Llc, Real Estate Investment Company, Non-professional furnished rental
News
Published
LLC - Real Estate Investment Company - Non-Professional Furnished Rental
When you become the owner of real estate in France, especially when you are a non-tax resident in France, sooner or later the question of the taxation of this property and its inheritance arises. Consequently, the question of choosing the appropriate structure to manage the rental of a property as a family arises, and several options present themselves depending on the inheritance / tax angle one wishes to favor.
The choice of one option over another will depend, in particular, on the objective pursued.
What are the specific objects and conditions for the potential structures?
The Non-Professional Furnished Rental (LMNP), for its part, allows for the collection of additional income from real estate assets while holding non-professional status.
The accommodation concerned by the rental must strictly be furnished, and the income generated can neither exceed 23,000 euros per year nor represent more than 50% of overall income (unless non-resident) to maintain LMNP status.
The family SARL (limited liability company) allows for profits to be made while benefiting from reduced taxation. This structure is particularly recommended if the financial risk is high, in that the liability of the partners is limited to the amount of their contribution (indeed, the family SARL is first and foremost a SARL).
In addition to meeting the conditions for setting up a traditional SARL, it must be composed of partners who are directly related or collaterally related up to the second degree, or by marriage.
Finally, the family SCI (real estate investment company) is recommended with the objective of preserving and passing down wealth from generation to generation.
The company must necessarily have a real estate activity as its corporate purpose (as with traditional SCIs) and must be composed of members of the same family up to the fourth degree.
Let us look point by point at the conditions, advantages, and disadvantages of these different structures, which at first glance are similar but in reality carry many differences.
**What are the main advantages of these structures?
FROM A TAX PERSPECTIVE
Choice of taxation method**
In a family SARL, a choice is given between taxation under Corporate Tax (IS) and taxation under Income Tax (IR), noting that while a traditional SARL can certainly opt for IR, this option is limited to 5 years, whereas it is unlimited for family SARLs.
It should be specified that if the partners choose the IR, each partner can offset, in proportion to the percentage of shares they hold in the family SARL, the deficit incurred by the company against their personal taxation.
Furthermore, the option for the IR avoids double taxation in the event of a profit.
In fact, only the partners are taxed under the IR, whereas in traditional SARLs, profits are taxed first under the IS and a second time under the IR if the profits are distributed. However, it should be noted that taxation under the IR does not always prove beneficial, hence the importance of comparing it with corporate tax rates.
The choice between IR and IS is also possible in a family SCI. In the case of opting for the IR, the partners will have to choose between the actual regime and the micro-land regime; it is the partners who will be taxed. The choice for the IR has the advantage of not requiring bookkeeping.
If the IS is chosen, it is the company itself that will be taxed and not the partners.
Finally, since the LMNP grants non-professional status, it will be a matter of choosing not between IR and IS, but between the actual regime and the micro-BIC regime, as the income derived from the LMNP is classified under the category of BIC (industrial and commercial profits).
Allowance and exemption
In family-owned SARLs (limited liability companies), the sale of shares (which generates a capital gain) is exempt from tax, whereas in a classic SARL, partners are taxable under personal income tax (IR) on this capital gain.
Furthermore, under the Dutreil agreement, it is possible to benefit from a 75% tax allowance on the value of the shares in the event of the transfer of the business, subject to meeting certain conditions.
In family-owned SCIs (real estate investment companies), parent-to-child donations may be eligible for a tax allowance, as well as any dismemberment of property ownership (bare ownership/usufruct).
It should be noted that successive donations of company shares make it possible to avoid gift and inheritance taxes. Partners who, during their lifetime, transfer their real estate assets to their heirs free of charge benefit from the successive allowance system, so at the time of inheritance, the children are already the owners of the real estate and do not have to pay inheritance taxes.
In LMNP (non-professional furnished rental), if the actual tax regime (régime réel) is chosen, the expenses and costs related to the rental activity and the depreciation of the property can be deducted, and the deficit can be carried forward.
If the micro-BIC regime is chosen, a 50% allowance can be applied to rental income.
In addition, in the case of investment in a new or renovated serviced residence, the LMNP can be combined with the Censi-Bouvard tax exemption mechanism, which allows for a tax reduction of 11% of the cost price of the investment and the recovery of VAT under certain conditions.
From an inheritance perspective
Several scenarios must be anticipated in the context of a family SARL:
– the heir meets the kinship conditions: maintenance of the family SARL status
– the heir is neither the child nor the spouse of the deceased partner and does not meet the kinship condition: maintenance of the family SARL status is subject to the transfer of their shares by the heir to a person meeting the kinship conditions within a period of 6 months.
