commercial object to benefit from transparent taxation.

Things to look out for with an SCI

SCIs are also subject to legal constraints and entail costs that do not apply in the case of joint ownership.

Properly defining the SCI’s object

When the SCI is created, François must clearly state the object of the company by specifying the type of activity to be conducted. It must have a civil nature to benefit from transparent taxation. The SCI can thus be established to manage property, to rent out empty homes or even to build a property that will be sold.

⇒ We talk about transparent taxation when the natural persons – in this case the partners – rather than the company pay tax on their income. Partners pay tax on their taxable income (rent from property rental, for example) directly through their individual tax returns.

Conversely, the SCI’s object is deemed to be commercial if the intention is to conduct business, such as renting out furnished property or purchasing property for resale.

Administrative procedures and formalities

SCIs must be created by at least two people. Although they may choose whether to constitute it through a notarial or private deed, the manager and the partners of SCIs are required to adhere to company operating rules: organising annual general meetings, bookkeeping, complying with voting rules, etc.

Any capital gains made as part of the sale of shares in the SCI are subject to tax, especially when the property is located abroad.

What does an SCI cost?

SCIs have no minimum start-up capital, but costs may be incurred by creating and managing them: notary or solicitor’s fees if the articles of association are drafted by a professional; registration in the trade and companies register; accountancy fees; bank fees, etc.

In addition, adding property to the SCI is subject to registration and transcription fees, in the same way that the sale of shares results in the payment of transfer fees to the Registration Duties, Estates and VAT Authority.

Moreover, any capital gains made as part of the sale of shares in the SCI are subject to tax, especially when the property is located abroad.

If, for example, François had an apartment in France through a Luxembourg SCI, any capital gains made by selling his shares would be taxed in France. This is an obligation established in the last bilateral tax treaty enacted between France and Luxembourg. This tax treatment doesn’t apply everywhere, however. You are therefore advised to consult an expert adviser to find out about any tax treaties between Luxembourg and the country where the property is located.

Finally, SCI partners are responsible for their company’s debts in respect of third parties. This means that their responsibility is not limited to the amount given to the company, but extends to all of their personal assets.

François now understands the basics of how SCIs work. Whether he chooses to use this type of structure will basically depend on his objectives and personal situation. We would recommend that he approach an expert (notary, solicitor, etc.) in order to choose the best solution to ensure his property can be managed and transferred under the best conditions.