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EXPLAINED: The advantages and pitfalls of buying French property with an SCI

Owning property via SCI can offer certain advantages to property owners in France, but they also have drawbacks and complications. Here is what you need to know

Published: 8 March 2023 16:11 CET

EXPLAINED: The advantages and pitfalls of buying French property with an SCI

A house outside Paris (photo by LOIC VENANCE / AFP)

An SCI – société civile immobilière – is a non-trading real estate company made up of at least two people. Essentially, it allows people to own property such as a second home through shares of a company, rather than under their own name.

There are more than one million properties in France that are registered as SCI’s.

The Local spoke with experts on the French property law and taxation to understand whether SCI properties are useful for foreign property-owners in France, and the pitfalls they need to be aware of.

Who might benefit from an SCI?

Most people set up SCIs for one of two reasons; tax and inheritance.

Setting up an SCI for property ownership in France can be an advantageous way to share and pass down property between people, namely families with unique situations and non-married couples.

It can also offer certain tax benefits, depending on your situation.

However, creating an SCI can also involve several complex administrative procedures and may not be advantageous for everyone, so it is strongly recommended to consult a lawyer who has expertise in French inheritance and tax laws before setting one up.

Paris-based notaire, Laure Gaschignard, told The Local that the main profile that would benefit from an SCI would be couples who live together but are not married or pacsé (in a civil partnership).

“Especially for foreigners who are not looking to be married or PACS’ed (les concubins in French), an SCI can allow you to set up an inheritance structure for your property purchased together”, explained the notaire.

Setting up an SCI can allow partners to structure the inheritance process for their property so that the other person is able to remain either a full or partial owner. The key benefit to an SCI is that it sets up a very specific delineation of who owns what, which can make succession processes more clear.

Gaschignard went on explain that even though an SCI can allow several people to buy and manage a property together, it is most useful for those who have unique family situations and are in need of a more flexible way to structure their property ownership and inheritance.

She warned that in previous decades, many French families set up SCIs because they were popular at the time.

“That generation often ran into problems because they did not realise that an SCI involves many administrative tasks. These tended to fall to the wayside, especially if interpersonal problems arose or there was a death of one of the partners of the SCI.

“An SCI is a large commitment. It means you will agree to run a company, and that involves paperwork and meetings”.

Inheritance laws

She explained that in years past, many foreigners opted for SCI properties because they seemingly offered a way to bypass strict French inheritance laws (that do not, for example, allow parents to disinherit their children).

However, in 2015, the European Union passed regulation that allows people to opt for the law of the country of their nationality to apply to their estate. This law applies to non-EU nationals (so still applies to Brits, despite Brexit).

As a result, it is no longer necessary to set up an SCI to structure the inheritance process for your property according to your personal situation – you can simply opt for your will to be dealt with under the laws of your home country – read more HERE.

“These days, I mostly recommend SCI properties for people who have a serious interest in running an SCI and want to use it for structuring a family property”, Gaschignard explained.

The Local also spoke with tax attorney, Maître Edouard Pruvost, who works with both French nationals and English-speaking foreigners, explained that he often sees people opt to own property in France via SCI because of potential to optimise tax benefits, namely those seeking to earn money from renting out their property.

Nevertheless, notaire Laure Gaschignard cautioned that these benefits are very situational.

“For foreigners who only want to rent out their second-home for a couple of months when they are out of town, you may not need to set up an SCI, but for those who rent their property out for the full year and turn a profit, it might be more advantageous”.

How do you set one up?

Tax attorney Pruvost told The Local that the process for buying property with the intention of setting up an SCI is “not that different from the general procedure for buying property in France”.

“The research process is the same, reaching out to and working alongside a real estate company (agence immobilier) is the same. You can still finance an SCI with a loan, and you still need to sign final paperwork alongside a notaire“, Pruvost said.

“The key difference is the name that is signed on the contracts. With an SCI, you sign as the company on all contracts, not with your personal name”.

