Creating an SCI to Buy Real Estate When the Partners are not Married

buying a home in FranceQUESTION:

A friend of mine who has been living in France for over twenty years says that the best way to buy real estate in France when a couple is not married is to create a SCI so that they can both own shares of the company. What do you think about this? Do you think that the fact that this friend is homosexual makes a difference in this matter?

 

ANSWER:

Your question raises more significant issues than at first appears.

An SCI stands for Société Civile Immobilière and it is created to own and manage real estate. Each person involved is called a “partner” and the shares are owned by all the partners. For French residents, the SCI is rarely the best solution for people who want to buy real estate, especially if they are going to live on the property.

First, consider your relationship. In France a couple can be married, PACSed, or simply living together. PACS stands for Pacte Civil de Solidarité, and documents a stable relationship different from marriage. It is available for both heterosexual couples and homosexual couples. It is a contract that resembles a prenuptial agreement and is registered with the court, le Tribunal d’Instance, where the couple lives. While in its early years the PACS was seen as a kind of marriage tailored to homosexual couples, today it has been totally embraced by the mainstream, with 2009 data indicating that now 95% of PACSed couples are heterosexual. Today, married and PACSed couples have almost the same rights, especially concerning fiscal situations. The PACS is therefore a good solution for heterosexual couples and I am surprised that your friend did not mention it. That being said, in order to be eligible for this status, one of the partners must be a French citizen, or the couple must reside in France. I recommend the PACS for couples who do not want to be married and who can qualify under the PACS guidelines.

One of the best uses of an SCI is when different generations of a family own real estate together in France. Specific rules are needed to organize both the common ownership and the “usage in common.” For example, the arrangements for using a small apartment or house would be different from the arrangements made for sharing a large mansion that has 10-15 bedrooms. Since France does not have anything that resembles a trust, the main point of the SCI is to regulate common ownership among partners.

Another reason to consider creating an SCI is to fight the consequences of French estate law. French law heavily regulates estates and those laws take precedent over wills that explicitly state different arrangements. You can put a non-family member in your will but you cannot disinherit your children, your spouse, or your parents. Furthermore, the taxation of estates in France increases as the heirs depart from the central bloodline. For example, a son pays less in taxes than a sibling of the deceased, who pays less than a cousin. For those who want to depart from this hierarchy, serious planning is required.

If you put a non-family member in your will, the rule of thumb is as follows: The surviving spouse will receive his or her part of the estate first. The remainder of the estate will be divided by the number of children plus one. That is, if you have three children, the non-family beneficiary receives a fourth of the estate. As a result, many foreigners feel that their freedom to bequest is quite limited, even non-existent. Throughout the years, the SCI has also been used to fight this lack of freedom to bequest by writing the company bylaws to favor the surviving SCI partner(s). The SCI bylaws should define how shares will be transferred first among the said partners, then to third parties.

For example, the bylaws of the SCI could be used to distinguish between the third-party members in accordance with their ties with the existing family. The scheme could block the children and favor the romantic partner in one scenario, or systematically favor the immediate blood link in order to keep, for example, an ancient castle in the family. So the conflict of those two laws, the bylaws on the one side and the absolute right of the surviving spouse and the children to inherit on the other, is solved by first applying the SCI bylaws. These designate the inheritor(s) and their share, after which the beneficiary of this decision must compensate the lawful heir(s), i.e., buy out the family members’ shares. The obvious question, and the source of numerous lawsuits, is: “how much is a share worth?”

Another reason why non-French residents often choose the SCI is that the liquid assets of an estate are governed by the country of residence, while real estate is governed by the country of location. Since the shares of an SCI are considered to be liquid assets, this scheme enables American residents (for example) to bequest their SCI shares according to American law, which will be taxed according to the same American law.

Now I will go back to your question and look at several scenarios.

1 – If you and your partner want to buy a primary residence together, the best situation would be to get married or PACSed. Then you own the property outright and benefit from low estate taxes and other provisions covering the primary residence, le domicile principal.

2 – If you and your partner want to buy a secondary residence, creating an SCI makes the best sense if you are both non-French residents. If you are a French resident and want to use the residence for your personal use, then it is not worth it to create a SCI unless you are legally single, i.e., neither married nor PACSed. If you plan on renting out, it will require a precise case-by-case analysis. If you rent the place furnished, for instance, creating a normal commercial corporation like a S.A.R.L. might be financially advantageous.

3 – If you want to buy property with family members, the number of owners involved complicate the benefits of direct ownership, and therefore a SCI is probably the best solution. One other specific situation where the SCI is the perfect answer is when older persons, commonly the grandparents, want to give a portion of their assets to their children. The regulation about changing the ratio of the ownership shares of an SCI is much simpler than having a notary draft a new title once the gift of a portion of the property is recorded. The SCI then becomes a beautiful tool to gradually pass real estate assets from one generation to the next.

As you can see, these are not common situations, and certainly not the romantic situation of a couple buying their first home.

 

 

 

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