When reading articles on French property, the "société civile immobilière" (SCI) is very often referred as a traditional special purpose vehicle (SPV) to purchase a property in France between friends or members of a family.
However, the SCI is not recommended when buying-to-let a furnished property in France as the company would automatically be subject to corporation tax if its rental income is greater than 10% of its turnover, which is likely in most cases.
An alternative to the SCI is the less known French SPV, the "SARL de famille".
What is an SARL de famille?
It is a classic French limited company ("société à responsabilité limitée") whose shareholders are members of the same family. One of the main advantages of this SPV is that the shareholders can opt to be taxed under French income tax ("impȏt sur le revenu") as if the company was a partnership limited company ("société de personnes") rather than for the company being taxed under French corporation tax. This means that the shareholders could benefit of the following (non-exhaustive):
- be subject to the status of Non-Professional Lessor of Furnished Property ("Loueur en Meublé Non Professionnel" (LMNP)), in which income is taxed under BIC category ("Bénéfices Industriels et Commerciaux") and annual charges/fees can be deducted from the same revenue. This tax system significantly reduces or may even cancel the owner’s tax liability;
- benefit from the same tax relief as for individuals when selling the property;
- recover the VAT in certain circumstances.
All shareholders must all agree on the tax regime they will choose. The tax regime option must be signed by all shareholders and must be inserted in the incorporation document.
The tax regime of the company must be chosen carefully by the shareholders of the company as it is in some circumstances better for them to opt for the company to be subject to corporation tax rather than them being subject to income tax.
What are the conditions?
The activity carried out by the company must be commercial, industrial or agricultural. In France, letting a furnished property is considered as a commercial activity. Therefore, a SARL de famille would be appropriate if you are letting your property furnished or for a leaseback French property.
The company shareholders must be members of the same family: first and second-degree relatives, by marriage or civil partnership.
For instance, a SARL de famille can be created between:
- married couples or couples under a civil partnership;
- a parent and his/her child(ren);
- a parent, his/her child(ren) and their spouses/civil partners;
- between siblings and their spouses/civil partners;
- between a grand-parent and his/her grandchild(ren) if the latter are siblings;
- between a father in law and his son in law.
A SARL de famille cannot be created between:
- siblings and one child of one of them;
- two brothers in law;
- cohabiting partners.
A good estate planning “tool”
Like the SCI, an SARL de famille can be a good effective estate planning “tool”. A parent can give to each of his/her child(ren) €100,000.00 and €31,865.00 to his/her grandchild(ren)tax free. In the case of French property, this estate planning operation can be advantageous if the property was purchased by an SARL de famille. Each parent can indeed transfer every 15 years some of his/her shares to his/her child(ren) and to his/her grandchild(ren) with the same tax allowances mentioned above.
Mortgages
French lenders, depending on personal circumstances of the purchasers, will be happy to lend to a SARL de famille whose members are non-residents.
Disadvantages:
The SARL will be the legal entity owning the property. The shareholders must plan ahead before purchasing for situations where some shareholders wish to sell the property or transfer their shares.
Each shareholder will be taxed on the rental income received by the company in proportion of their shares even so no dividend has been distributed.
Using a SARL de famille to purchase a property will incur additional expenses: professional legal fees to set up the company and registration.
As a company, there is a certain amount of annual paperwork that must be completed. While one can delegate this to an accountant, there would still be his/her fees to consider.
Conclusions:
The SARL de famille can be suitable for families planning to buy-to-let a furnished property in France. Like the SCI, it provides flexibility and advantages in terms of the taxation regime and estate planning.
Each family is different and an assessment of the buyers ‘s personal circumstances and wishes must be carried out before opting for the SARL de famille. At Francophile Legal consulting, we can advise you on suitable structures to purchase your French property.
If you have any questions on this topic, please contact Loic Raboteau via email at loicr@bandmlaw.co.uk or tel on +44 (0) 20 7356 0833.
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