As such, the SCI will need to be created prior to the step where the Compromis de Vente, which is drawn up by a notaire and functions as the preliminary contract, is signed.

You can learn more about the general steps for purchasing property in France, as well as the estimated timeline for the process HERE.

Gaschignard said that some might be tempted to use an online template for building contracts for their SCI.

“These are less adapted, so you should work with a professional who can offer you specialised help. Oftentimes, these standard online templates have a lot that need to be fixed”.

When creating the company, statutes will need to be drafted to determine methods for decision-making (whether done unanimously or by majority), and you will need to appoint a gérant – the person who will manage day-to-day tasks.

You’ll also need to decide on the company’s headquarters (the registered office), publish a notice of the creation of your company in a legal newspaper and register the company in the Trade and Companies Register (RCS) at the clerk’s office of the Commercial Court, according to the French ministry of economy.

What are the benefits of setting up an SCI?

For Maître Gaschignard, the main benefit is for people with a complicated family structure who want to secure the inheritance of the property.

The other, less tangible, benefit to setting up an SCI would be setting up a clear management system for your property, which can be helpful for families. An SCI also means that debts and profits incurred on the property are divided amongst partners based on shares, so if work needs to be done on the property, that cost can be divided based on proportion of shares held.

There are potential tax benefits for setting up an SCI, but Gaschignard warned that French financial authorities have done more in recent years to stay on track of all property ownership and you can be certain that you will still owe taxes on your SCI property.

Nevertheless, some benefits are possible, but just how advantageous they are will depend on choosing the proper tax regime for your situation. In France, property can be taxed either sur société (corporate tax regime) or sur revenu (income-based tax regime).

One key difference is that on the impôts sur revenu regime, the SCI partners are subject to income taxes at the standard proportional rates, as well as social security deductions.

“This is something that has changed for British people with SCI properties in France. As a result of Brexit, British people with property in France now have to pay French social security contributions at the full rate (17.2 percent) like other non-EU nationals”.

When deciding on which tax regime to choose, you will need to consider your reasons for purchasing an SCI property.

“For foreigners who spend half the year in their second home and occasionally rent it out for the other parts of the year, they likely are earning enough to help with bills, but they are not engaging in commercial activity. In this scenario, it is probably best not to stick with impôt sur revenu“, Gaschignard explained.

“Most of the time, I would recommend impôt sur société for very high earners who plan to keep the house for a long time. This would also work for those who rent out their home all year-long and earn a profit from the rental”.

The notaire also explained that when selling an SCI, there can be different fees depending on the tax regime you choose.

Tax attorney Pruvost summarised his rule of thumb when advising clients regarding SCI tax regimes: “If you have a monthly income lower than €10,000 per month, then it tends to be best to stay on the income-based tax regime. For those who earn more than that – or turn a profit renting out their property for long periods – then it might be more financially beneficial to use the corporate tax regime”.

What are the drawbacks?

“There is a lot of paperwork”, Gaschignard warned, adding that foreigners unfamiliar with the French language or legal apparatus would likely find the process to be complicated.

In order to make the best choice, both Gaschignard and Pruvost recommend seeking legal counsel – which can be expensive – before opting to set up an SCI and prior to deciding on the taxation regime.

“Whenever I offer services to UK nationals, I work alongside senior tax associate and lawyer Marie Bich, who is based in London”, Gaschignard explained, adding that building a team with a representative familiar with UK law can be beneficial for Brits.

As for Pruvost, he warned that “oftentimes people will set up an SCI under the wrong taxation regime for their financial situation. For some people, it can be a tool to owe less in taxes on your French property, but you need to be very careful when setting one up. It is easy to make serious mistakes”.

What should you do if you have an SCI property and you want to convert it back?

SCIs have become less popular as time has gone on and several tax loopholes have been closed.

For foreigners who own second-homes in France, the 2015 EU ruling on inheritance means that for many people their rationale for having an SCI – bypassing French inheritance laws – no longer applies.

