Property investment companies for a professional asset

Should be a SCI to hold your professional real estate?

Business owners may decide to buy the premises in which they run their business.

They then have to decide how to hold the premises. 

In some cases, it may be interesting for an entrepreneur to acquire professional premises through a professional Civil Real Estate Company (SCI). This corporate form leads to certain advantages, mainly for obtaining a bank loan or for transmitting.

If the building is held as business property:

• From an accounting point of view, this results in the building being included in the business’ balance sheet.

Advantages:

• The purchase costs may be deducted from the business results.
• The interest on the loan taken out to purchase the premises may be deducted from the operating results.
• The entrepreneur may amortize construction work, which means that he/she may deduct, from the annual results, a sum for a fraction of the value of the building according to the length of time for which it is used.

Drawbacks:

• The inscription of the building increases the value of the assets of the balance sheet, which makes the sale of the business more expensive, unless the entrepreneur devalues the real estate part.
• If the business owner decides to keep the building, to rent it, he will have to remove it from the balance sheet, which will generate a tax on capital gains.
• If the business experiences difficulties, any immovable property included in the balance sheet will not be protected from liquidation and will be subject to the same outcome as businesses in the event of court-ordered receivership or liquidation.

In order to avoid such drawbacks, business owners usually create a property investment company founded, for example, with their spouses to purchase buildings intended for their business.

If immovable property held by a property investment company:

The property investment company then makes the purchased building available on a lease. 

The professional SCI is a civil society whose corporate purpose relates to the management of real estate assets. This real estate property is made up of premises used in the context of a professional activity. The SCI is made up of at least two partners. It helps distinguish real estate from commercial exploitation. It is an alternative to the direct management of professional premises.

Good to note: the SCI does not require a minimum capital when it is incorporated. The liability of the partners is unlimited, in proportion to their participation in the share capital. The SCI is in principle subject to income tax, but has an option for corporate tax. As for the management of the SCI, it is entrusted to a manager, natural or legal person, partner or not.

Drawbacks:

• the purchase costs and loan interest are not deductible from the business results.
• the building cannot be amortized

Advantages:

• In theory, the professional building is protected from any legal proceedings that may affect the business loan interest is deductible from property income
• If the building is sold and subject to the income tax scheme (option à l’impôt sur le revenu) having been adopted, the capital gains tax payable is the same as for private individuals: complete exemption after 22 years' holding (30 years for social security contributions). When the company is subject to IS, its real estate capital gains are considered as a standard result.
• The property investment company may be used as a business property management tool that facilitates transfers to your children. The integration of new partners can be done through the transfer of shares in the SCI. It is then possible to take advantage of the deductions which are offered for donations, in order to reduce the tax base. Moreover,  it is possible to resort to the dismemberment of property, which means, to give only bare ownership while retaining the usufruct (the right to enjoy and recover income). The value of bare ownership is lower than the value of full ownership.
• The entrepreneur builds up real estate assets through the SCI without having to personally pay the costs and expenses of the properties. The cost of work and loan repayments are deducted from the profits of the SCI while the rents paid can be deductible from the income of the professional activity. Please note: Rents are only deductible if they are in line with the market price.
• When the SCI realizes a deficit, the partners can carry forward this property deficit on their declaration in order to reduce the amount of their property income and to charge part of the deficit on their overall income.

Only an individual, in-depth analysis of your property situation will, however, determine whether it is advisable to set up a property investment company.

Should you decide to go ahead, you will have to be extremely careful when drawing up the articles of association and commercial lease, hold general meetings and keep separate accounts.

The appropriate tax system (option for corporate tax rather than income tax), funding method (standard loan or leasing) or other more unusual means of purchase (building lease, long lease, etc.) also have to be examined.

Find a notaire

Contact your notaire before you begin any projects. Your notaire specialises in property and family matters and will advise you.