How is an SCI taxed: income tax or corporate tax?

The default regime: tax transparency under Article 8 of the French General Tax Code

An SCI that lets premises unfurnished does not itself pay tax: its results are taxed in the hands of the partners, in proportion to their rights (Article 8 of the French General Tax Code). For an individual partner, the rents are property income, taxed at the progressive scale after deduction of actual expenses (loan interest, works, property tax), plus social levies of 17.2%.

Any rental deficit is set off against overall income up to 10,700 € per year, the excess being carried forward against rental income of the following ten years (Article 156, I-3° of the French General Tax Code). The simplified micro-foncier regime is only available to a partner who also owns at least one directly held property let unfurnished (Article 32 of the French General Tax Code; BOFiP, BOI-RFPI-DECLA-10).

On resale, the capital gain falls under the individuals' regime: 19% income tax and 17.2% social levies, with holding-period allowances leading to a full income tax exemption after 22 years (Articles 150 U and 150 VC of the French General Tax Code) and a social levies exemption after 30 years (Article L. 136-7, VI of the French Social Security Code).

The corporate tax option: what it changes

The SCI may opt for corporate income tax (Articles 206, 3 and 239 of the French General Tax Code). The option may be revoked until the fifth financial year following the one in respect of which it was exercised; after that, it becomes final, and a revocation bars any new option.

Under corporate tax, the company deducts depreciation of the building and all actual costs: taxable profit is often low while the loan is being repaid. Profit is taxed at 15% up to 42,500 € for companies meeting the conditions of Article 219, I-b of the French General Tax Code (turnover below 10 million euros, fully paid-up capital held at least 75% by individuals), then at 25%. The partners are only taxed on actual distributions, in principle at the 30% flat tax (Article 200 A of the French General Tax Code).

Income tax or corporate tax: the comparison at a glance

Taxation of rents: at the progressive scale plus 17.2% for each partner under income tax; at 15% then 25% at company level under corporate tax. Depreciation of the building: impossible under income tax; deductible under corporate tax, which often keeps taxable profit low. Distributions: not applicable under income tax, where the partners are taxed directly; subject to the 30% flat tax on dividends under corporate tax.

Capital gain on resale: the individuals' regime with exemptions at 22 and 30 years under income tax; sale price less net book value, with no holding-period allowance, under corporate tax. Accounting: simplified under income tax; accrual accounting and a full corporate tax return under corporate tax.

The two major traps

The resale trap under corporate tax: the taxable gain equals the sale price less the net book value, that is, the purchase price reduced by the depreciation already deducted. The depreciation claimed during the holding period is therefore clawed back on exit, with no holding-period allowance whatsoever, and the net proceeds bear a second 30% tax when distributed to the partners. The longer the holding period and the higher the expected gain, the more the income tax regime regains the advantage.

The furnished rental trap: habitual furnished letting is a commercial activity (Article 35, I-5° bis of the French General Tax Code). An SCI under income tax that lets furnished premises becomes automatically liable for corporate tax (Article 206, 2 of the French General Tax Code), with all the consequences described above. Administrative guidance only tolerates ancillary commercial receipts not exceeding 10% of total receipts excluding VAT (BOFiP, BOI-IS-CHAMP-10-30).