It is possible to dissolve an SCI and get the property back under your own name. However, it might be more costly to dissolve the SCI rather than to maintain it.

The dissolution of a Société Civile Immobilière must be decided on via a general meeting with shareholders, where partners would vote whether or not to dissolve the company.

You should be aware that if the SCI has appreciated in value significantly, then you will likely be taxed on liquidation. While it would be possible to recover your assets, depending on the situation, you could lose out on funds in the process.

According to Pruvost, the best option for those looking to dissolve would be to meet with legal counsel and find out approximately how much you stand to gain or lose in the dissolution process.

How should people with SCI properties fill out the new property declaration form?

A further problem with SCIs has recently become apparent, as France has introduced a new requirement for all property owners in France to fill in a property tax declaration – find full details here.

This obligation concerns all owners, but many SCI property owners have found themselves perplexed to not see their property show up after logging onto their personal space on the impots.gouv.fr website.

This is because, according to French tax authorities, owners of SCI properties should carry out the procedure on their “professional” space, rather than their personal space.

Anyone who runs a business in France will already have a ‘professional’ tax account, but SCI property owners will need to set one up in order to make the legally-required declaration.

You can set one up by going to the website impots.gouv.fr and clicking “Votre espace professionel”.

Next, you will click “Créer mon espace professionel”. Fill out the required information, keep in mind you will need access to the SCI’s SIREN number and the company’s official email address.

The tax office for your département will send you an activation code by post as soon as your space creation request has been validated. You will then have 30 days to activate your space and fill in your bank details. Once this is finished, you ought to be able to access the online service immediately.

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Explained: How are foreign pensions taxed in France?

France is a popular destination for people to retire to, and in most cases the retirees’ main or only income will be a pension paid from their home country.

So is this pension income taxed in France?

First steps

To determine whether you need to declare and pay tax on your foreign pension in France, the first question is whether or not you are a tax resident here (you can look through our guide).

If you are a tax resident of France, then you are required to declare all worldwide income – including foreign pensions – when you make your annual income tax declaration. Declarations are now open – find full details on how to fill it in HERE.

The next step is figuring out whether you will owe tax in France, and this will depend on several things;

the type of pension you receive (state pension, government employees’ pension, private pension)
where your pension is paid
how you draw your pension (lump sum or monthly payments)
the tax treaty between France and the country your pension is paid in.

This article is intended to give an overview of the situation for English-speaking foreigners living in France. It is highly recommended to get help from an expert financial advisor. You may also want to start by consulting our guide on pensions, if you have pensions from both France and either a non-EU country or an EU one.

Pension country

When it comes to taxation on foreign pensions, it all depends on the tax treaty between France and the country that is paying your pension, which is why the situation is significantly different depending on where that pension is paid.

In this scenario, your nationality usually isn’t important – the key thing is where the pension is being paid and the fact that you are now a tax resident in France. For most people, their nationality and the country that pays their pension will be the same (eg Brits receiving a UK pension) but not always, as some people may have worked in multiple countries before retiring to France.

This article is aimed at people who have worked in another country and then retired to France – the situation can be different for people who have worked in France and then retired.

US pensions

American retirees living in France benefit from a generous US-France tax treaty to avoid double taxation on all pension income, including private pensions.

To better explain the situation, The Local spoke with tax expert, Jonathan Hadida from HadTax.

“The reason we call France the bees’ knees for American retirees is because US-sourced pension income is only taxed in America. That means when you take money out of your 401(K) or IRA, those are taxable at your tax bracket in the United States.

“You have to report it on the US-side and pay US taxes at your marginal rate” Hadida explained.

“On the French side, US-sourced pension income is reportable in France for rate-purposes but benefits from a deemed credit.

“This means you put it on your French tax form, and you calculate the tax and you get a deemed credit equal to that. Ultimately, you wind up paying no French taxes on your US-sourced pension thanks to Article 18 of the US-France tax treaty”.

How do I report US-sourced pension income to French authorities?

