Investment Structures for French Real Estate

When it comes to purchasing real estate in France, there are many legal aspects to consider before you sign the final bill of sale. From deciding whether to purchase your new property as an individual or through a company, to reduce your liability on French property wealth tax (*) or optimise your children’s inheritance, it’s important to do your research before buying.
To help you cut through the red tape, you’ll find our overview of investment vehicle options below with the pros and cons for each structure plus a quick look at what you need to purchase real estate as a non-resident in France. Before purchasing, we always recommend speaking to your own legal adviser (Athena Advisers can refer you to the right person who is specialised in the field) to ensure you choose the best investment strategy to fit your situation.

(*) wealth tax only applies to your assets in France above a net liability of €1.3m per tax household. For example, if your property cost €2m and you have a mortgage of €701,000, you will be under the wealth tax threshold.

INVESTING AS A NON-RESIDENT IN FRANCE

If you’re looking to buy property as a non-resident, the good news is that there are currently no restrictions on purchasing real estate in France. However, in order to get a mortgage with a French financial institution, you and your joint owners including any children over the age of eighteen will have to meet certain criteria based on your income, your marital and residential status, plus your country of origin depending on its double taxation treaty with France.

When you decide to purchase a property in France as an individual or a family, if you don’t opt to abide by the inheritance laws of your country of citizenship, your property will be subject to French inheritance law - whether you are French residents or not. In this case, as heirs to your estate, your children may well be liable to pay inheritance tax and they will also need to be in agreement when it comes to reselling the property down the line.

INVESTING AS A SCI STRUCTURE

Many families choose to get round these issues of inheritance by setting up an SCI (Société Civile Immobilière) structure. The purpose of an SCI is to purchase, own and manage property as a group of shareholders rather than as a couple or family. Easy to set up, with an SCI you no longer need a notaire to handle your estate, you can bypass the compulsory division of property amongst your children under French law and you can also give yourself more liquidity when splitting assets should you decide to sell your shares.

Advantages of choosing an SCI structure

• As a family-owned company, fiscal transparency applies to SCIs so shareholders are taxed on an individual rather than a company basis.
• If the property is your main residence and not used as a rental, setting up an SCI can help you optimise your legacy. Legally you are allowed to transfer shares to your children and other family members by way of a tax-free gift up to a maximum value every fifteen years.
• Alternatively, if the property purchased is not your main residence, you may be eligible for tapered exemption on your capital gains tax and social charges liability from year 5 of ownership and fully exempt from taxation after 22 and 30 years of ownership respectively.

Drawbacks of choosing an SCI structure

• If you’re planning on getting a mortgage to finance your property, all members of the SCI will need to meet the bank’s financial and legal requirements including any children over the age of eighteen.
• Under SCI rules, to avoid paying corporate tax and remain under the individual taxation regime, you can only rent out your property on an unfurnished basis which gives you less flexibility if you wish to recover your property at any point during the three-year rental contract. If you intend to rent the property furnished on a short-term basis, the SCI may become non-transparent therefore triggering the corporation tax regime. ( See our recommendation below should you decide to rent furnished)
• Additionally, setting up an SCI involves paying legal fees while as shareholders, you will also need to hold an annual meeting and file company reports every year.

INVESTING AS AN SARL FAMILLE STRUCTURE

If you plan on renting out your property on a furnished basis when not in residence, an SCI may not be the most advantageous solution as SCIs become opaque and therefore subject to corporation tax if your rental income equals more than 10% of the company’s annual turnover. Instead, you might want to look into setting up an SARL Famille (Société A Responsabilité Limitée de Famille). A transparent structure designed to cover commercial activity such as furnished rentals, creating a SARL Famille can help you take advantage of France’s LMNP (Location Meublée Non Professionnelle) scheme for short-term rentals or regime para hotelier while you may also be eligible to benefit from the tapered relief of capital gains tax for individuals.

Advantages of choosing a SARL Famille structure

• With a SARL Famille, each shareholder is taxed in proportion to their individual shares based on the rental income received during the year.
• Non-residents may find it easier to obtain a French mortgage with some banks when purchasing through an SARL Famille rather than as an individual.
• Much like the SCI, purchasing your property through a SARL Famille allows you to optimise your children’s inheritance through tax-free gifting. As a shareholder, you are allowed to transfer a certain percentage of your shares to your children and grandchildren every fifteen years ensuring they will not need to pay inheritance tax on these gifts. You have also the possibility to add your children (even those under 18 years old) to the company shareholders by giving them a share of capital. By way of accounting and as the debt of the company gets refunded, their share of capital grows in value while triggering little to no inheritance tax.
• When calculating the liability of your wealth tax in France, you declare only 80% of the asset's value. So, in essence, when you are renting out your property on a furnished basis and you have received a VAT rebate on the purchase price, you will only declare a value equivalent to the price excluding VAT.
• Any child in the shareholding above 18 years old is considered as another tax household, therefore, allowing you to benefit from another wealth tax threshold of €1.3m on top of your own tax threshold.

Drawbacks of choosing an SARL Famille structure

• As the SARL Famille will be the legal body that owns your property, you will need to plan ahead for a time when any or all of the shareholders want to either put the property on the market or transfer their shares to ensure that the other shareholders are given priority to purchase those shares.
• Company shareholders in an SARL Famille must be members of the same family or direct relatives by marriage or civil partnership
• Setting up the SARL Famille and the company registration will involve a setup fee of circa €2,000 and either you or your accountant will need to prepare and file annual company accounts.

Disclaimer
This article is for general information purposes only and is not intended to be used as legal advice. You should always obtain professional legal advice before taking, or refraining from, any action based on the content of this article. The information published in this article does not constitute legal, tax or other professional advice from Athena Advisers or from any of our affiliates.