(RM Tailhades n°3693 of June 23, 1982 – BOI-IS-CHAMP-20-20-40, § 20).
(Rép. TAILHADES February 16, 1984 p.226 n° 13754).
– the heir is a child or the spouse of the deceased partner but does not meet the kinship condition towards the remaining partners: maintenance of the family SARL status and the heir can retain their shares regardless of the family relationships that the new partners have with the others.
In the event of death in a family SCI and where the bylaws do not provide otherwise, several scenarios are possible:
– Continuation with the heirs
– Continuation of the SCI with the surviving partners
– Dissolution of the SCI
In LMNP (non-professional furnished rental), in the event of the investor's death, the property will be transferred to the heirs who must continue the LMNP until the end of the lease.
While these three types of structures offer many advantages, they also have some disadvantages, particularly administrative, legal, and tax-related.
What are the major disadvantages of these structures?
Indeed, in a family SARL, the bylaws are mandatory since it is, let's remember, a SARL; this structure therefore requires a certain administrative rigor.
Furthermore, an important point to note is the difficulty of finding a transferee within the framework of a family SARL.
Indeed, the requirement of a kinship tie obliges the transferor to find a transferee within their family for the company to retain its qualification as a family SARL and the benefits that flow from it. If they fail, the family business becomes a classic SARL since not all partners are members of the same family, and therefore the SARL will lose the tax benefits associated with its former family SARL status.
From a tax perspective, in the case of income tax taxation, the manager's remuneration is non-deductible.
In addition, if the family SARL makes a profit, the profits are added to the income of the partner's tax household and can change the marginal tax rate.
The main disadvantages of the family SCI are the administrative burden as well as the unlimited liability for the company's debts, regardless of each partner's contribution.
From a tax perspective, the partners are taxed on dividends and the company on corporate tax.
Furthermore, although this is entirely consistent given the very purpose of an SCI, let us specify that it is prohibited to carry out a commercial activity in an SCI, which therefore implies the impossibility of renting out the property as furnished.
Finally, regarding the LMNP, from a tax perspective, reductions are applied to the taxable base and not to the tax due.
Moreover, the depreciation of the property is done over 30 years and furniture over 7 years. Beyond these periods, it is not possible to continue the depreciation, which consequently leads to an increase in taxation.
Furthermore, death makes the tax immediately due, even if the activity is taken over and continued by an heir.
As you will have understood, depending on your situation and the objective pursued, the elements developed above must be taken into consideration in order to choose the most appropriate structure for your project.
In brief
Family SARL (limited liability company) | Family SCI (real estate investment company) | LMNP (non-professional furnished rental) | ||
|---|---|---|---|---|
LEGAL | + | Liability limited to the amount of the contribution | Preservation of family heritage | Non-professional status |
- | Administrative rigor | Activity must strictly relate to real estate and be non-commercial / unlimited liability for debts | Limit of €23,000/year of generated income | |
TAXATION | + | Choice between income tax (IR) and corporate tax (IS) | Income tax (IR) but choice between actual regime (régime réel) and micro-BIC regime | |
Exemption on the sale of company shares / Deduction in certain cases | Tax deduction applicable to certain donations | Deductions, allowances, and carry-forward of deficits | ||
- | If IR, no deduction for manager's remuneration. If IS, profits can alter the marginal tax rate | If IS, partners will still be subject to IR in the event of dividend distribution | In the event of death, immediate taxation is payable even if the activity continues | |
INHERITANCE | + | Allowances possible in the event of donation and/or transfer of the company | No kinship link required between the investor and the heir | |
- | Difficulty in finding a transferee meeting the kinship requirements | In the event of the investor's death, obligation for the heir to continue the LMNP until the end of the lease |
Concretely, which structure should I choose based on my objective?
There is no right or wrong choice of structure; everything depends on the objectives pursued when creating the structure, as well as the medium and long-term goals.
You want to rent out your furnished property to earn additional income without worrying too much about administrative paperwork, and you know that this income will not exceed €23,000/year, while ensuring a tax exemption on rents for several years => We advise you to opt for the LMNP status.
Making a profit is not your primary goal; you mainly want to manage, protect, and best preserve the family real estate assets => We advise you to opt for the family SCI.
You want to make a profit while benefiting from reduced taxation, and you prefer this activity to be regulated and structured (specifically by articles of association) => We advise you to choose the family SARL.