Although you won’t end up paying French taxes on your US pension, you do need to tell the French taxman about it. The annual French income tax declaration requires you to declare all global income, including pensions.

International Financial Advisor, Bryan Dunhill with Dunhill Financial explained: “You fill it in within box 1AL or 1BL on form 20-42 on the French tax return, then you claim it in on the 8TK of the 20-47 to say it is US-based pension income, and then you will get a tax credit from the French.

“It goes in and it goes out on the French side. Being a US retiree in France is fantastic”, Dunhill said.

For both 401(K)s and IRAs, Americans in France should still keep in mind that early withdrawal (prior to the age of 59 and a half) can still lead to a 10 percent early distribution penalty. There are certain exemptions, such as first time homebuyers and higher education, but you should meet with a tax adviser to determine if you qualify.

What about social charges?

In addition to taxes (impôts), France also requires people to pay social charges (prélèvements sociaux) on income. However, only specific types of income can be considered for social charges, such as the CSM charge (PUMa) for healthcare.

The general rule is that pensioners and their spouses do not have to pay the CSM charge, but France specifically exempts people who have a pension from France, the EU, the EEA and the UK (people with S1 forms).

There is some debate over whether common types of American private pensions such as a 401(K) or IRA are treated as a pension (and therefore exempt from CSM) or as investment income (which can attract CSM charges).

Hadida told The Local: “Under the principle of equality amongst taxpayers, URSAAF has treated most US pensions/IRA distributions/401(k) distributions akin to a French/Swiss/European pension and have therefore exempted Americans with pension income.”

“I have called URSSAF, and I was told by the representative that they should be paying for PUMa. But in practice, I have not seen many American pensioners charged for it.

Canadian pensions

In Canada, the pensions system includes multiple tiers of public and private schemes, but luckily the double tax treaty between Canada and France is explicit about where pensions are taxed.

The Local spoke with Isaac Barchichat, a registered CPA in France, Canada and the USA to understand the situation for Canadians in France. He is a managing partner at Monceau CPA, an international accounting firm based in Paris with offices in the US and Canada.

He told The Local: “Tax treaties usually follow the OECD model, which means that Article 18 is usually focused on pensions.

“Article 18 for the Canada-France treaty is very similar to the USA-France treaty. This means that pensions are taxed in the country that they are issued in,” he said.

As a result, any Canada-based pension – whether that is the Old Age Security plan, the CPP (Canada Pension Plan) or QPP (Quebec Pension Plan), or a private personal or employer plan (such as Registered Retirement Savings Plans, or RRSPs) – would be taxed in Canada, not France.

Barchichat explained that Canadians in France should still declare their pension income in France. Like Americans, they will receive a tax credit from France attesting that they have already paid tax in Canada on their pension.

“People should still maintain proof that the pension was already subject to tax, in case of an audit,” he added.

Barchichat also recommended that Canadians resident in France can make use of the ‘mention expresse’ section in their French tax declaration.

“Sometimes French local tax authorities fail to assess foreign income properly. Using the ‘mention expresse’ allows you to specify to French tax authorities Article 18 from the tax treaty to ensure that they process your documents properly,” he advised.

What about social charges?

Similar to the situation for Americans (described above), the exemption for social charges specifies French, EU, EEA and UK pensions, not Canadian ones.

That being said, as Hadida mentioned above, French tax authorities often apply the same exemption normally intended for EU pensions to non-EU ones.

Barchichat, who is licenced in both the US and Canada, said that in his opinion neither American nor Canadian pensioners should be charged for prélèvements sociaux.

“If this happens, it is a mistake by tax authorities”, he added. You can learn more about contesting a CSM charge here.

UK pensions

Brits – or anyone else receiving a UK pension – have a very different situation to Americans and Canadians.

As per the UK-France dual tax agreement (PDF), whether you will be taxed in France or the UK depends on the type of pension – government/civil service pension or a private pension.

