Everything you need to know about the combination of SCI and LMNP statutes

What is an SCI and an LMNP status?

Understanding the fundamentals of Real Estate Civil Society (SCI) and the status of Non-Professional Furnished Renter (LMNP) is an important prerequisite for any real estate investor. These two forms of investment offer distinct advantages, but also specific constraints, and therefore address different investment situations and objectives.

One Real Estate Civil Society (SCI) is a legal structure with the participation of at least two persons (natural or legal) whose asset objective is to own, manage and transmit real estate.

SCI is considered to be a legal entity distinct from its founders, which means that it has its own legal personality and is independent of its creators. This is why its creation requires specific procedures, in particular:

• The drafting of statutes
• The publication of a legal announcement
• Its registration in the Trade and Companies Register (RCS).

Like any company, an SCI has a limited lifespan, up to 99 years. It is regulated by common civil society law and must be mainly oriented towards civil activities.

From a fiscal point of view, the income generated by an SCI is subject to income tax, in the category of property income, unless the SCI opts for corporate tax, thus offering an attractive tax alternative depending on the investor's situation.

The status of Non-Professional Furnished Renter (LMNP) allows owners to rent furnished real estate, benefiting from an advantageous fiscal framework. One of the main advantages of the LMNP is the possibility of amortizing the value of the property and furniture, thus significantly reducing the taxable amount of rental income. In LMNP, owners have the choice between two tax regimes : The micro-BIC And the BIC-real regime. The micro-BIC grants a flat rate reduction of 50% on rental income, thus simplifying tax reporting. For its part, the BIC-Réel regime allows a precise deduction of the real expenses associated with the rental (such as management fees, maintenance, loan interests, acquisition costs, etc.) as well as the depreciation of real estate and its furniture. This option is particularly advantageous for owners with significant expenses or those who buy to rent. It leads to a significant reduction in the tax on rental income.

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Combining SCI and LMNP

The combination of SCI and LMNP statuses is attracting the interest of many investors seeking to optimize their real estate and fiscal assets. We explain to you what the law says about this possibility, as well as the conditions necessary to make this combination.

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Combining SCI and LMNP: What does the law say?

The French legal framework offers some flexibility in the structuring of real estate investments, but it also imposes clear limits on how different statuses can interact. In principle, an SCI is designed for the ownership and management of real estate, with a default taxation on the income of partners (SCI at IR). However, the civil nature of SCI does not, in theory, allow it to carry out commercial activities, a category in which furnished rentals are classified.

The legislation frames this distinction by establishing that if an SCI engages in furnished rentals, it risks being reclassified as a commercial company, with all the tax and accounting implications that this implies, in particular the liability to corporate tax and commercial social security contributions. However, nuances exist, and certain configurations can make it possible to take advantage of the advantages of both statuses, subject to meeting specific conditions.

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The conditions for combining SCI and LMNP

To fully comply with the law and simultaneously maintain the two statutes of the SCI and the LMNP, certain conditions must be met:

• The income you earn as a Non-Professional Furnished Renter (LMNP) must not exceed 10% of the total turnover achieved by your SCI during the year.
• If you rent your assets in LMNP on an occasional basis rather than all year round (such as during vacations, weekends or holidays), the tax authorities allow the accumulation of LMNP and SCI statuses, provided that LMNP income is not the main source of income for the SCI.

If the SCI does not meet these conditions, it will no longer be subject to income tax (IR) and will have to switch to the corporate tax (IS) regime, which is normally applicable to commercial companies. The company's taxable profits will then be subject to a fixed rate of 25% or 15% depending on income.

In fact, the SCI can benefit from a reduced rate of 15% on profits under €42,500, provided that three conditions are met:

• A turnover excluding taxes of less than 10 million euros,
• Fully paid up share capital,
• 75% of the capital is owned by natural persons.

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What are the procedures for combining SCI and LMNP?

The combination of SCI and LMNP statuses can be beneficial for real estate investors. This includes complying with the conditions set out earlier in the section, but we also want to highlight two important points:

• Revenues from LMNP must not exceed 10% of the total turnover generated by SCI during the year.
• Your LMNP activity is carried out on an occasional basis, i.e. the LMNP should not be the main source of income for your SCI.

It is important that SCI associates fully understand the implications of this choice before engaging in leasing as an LMNP.

The IS regime has two significant advantages:

• A tax rate of 15% if the profits are less than €42,500 per year (25% beyond in 2022).
• A stable tax, offering visibility on SCI taxation (the tax has been revised only 4 times in 30 years, and downwards).

However, these advantages must be balanced against the disadvantages of the IS regime, such as the double taxation of results and heavier accounting management (obligation to file the Cerfa tax return no. 2065) with Qlower or an accounting firm.

However, it is important to stay informed of legislative and fiscal developments affecting SCIs and LMNP status to adjust your strategy accordingly.

Thus, given the complexity of the procedures and the tax implications, the use of real estate tax experts is recommended to secure your investment and optimize your tax strategy.

