Should you purchase your French property through a SARL (LLC) ?
An SARL is a limited liability company and one of the most common types of business in France and very popular with Foreign residents buying in France.
This type of company must be composed of two or more partners or you can create an EURL (single-member company with limited liability) if you want to set up a company by yourself. There is also a Family SARL which allows you to make an SARL with direct family members. This is strictly limited to children, parents, grandparents, siblings and spouses. For example, it would be impossible for a niece and uncle to make a family SARL together. In this case they would need to create a SCI (Civil Society for Real Estate).
1 – A flexible structure with limited liability
The liability of the partners is limited according to how much capital they have invested in the business. However, it is important to remember that it will be difficult to get a mortgage with a small amount of capital. This means that you will need to act as guarantor for the SARL or increase your capital contribution.
There are three major types of SARL, the “classic” SARL, the family SARL, and the SARL Unipersonal (or EURL) which is for those who want to create a business alone. With EURLs, you can always later switch to a different type of SARL if you want to start working with a partner.
Unlike an SCI, family SARL and EURL businesses can take advantage of the French “rented-out, non-professional, furnished properties” scheme (LMNP). If this is something that you would be interested in pursuing, it is important to get advice on this as your income may be taxed. In addition, if you are trading alone (EURL), you will not need to pay social security contributions if you make €23,000 or less per year. In the case of a family SARL, this limit is multiplied by the number of family members in the company. For example, if your business has four partners, this threshold is increased to €92,000!
2 – A favourable tax system with benefits on capital gains, inheritance and the ability to reclaim VAT
Real estate gains in an SARL are part of the professional tax regime in France because the company’s business is commercial. However, after five years, long-term real estate capital gains benefit from a 10% reduction per year. In other words, you would be totally exempt from paying capital gains tax after 15 years. If you were operating as an SCI, it would take 22 years to reach total exemption from capital gains tax and 30 years to be exempt from the social security part.
In France a family SARL allows the dismemberment or separation of shares with the possibility of separating usufruct (use, rent or ability to live in the property) and bare ownership of the property (the ability to sell it once the usufruct has expired). If you keep the usufruct (you continue to collect rent) and you give your children the bare ownership, the amount of inheritance tax will generally be very low. One can see a certain advantage of passing on one’s shares when the company is in debt.
Let’s assume we have a client associated in a “SARL familiale” owning an apartment worth 1M euros financed by a mortgage. This client owns 50% of the shares, and there is still 600,000€ to repay. The value of the client’s shares is 200,000€ (400,000€ x 50%). If he transmits the bare ownership to his child worth 80,000€ (200 000 x 40%), the taxable base becomes 0€ thanks to the tax rebate of 100,000€.
When an LMNP investment is subject to VAT (20%), it can be recovered 6 months after the acquisition of the property. In order to benefit from this scheme, your property must fall into one of the following categories:
- – Accommodation services provided in classified tourist hotels
- – Accommodation services provided in classified or approved holiday villages
- – Accommodation provided in classified tourist homes which are intended to accommodate tourists and are rented by a contract for a period of at least 9 years to an operator who has subscribed to a tourism promotion commitment
Whether free or for a fee, you must also offer 3 of these services:
- – Breakfast
- – Daily cleaning of the premises
- – Linen supply
- – Concierge
In addition, you must own the property for at least 20 years to realise the full benefit of the reimbursement. If you do decide to sell before 20 years, the VAT will have to be refunded to the State pro rata. If you have a commercial lease, it will then be necessary to sell your property with the latter to avoid being liable.
3 – General costs and management of the structure
You will need to write up the statutes of the company for the clerk’s office at the Commercial Court and advertise the incorporation of the company in the newspaper. This will cost between €1,000 and €2,000.
The company is managed by one or more managers appointed from among the partners or it can be someone external. However, a manager must be a natural person – not a legal entity. The powers of a manager are defined in the statutes of the family SARL. The partners meet at least once a year in an ordinary general meeting. Decisions leading to a modification of the statute would be made at an extraordinary general meeting. If taking out a loan from a retail bank then the guarantor should be the manager.
Like those who are self-employed, the SARL will need to pay territorial economic contribution (formerly business tax). New businesses will not need to pay this tax during the year of their creation.
4 – You have the choice on tax regime
If you choose to pay corporation tax, you cannot change your mind and opt for income tax. However, it would be possible to switch to corporation tax if you were originally paying income tax.
Income tax regime
The SARL, since it carries out economic operations for a fee, is a taxable person and, as such, is liable for VAT. When you recover the VAT on the amount of the property, you will have to pay VAT of 20% on rental income. For LMNP property in a senior, student, business or tourism residence, a rate of 10% applies. Property that falls into the leaseback LHPE residence type, the VAT is 5.5%.
Corporation tax regime (IS).
For companies with a turnover of less than €7,63m, corporation tax varies according to which profit bracket your business falls in:
|Corporation Tax Rate
|€0 to €38,120
|€38,120 to €75,000
For companies with a turnover turnover between €7.63m and €50m, corporation tax is broken down into two brackets:
|Corporation Tax Rate
|€0 to €75,000
Companies with a turnover in excess of €50m will pay a flat rate of 33.33%, regardless of profit.
A real estate company in the form of an SARL has more advantages for less inconvenience than SCI. However, you will need to be very mindful of the requirements of a family SARL if you want to make the most of the furnished rental. As this is a complex issue it is best to involve your mortgage broker and tax adviser at an early stage to ensure all works well.
Published in June 2019. This article is for informational purpose only as an initial guide to the main points and does not constitute tax advice. Please seek independent tax advice before committing to any purchase to ensure the have the correct set up for your personal situation.