When you become the owner of a property in France, and even more so when you’re not a French tax resident, sooner or later you’re faced with the question of taxation and inheritance. This raises the question of choosing the appropriate structure to manage the rental property as a family, and there are several options, depending on the inheritance/tax angle you wish to pursue.
The choice of one option over another will depend on the objective pursued.
What are the purposes and conditions of each structure?
LMNP (non-professional furnished rental) let you earn additional income from real estate in a non-professional capacity.
To qualify for LMNP status, the property must be furnished, and the income generated must not exceed 23,000 euros per year, nor represent more than 50% of total income (unless you are a non-resident).
The family SARL allows you to make a profit while benefiting from lower taxes. This structure is particularly recommended if the financial risk is high, as the liability of the partners is limited to the amount of their contribution (the family SARL is first and foremost an SARL).
In addition to meeting the same requirements as a conventional SARL, it must be made up of partners who are directly related or collaterally related up to the second degree, or by marriage.
Finally, the family SCI is recommended for the purpose of preserving and passing on assets from generation to generation.
The company’s corporate purpose must be real estate (as with traditional SCIs), and it must be made up of family members up to the fourth degree.
Let’s take a step-by-step look at the conditions, advantages, and disadvantages of these different structures, which at first glance appear similar but in reality have many differences.
What are the main advantages of these structures?
– FROM A TAX PERSPECTIVE
Choice of taxation method
In a family SARL, the choice is between corporate income tax (IS) and income tax (IR), although a conventional SARL may opt for income tax, but this option is limited to 5 years, whereas it is unlimited for family SARLs.
It should be noted that if the partners opt for personal income tax, each partner can offset the deficit incurred by the company against his or her personal tax liability, in proportion to the percentage of shares he or she holds in the family SARL.
In addition, opting for corporate income tax avoids double taxation in the event of profits.
In a traditional SARL, profits are taxed once for corporate income tax purposes, and again for corporate income tax purposes if the profits are distributed. It should be noted, however, that income tax is not always beneficial, which is why it is worth comparing it with corporate tax rates.
The choice between income tax and corporation tax is also possible for family SCIs. If you opt for income tax, the partners will have to choose between the real estate tax system and the micro-property tax system, and it is the partners who will be taxed. The advantage of opting for income tax is that no bookkeeping is required.
If you opt for corporation tax, it is the company itself that will be taxed, not the partners.
Finally, as LMNP is a non-professional status, the choice is not between income tax and corporation tax, but between the actual tax regime and the micro BIC regime, as income from LMNP is classified as BIC.
Allowance and exemption
In a family-run SARL, the sale of shares (which generates a capital gain) is tax-exempt, whereas in a conventional SARL, the partners are liable for income tax on this capital gain.
In addition, under the Dutreil pact, it is possible to benefit from a 75% allowance on the value of the shares in the event of transfer of the company, provided certain conditions are met.
In the case of family SCIs, the parent-child donation may be eligible for a tax allowance, as may any dismemberment of ownership (bare ownership/usufruct).
Please note that successive gifts of shares avoid gift and inheritance taxes. Partners who transfer their real estate assets to their heirs free of charge during their lifetime benefit from the successive deduction system, so that at the time of inheritance, the children are already the owners of the real estate and do not have to pay inheritance tax.
With LMNP, if you opt for the “real regime” system, you can deduct the costs and expenses associated with the rental activity and the depreciation of the property and carry forward any deficit.
If the micro-BIC system is chosen, a 50% allowance can be applied to rental income.
What’s more, if you invest in a new or renovated serviced residence, LMNP can be combined with the Censi-Bouvard tax reduction scheme, which entitles you to a tax reduction of 11% of the cost price of the investment, and to reclaim VAT under certain conditions.
– FROM AN INHERITANCE POINT OF VIEW
There are several possible scenarios for a family LLC:
– the heir meets the family relationship conditions: the family LLC status is maintained
– the heir is neither the child nor the spouse of the deceased partner and does not meet the family relationship condition: family SARL status is maintained, subject to the heir transferring his or her shares to a person who does meet the family relationship condition within 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 spouse of the deceased partner but does not meet the condition of kinship with the remaining partners: the status of family SARL is maintained, and the heir may retain his shares regardless of the kinship ties that the new partners have with the others.
