The apparent fashion, very much in evidence a few years ago, for individuals to purchase French properties via some form of company appears to be on the wane. Nevertheless we do still get asked on a fairly regular basis whether it is worth considering purchasing a property through a company. Although, in the majority of cases the answer is usually a fairly clear ‘no’ there are sometimes occasions when purchase through a company is appropriate.

One of the main reasons why individuals choose to use a company to purchase their French property is to avoid the provisions of French succession law which, as many readers will be aware, gives forced inheritance rights to certain members of a deceased’s family, notably his or her children.

When an individual owns a property through a company it is the company shares that change hands when the individual dies. As shares are classed as moveable property, under both French and UK law these will be subject to the law of the deceased’s country of domicile. Therefore, for French property owners who remain domiciled in the UK it is UK law which will apply – giving the individual the right to leave the shares as he pleases.

It should be noted however that there have been cases where ownership of property through a company has been successfully challenged in the French courts where it can be proved that the primary motive was to avoid succession rights.

Companies are also sometimes used where a number of couples or individuals wish to purchase a property for their joint use. By using a company they can have a more businesslike structure, with a few ground rules. They can also provide that, in the event of one of them dying, the surviving owners will have the right to buy out the shares which pass to the deceased owner’s heirs, thus limiting the potential ownership of the property.

Underlying value

It is still a common misconception that the use of a company to purchase property in France will also avoid payment of inheritance tax (IHT) in France. In most cases this is not so. Where more than 50 per cent of the value of the company concerned derives from an underlying value of French real estate then the shares in the company will be subject to French IHT in exactly the same way as the real estate itself. So while it is perfectly possible to use a company to allow property to pass to, say, an unmarried partner or to stepchildren, the recipients will still be subject to the high levels of IHT that apply in France to parties who were unrelated to the deceased.

A possible exception to this is where shares in a company are held jointly en tontine allowing them to pass, on the death of one shareholder to the surviving shareholder(s). This exception to the tax rules that generally apply to tontine ownership is due to a ‘loophole’ in French law which has remained open for almost forty years. There are those who view this as an abus de droit and therefore liable to challenge but at the moment it does appear to work and, if there are other valid reasons for setting up a company it may be worth a try.

The type of company most commonly used to buy real estate in France is the société civile immobilière or SCI. This is a ‘civil objects’ company under French law. There is no real equivalent under English law but it is sometimes likened to a partnership rather than a company. This is because, while it remains within its civil objects the company is fiscally transparent under French law, meaning that it is not subject to French corporation tax (impôt sur les sociétés or IS) but the shareholders are taxed as individuals on income and profits which the company makes.

Commercial activity

If an SCI exceeds its civil objects and engages in what French law considers to be commercial activity, it will lose its transparency and will become subject to IS. Letting property on an unfurnished basis is within civil objects but letting on a furnished basis is not – meaning that, for example, a property owned by an SCI and used for holiday lettings will be subject to IS on the income it makes. Perhaps more importantly a non-transparent French-based company will be liable to IS on any gain it makes if the property is sold. As the basic rate of the tax is 33.3 per cent (as opposed to 16 per cent for capital gains tax paid by most individuals) and there is no taper relief, this can be a major disadvantage.

It should also be noted that UK law does not regard an SCI as being transparent and this may have tax consequences in this country.

Until recently a much-publicised potential disadvantage of using an SCI was the possible liability which shareholders had to pay UK income tax on the ‘benefit in kind’ if they had the free use of the company’s property. These rules were clarified in the March 2007 UK budget with the result that this tax will not apply in the vast majority of cases.

An SCI is not a limited liability company which means that any shareholder could, theoretically, be liable for all of the debts of the company. The French equivalent of a private limited liability company is the société à responsabilité limitée or SARL. This type of company is not generally transparent – meaning that it will be subject to French corporation tax. An exception is a form of family-owned SARL which can be transparent, subject to the same restrictions as for an SCI.

Those based in the UK may wish to use a UK company for their purchase. In the past the advice has generally been that, since a non-French company cannot be transparent under French law then it will always be subject to IS on its income and profits. Recent French case law (jurisprudence) however indicates that under the provisions of the France/UK taxation treaty, a UK company that sells real property in France will not be liable to IS on any gain realised provided the company does not have a permanent establishment in France. However, as many notaires and tax advisors remain unaware of this point, owners may find the costs and hassle of arguing their case may outweigh the tax advantages of the decision.

Mutual arrangement

An off-shore company may also be considered as a vehicle for ownership. The notion of off-shore tends to equate, in many people’s minds to ‘tax-free’ but this is unlikely to be the case. As with UK-based companies, off-shore companies cannot be transparent in France and their ownership of French property will be liable to IS. Furthermore off-shore tax havens do not tend to have the benefit of taxation treaties and the protection that these can afford.

Any company which owns real estate in France is potentially liable to an annual tax of 3 per cent of the property value. In the case of companies based in France itself or in countries (such as the UK) which have mutual arrangements with France for the avoidance of tax fraud, this annual tax can be easily avoided by a simple undertaking to provide certain information relating to the company and its shareholders, on demand, to the French tax authorities. In the case of off-shore tax havens no such arrangements will exist and therefore the tax cannot be avoided in this way.

Finally it should be remembered that even the most basic of companies will require some level of administration such as the holding and minuting of a general meeting at least once a year and the keeping of basic accounts. In addition there are quite significant costs associated with the setting up of French SCIs or SARLs. The more complex the structure (eg companies owning other companies) the greater the costs are likely to be and the more there is to go wrong. In the majority of cases, particularly where couples or families are involved, there will be a simpler and cheaper solution.

There will always remain situations in which a company structure is appropriate but make sure you see professional advice before using this route.