SCI and VAT: what you need to know before investing

When considering investing in real estate via a Société Civile Immobilière (SCI), the question of VAT is a key element not to be overlooked, particularly in the case of furnished rentals. Although often used to optimize asset management and facilitate the transfer of property, SCIs are subject to specific tax rules that can have an impact on the profitability of the investment. This article reviews the main implications of VAT for an SCI, and the precautions to be taken before investing.

SCI and its tax system

An SCI is a legal structure enabling several associates to own and manage one or more properties. By default, an SCI is subject to income tax (IR), but under certain conditions it can also opt to pay corporation tax (IS).

In principle, SCIs are exempt from VAT when they are engaged in bare rental activities (i.e., without furnishings or associated services). However, certain real estate transactions may be subject to VAT, which may have consequences for the company's tax regime and that of its partners.

SCI and furnished rentals a special case

Furnished rental is an activity with specific VAT obligations. Unlike bare rental, it is considered a commercial activity, which has a direct impact on the SCI's tax regime. To find out more

1. Incompatibility between SCI and furnished rental An SCI whose main purpose is the furnished rental loses its civil status and may be reclassified as a commercial company. This means that it could be subject to corporation tax (impôt sur les sociétés - IS), with significant tax consequences, notably on the taxation of capital gains when the property is resold.
2. VAT and furnished rentals In principle, furnished rentals are exempt from VAT, except in certain specific cases:
   • If the rental includes hotel services (breakfast, regular cleaning, reception, etc.).
   • If the property is located in a service residence (student residence, senior residence, tourist residence). In these cases, VAT is applicable at the rate of 10% or 20%, depending on the services offered.

The impact of VAT on SCI investments

If an SCI is subject to VAT, it can reclaim the VAT on works and acquisitions, which can represent a significant financial advantage. However, this VAT recovery is conditional on the company charging VAT on its rents, which can have an impact on rental profitability.

Advantages and disadvantages of VAT registration

Advantages :

• VAT can be reclaimed on purchases and work.
• Better tax optimization for certain types of investment (service residences, for example).

Disadvantages :

• Obligation to charge VAT on rents, which may reduce attractiveness to individual tenants.
• More complex administrative and accounting formalities.
• Risk of reclassification of the SCI as a commercial company and transition to corporate income tax.

What precautions should I take before investing?

Before setting up an SCI for a real estate project involving furnished rentals, it's essential to carefully assess the tax and legal consequences. Here are a few recommendations:

• Analyze the nature of the project: if the aim is to run a furnished rental business, it may be more interesting to opt for another legal structure, such as a SARL (limited liability company) or a sole proprietorship.
• Consult a chartered accountant or a tax lawyer to anticipate tax impacts and avoid reclassification as a trading company.
• Study the available tax regimes and check whether VAT can be a lever for optimization or a brake on profitability.
• Plan the legal structure to suit the type of property and the type of rental envisaged.

Conclusion

Investing via an SCI offers many advantages, but the question of VAT and furnished rental requires particular attention. As furnished rental can lead to the SCI becoming commercialized and subject to corporation tax, it is crucial to anticipate these impacts before structuring an investment project. By taking the right advice and studying the tax options available, you can optimize your real estate investment while avoiding tax pitfalls.