If you have a UK government or civil service pension (eg a state school teachers’ pension), then this will remain taxable only in the UK. Some old NHS pensions were considered ‘government pensions’, but modern ones might not be. You can check if your pension is classified as ‘government’ here.

You still have to declare this income to the French tax authorities, but you will not be subject to tax in France on it, although it does count towards your household income which can push you into a higher tax bracket.

The same is not true of private pensions: these are generally taxed in France, not the UK, as soon as you become a tax resident here. Confusingly, the UK state pension is also considered a private pension, even though it is paid by the government.

Normally private pensions are taxed upon distribution in the UK. Once you move to France, in order to avoid paying tax twice on the same income, most people fill out an NT form and sending it to HMRC (who will communicate to your pension company) to receive your British private pension in gross.

You can find a more in-detail look at the situation for UK pensioners HERE.

How do French taxes work?

If you have a private pension you will need to work out how it will be taxed in France, but this too is complicated as it depends on the exact pension type and whether you take the money as a lump sum or as regular payments.

If your pension is paid as a regular income, then when doing your yearly French tax declaration, you will add up your pension income for that year and you will be taxed at the normal marginal rates for income (the barème). These rates go up to 45 percent (for the highest earners only) plus social charges if they apply (more on this below).

Pension income can also benefit from a 10 percent tax deduction, as long as it does not exceed €4,123 or fall below €422 per household.

Lump sums are more complicated and depend on several factors including the pension type and how you take them – when deciding on this it’s highly recommended to get individual financial advice.

The Local spoke with financial adviser Maeve Hoffman, from Spectrum IFA Group, who said: “Figuring out what to do with your pension should be part of your wider financial plans for your life. This may be your most important asset, besides your home, and the best answer for what to do with your pension is highly individual. There are no sweeping generalisations when it comes to advice on private pensions. Everyone’s situation is different.

“You will want to start by considering whether you plan on being in France in the long-term. Some options could have serious consequences if you return to the UK shortly after.”

What about social charges?

People who have never worked in France and who retire to France once they reach the UK state pension age are entitled to as S1 – this status ensures that the UK continues to pay your healthcare costs are not charged prélèvements sociaux. Non-working spouses of an S1 holder can also benefit.

Those who take early retirement and move to France before they reach the UK state pension age may have to pay social charges until they are able to apply for the S1. However, there are several exemptions to social charges, so even if you expect a bill, you may not end up being charged. More information in our guide.

Australian pensions

The situation for Australians can be particularly confusing, largely due to the fact that Australia and France do not have a bilateral social security agreement (though there is an income tax treaty).

Let’s start off with the simple answer – if you receive a civil service pension from the government of Australia – meaning you were a federal or state public worker, then that pension is only taxed in Australia and it will not be taxable in France, though you will have to declare it along with all global income.

As for all other pensions – these are considered taxable in France.

There is another catch for Australians – the lack of a social security agreement means that Australians living in France may not be able to claim their Age Pension (assuming they qualify based on income constraints).

While you can be an Australian living in Austria, Belgium, Chile, Croatia, the Czech Republic, Spain or Estonia, among others, and still claim your Age Pension, this is not the case in France.

What’s crucial here is when you move – if you start receiving your old-age pension and then you move to France, then you may be able to continue claiming the pension. If, however, you move to France before you reach pension age, then you will not be able to claim it unless you move back.

A spokesperson for the Australian government told The Local in a previous interview: “To be eligible for Age Pension, a person must generally be an Australian resident and be in Australia at the time the claim is lodged, or in a country with which there is an International Social Security Agreement in place.”

There is no such agreement with France. And, despite the efforts of some of the thousands of Australians living in France to get politicians in both countries to act, there appears to be little urgency to change the situation, which means it could be some time yet before we are able to give you any good news on the pension front.

There are groups pushing for a social security agreement, such as the Facebook group ‘Australian Pensions in France’, which can also be a helpful place to connect with other Australians navigating tax complexities between the two countries.