In the event of death in a family SCI, and if the articles of association make no provision for this, there are several possible scenarios:
– Continuation with the heirs
– Continuation of the SCI with the surviving partners
– Dissolution of the SCI
In the case of LMNP, in the event of the investor’s death, the property will pass to the heirs, who must continue the LMNP until the end of the lease.
While these three types of structure offer many advantages, they also have a number of drawbacks, particularly in terms of administrative, legal and tax issues.
What are the major drawbacks of these structures?
In a family SARL, the articles of association are compulsory, as it is a SARL (limited liability company), so this structure is subject to a certain amount of administrative rigor.
In addition, there is an important point to be made about the difficulty of finding a transferee for a family owned SARL.
Indeed, the family relationship requirement obliges the transferor to find a transferee within his or her family if the company is to retain its status as a family SARL and the advantages that this brings. In the event of failure, the family company becomes a classic SARL (limited liability company), since all the partners are not members of the same family, and the SARL loses the tax advantages linked to its former status as a family SARL.
From a tax point of view, if the company is subject to personal income tax, the manager’s remuneration is non-deductible.
What’s more, if the family SARL is profitable, the profits are added to the income of the partner’s tax household and may change the marginal tax rate.
The main disadvantages of the family SCI are the administrative burden and the indefinite liability for the company’s debts, regardless of each partner’s contribution.
From a tax point of view, the partners are taxed on dividends and the company on corporation tax.
What’s more, although this is entirely consistent with the very purpose of an SCI, it is forbidden to carry on a commercial activity within an SCI, which means that it is impossible to rent out the property.
Finally, as far as LMNP is concerned, from a tax point of view, reductions are made to the taxable base, not to taxes.
In addition, the property is depreciated over 30 years, and the furnishings over 7 years. Beyond these periods, it is not possible to continue depreciation, which means higher taxation.
In addition, in the event of death, taxation is immediately due, even if the business is taken over and continued by an heir.
As you will have understood, depending on your situation and the objective you are pursuing, the elements set out above should be taken into consideration in order to choose the most appropriate structure for your project.
In brief
Family SARL | Family SCI | LMNP | ||
LEGAL | + | Liability limited to the amount of the contribution | Preserving family heritage | Unprofessional status |
– | Administrative discipline | Business must be real estate and not commercial / indefinite liability for debts | Limit of €23,000/year in revenue generated | |
FISCALITY | + | Choice between income tax and corporate tax | Income tax, but choice between actual regime and micro BIC regime | |
Exemption on sale of company shares/ allowance in certain cases | Tax allowance applicable to certain donations | Deductions, allowances, and loss carryforwards | ||
– | If corporate income tax, no deduction for manager’s remuneration If corporate income tax, profits can change marginal tax rate | If corporate income tax, associates will also be subject to corporate income tax in the event of dividend distribution | If death occurs, tax immediately due even if business continues | |
SUCCESSION | + | Possible allowances in the event of donation and/or transfer of the company | No relationship required between investor and heir | |
– | Difficulty finding a transferee who meets the conditions of kinship | If the investor dies, the heir is obliged to continue the LMNP until the end of the lease. | ||
In concrete terms, which structure should I choose according to my objectives?
There is no right or wrong choice of structure: it all depends on the objectives pursued when the structure was created, as well as on medium- and long-term objectives.
You want to rent out your furnished property to earn additional income without having to worry too much about administrative paperwork, and you know that this income will not exceed €23,000/year, while ensuring that your rents will remain stable for several years =>We advise you to opt for LMNP status.
Your primary objective is not to make a profit, but to manage, protect and preserve your family’s real estate assets => We recommend that you opt for the family SCI.
If you’re looking to make a profit while benefiting from a lower tax burden, and you’d prefer this activity to be well structured (in particular by means of articles of association) => We recommend the family SARL.
Don’t hesitate to contact us to set up the legal, tax and accounting structure best suited to your needs. Contact us directly on +971 058 645 3069, or info@expatslawfirm.com. For further information, please visit our website https://conseil-avocate.com or https://expatslawfirm.com.