SARL – SCI – LMNP

When you become the owner of a property in France, especially when you are not a tax resident in France, you sooner or later ask yourself the question of the taxation of this property and of inheritance. This raises the question of choosing the appropriate structure to manage the rental of a property as a family, and several options are available depending on the inheritance/tax angle you wish to prioritize.

The choice for one option rather than another will be made in particular according to the objective pursued.

What are the objects and conditions specific to the structures that can be considered?

There Non-professional furnished rental (LMNP) as for it, allows you to receive additional income from real estate while having a non-professional status.

The accommodation concerned by the rental must be furnished and the income generated cannot exceed 23,000 euros per year, nor represent more than 50% of the total income (unless non-resident) to retain LMNP status.

There Family LLC allows you to make profits while benefiting from reduced taxation. This structure is particularly recommended if the financial risk is high since the liability of the partners is limited to the amount of their contribution (in fact, the family SARL is above all an SARL).

In addition to meeting the conditions for setting up a traditional SARL, it must be made up of partners with a direct or collateral family relationship up to the second degree or through marriage.

Finally, the Family SCI is recommended with the aim of preserving and transmitting heritage from generation to generation.

The company must necessarily have a real estate activity as its corporate purpose (as for classic SCIs) and must be made up of members of the same family up to the fourth degree.

Let's look point by point at the conditions, advantages and disadvantages of these different structures which at first glance are similar but which in reality have many differences.

What are the main advantages of these structures?

– FROM A TAX POINT OF VIEW

Choice of taxation method

In a Family LLC, the choice is given between taxation under corporate tax (IS) and taxation under income tax (IR), knowing that a classic SARL can certainly opt for IR but this option is limited to 5 years while it is unlimited for family SARLs.

It should be noted that in the event that the partners choose IR, each partner can charge, in proportion to the percentage of shares that he holds in the family SARL, the deficit incurred by the company in his personal taxation.

In addition, the option for IR makes it possible to avoid double taxation in the event of profit.

Indeed, only the partners are taxed under the IR whereas in classic SARLs, the profits are taxed a first time under the IS and a second time under the IR if the profits are distributed. However, it should be noted that the IR taxation does not always prove beneficial, hence the interest in comparing it with the corporate tax rates.

The choice between IR and IS is also possible in Family SCI. In the case of the option for 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 IR has the advantage of not requiring accounting.

If you choose IS, it is the company itself that will be taxed and not the partners.

Finally, the LMNP granting a non-professional status, it will be a question of choosing not yet IR and IS but between real regime and micro BIC regime to the extent that the income drawn from the LMNP is placed in the BIC category

Abatement and exemption

In the Family LLCs, the transfer of shares (which generates a capital gain) is exempt from tax, whereas in a traditional SARL, the partners are liable for income tax on this capital gain.

Furthermore, under the Dutreil pact, it is possible to benefit from a reduction of 75% on the value of the securities in the event of transfer of the company, subject to meeting certain conditions.

In the Family SCI, the parent-child donation may be subject to a tax reduction, as may any dismemberment of property (bare ownership/usufruct).

Please note that successive donations of company shares allow you to avoid gift tax and inheritance tax. Partners who, during their lifetime, transfer their real estate assets to their heirs free of charge benefit from the system of successive allowances, meaning that at the time of inheritance, the children are already the owners of the real estate and do not have to pay inheritance tax.

In LMNP, if the actual system is chosen, the charges and expenses linked to the rental activity and the depreciation of the property may be deducted and the deficit may be carried forward.

If the micro-BIC regime is chosen, a reduction of 50% can be made on rental income.

In addition, in the event of investment in a new or renovated service residence, the LMNP can be combined with the Censi-Bouvard tax exemption mechanism which allows you to benefit from a tax reduction of 11% of the cost price of the investment and to recover the VAT under certain conditions.

FROM THE POINT OF VIEW OF INHERITANCES

Several hypotheses are to be expected within the framework of a Family LLC :

– the heir meets the kinship conditions: maintaining the status of family SARL

– the heir is neither the child nor the spouse of the deceased partner and does not meet the kinship condition: maintenance of the status of family SARL subject to the transfer of his 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).

(Rep. 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 condition of kinship towards the remaining partners: maintenance of the status of family SARL and the heir can keep 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 in the event that the statutes do not provide for anything, several hypotheses are possible:    

– Continuation with the heirs

– Continuation of the SCI with the surviving partners

– Dissolution of the SCI

In LMNP, in the event of the investor's death, the property will be transferred to the heirs who will have to continue the LMNP until the end of the lease.

            While these three types of structures have many advantages, they also have some disadvantages, particularly at the administrative, legal and fiscal levels.

What are the major disadvantages of these structures?

In fact, in a Family LLC, the statutes are obligatory since it is, let us remember, an SARL, this structure therefore meets a certain administrative rigor.

Furthermore, an important element should be noted regarding the difficulty of finding a transferee in the context of a family SARL.

Indeed, the condition of the family relationship obliges the transferor to find a transferee within his family so that the company retains the qualification of family SARL and the advantages that come from it. In the event of failure, the family company becomes a classic SARL since not all the partners are members of the same family, therefore the SARL will lose the tax advantages linked to its former status as a family SARL.

From a tax point of view, in the event of income tax, the manager's remuneration is non-deductible.

In addition, 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 as well as the indefinite liability for the company's debts regardless of the contribution of each partner.

From a tax point of view, the partners are taxed on dividends and the company on corporate tax.

Furthermore, even if this is entirely consistent with the very purpose of an SCI, let us point out that it is prohibited to carry out a commercial activity in an SCI, which therefore implies the impossibility of renting out the property.

Finally, regarding the LMNP, from a tax point of view, the reductions are made at the level of the taxable base and not of taxes.

Furthermore, housing depreciation is calculated over 30 years and personal property over 7 years. Beyond these periods, it is not possible to continue depreciation, which results in 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

Concretely, which structure should I choose depending on my objective?

There is no right or wrong choice of structure, it all depends on the objectives pursued when creating the structure but also the medium and long term objectives.

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 tax exemption on rent for several years. We advise you to opt for the status LMNP.

Making a profit is not your primary objective, you mainly want to manage, protect and preserve the family real estate assets as best as possible => We advise you to opt for the Family SCI.

You want to make profits while benefiting from reduced taxation and you prefer this activity to be well framed and structured (in particular by statutes) Þ We advise you Family LLC. 

Don't hesitate to contact us to set up the legal, tax, and accounting structure best suited to your needs. Contact us directly at +971 058 645 3069 or at contact@conseil-avocate.com. For more information, please visit our website https://conseil-avocate.com or https://expatslawfirm.com.