What about superannuation plans?

The next complex area is the ‘superannuation’. While withdrawals from a ‘super’ can be accessed after becoming a resident in France, there are tax implications to be aware of.

The Local spoke with Martine Joly, chartered accountant and tax agent from Bilateral Solutions, who has experience working in both the Australian and French tax systems.

Joly explained that the challenge is that “the two systems are totally opposite. In Australia, pensions are done by capitalisation, with your employer paying into the superannuation.”

In Australia, the contributions were taxed when being deposited, so they are meant to be tax-free upon distribution.

However, France does not recognise this, so ‘super’ withdrawals are subject to tax here, even though in theory they have already been taxed in Australia.

To make matters more complicated, there are several different ways superannuation plans can be organised, but for the most part French fiscal authorities treat them as trusts.

This means that you may have additional reporting requirements each year, in addition to your annual French tax declaration, such as the “FORMULAIRE N°2181-TRUST2” which asks for the market value, as well as any accrued income, of the trust as of January 1st of that year.

If you are required to do this, then you will also have to name other people listed in the trust – whether they are ‘moral’ or ‘physical’ people. You will be required to give extensive information, including their dates of birth and addresses.

On top of that, you would also have to fill out an additional “event” declaration if a trust is created, modified or terminated. This must be done within one month of the event. This tax form is also available on the government tax site: FORMULAIRE N°2181-TRUST1.

How much can I expect to pay?

You will begin to be taxed when you start withdrawing from your super, and the way you are taxed will depend on whether you take payments in the form of an ‘income stream’ (periodic payments) or as a lump-sum.

If you take your super as an income stream, even though it is meant to be tax-free in Australia, you will still owe tax in France once it begins to be distributed. You would be charged at the progressive marginal (barème) rate for income tax, going all the way up to 45 percent (for the highest earners only).

If you try to avoid paying, be aware that “Australia will inform France”, as Joly explained.

“They communicate well and it will not be lost. So the French will realise if you have not paid any tax, because it is fully taxable in France. You have to declare this pension income,” she said.

As for lump-sum payments, whether or not you will owe tax in France depends on when you placed the super into your bank account.

“If you convert the super into a bank account prior to leaving Australia and becoming a tax resident in France, then this is not an income, it is a saving,” Joly said.

As such, you would not owe income tax on it, but you would still need to declare the foreign bank account to French tax authorities.

If you take your lump-sum super after moving to France and becoming a tax resident, then you would owe tax here upon distribution. As with UK pensions, lump sums are complex and you should get financial advice before making this decision.

Technically, French tax authorities may allow a return of once off pension capital to be taxed at a flat rate of 7.5 percent.

But in reality, anyone seeking to do this would need the express, written confirmation from French tax authorities that this rate will be applied. Similarly, you should be aware that this likely will not be possible if you have already begun drawing from your ‘super’, as the flat rate is often only available if the full amount is taken at once. Again, individual professional advice is highly recommended.

You can also find more information at the French tax website Impots.Gouv.Fr.

Joly pointed out a few other things Australians in France should be aware of – including the possibility you may owe the IFI (Impôt sur la fortune, or wealth tax) which considers whether you have property valued at €1.3 million or above.

“Due to high real estate prices in Australia, people just owning a small apartment in Sydney may not realise they would owe tax on this in France later on,” she said.

You should also keep in mind that Australia’s tax year runs on a different calendar year. France considers the period from January 1st to December 31st, while Australia looks at July 1st to June 30th.

This may make a difference when considering your tax residency.

What about social charges?

Australians have reported receiving social charges, in addition to taxes, for their superannuation income. That being said, there are several exemptions to social charges.

For example, if you are not working and your spouse is a recipient of an EU/EEA/UK pension (with an S1 form), then both of you would be exempt from paying the CSM health charge.

As the situation for Australians can be more complicated than nationals of other countries, it is highly recommended to seek expert assistance, particularly from someone who has qualifications in both countries and understands the tax treaty.

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