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The fiscal impact of combining SCI and LMNP

If you meet the income thresholds for the Non-Professional Furnished Renter (LMNP) status:

Your SCI remains subject to income tax, thus maintaining the advantages associated with LMNP status:

• You will pay less capital gains tax if the home is sold by the SCI.
• You will benefit from the regime of capital gains for individuals with its system of allowance for length of detention.
• You will be able to amortize the work and equipment of the accommodation over a fixed period of time.
• By being under the Income Tax (IR) tax system, you are not required to keep accounts for your company.

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If you exceed the LMNP income thresholds:

The administration will consider that you are carrying out a furnished rental business on a regular basis, and no longer on an occasional basis. Your status will then be requalified as a Professional Furnished Rental (LMP).

In this case, at the tax level, your SCI will be subject to Corporate Tax (IS) at the rate of 25%, or at the reduced rate of 15% for the portion of profits under €42,500.

Your income from furnished rentals will be doubly taxable: first at the level of the company, then at the level of the partners, on their dividends according to their tax schedule. You will switch to the professional capital gains system, thus losing the advantageous benefit of real estate capital gains from individuals that are still in place today.

Despite this, the transition to Corporate Tax offers several advantages, in particular the possibility of amortizing your real estate assets for tax purposes, to deduct more expenses, and to impute a possible deficit to the overall income of the SCI. In some situations, switching to corporate income tax can help reduce the amount of your taxes, especially if you are heavily taxed at the base.

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Advantages and disadvantages of combining SCI and LMNP

The combination of SCI and LMNP statutes represents an innovative real estate investment strategy.

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Benefits of accumulation for investors

Take advantage of the tax advantages of the LMNP: the advantageous tax regime for Non-Professional Furnished Rentals (LMNP) offers the possibility of deducting all real expenses, including depreciation, which considerably reduces the tax on rental income.

Limit of personal liability in the event of financial difficulties of the SCI: In the event of financial problems of Société Civile Immobilière (SCI), the partners are only held responsible for the company's debts up to their contributions. This makes it possible to limit the personal liability of the partners in the event of the bankruptcy of the SCI.

Possibility of transmitting real estate assets to children: SCI, as a legal form, facilitates the transmission of real estate assets to children in a simple and effective manner, benefiting in addition from a discount for the lower liquidity of real estate.
Possibility of raising funds from other investors: SCI offers the possibility of collecting funds from other investors, which can be useful to finance the acquisition of real estate or the carrying out of work.

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Risks and drawbacks to consider

Administrative and accounting complexity: the combination of LMNP and SCI statutes generates increased administrative and accounting complexity. Indeed, the SCI is required to maintain comprehensive accounting, and the partner must declare his rental income from the LMNP in his income tax return (IR).

Loss of certain tax benefits from SCI: the combination of the LMNP and SCI statutes results in the renunciation of certain tax advantages of the SCI. In particular, SCI subject to income tax (IR) may benefit from an exemption from real estate capital gains tax when selling a property after 30 years of ownership. However, SCI partners who carry out an LMNP activity lose this tax advantage.

Risk of requalification into an LMP: if the tax authorities consider that the rental activity is carried out on a professional basis, the combination of LMNP and SCI statuses can be requalified as Professional Furnished Rental (LMP). This will result in the taxation of rental income according to the industrial and commercial profits regime (BIC), with a loss of the tax benefits of the LMNP and subject to social security contributions.

Risk of conflict between partners: as with any SCI, the combination of LMNP and SCI statutes may cause conflicts between partners. SCI partners may have differing goals, especially when it comes to real estate management or profit distribution.

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How can risks be minimized?

Expert consultation: support from real estate law and tax professionals is essential to successfully manage regulatory complexity and optimize the investment structure.

Rigorous management: the establishment of solid administrative and accounting processes guarantees the accurate monitoring of fiscal and legal obligations, thus minimizing the risks of non-compliance. Qlower will support you on these aspects as well.

Regulatory watch : stay informed of legislative and fiscal changes that may impact your investment to quickly adjust your strategy.

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Tips for SCI LMNP rental management

The rental management of an SCI operating under the LMNP status combines the specificities of the management of a civil real estate company with those of furnished rentals. Effective and optimized management is key to maximizing the profitability of your investment while remaining in compliance with legal and fiscal obligations.

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1. Clarify the investment strategy

Before you start, clearly define the investment strategy of your LMNP SCI. This includes the choice of real estate, the type of rental (short-term, seasonal, etc.), and long-term financial goals.

2.Set up rigorous accounting

Accounting management is crucial for monitoring the financial performance of your SCI LMNP. Hire a real estate tax and LMNP specialist to keep your accounts up to date, optimize your taxation and ensure that you comply with all legal and fiscal obligations. Rigorous accounting will also allow you to make informed decisions based on accurate financial data.

3.Optimize rental management

To optimize the rental management of your SCI LMNP, consider the following options:

• Use of rental management software : digital tools can simplify rental management, from tracking payments to communicating with tenants.
• Delegation to a rental management agency : if you prefer to focus on the strategic aspect, delegating daily management to professionals can be an effective solution, although it represents an additional cost.
• Optimizing profitability : regularly analyze the market to adjust rents and maximize occupancy rates, while ensuring that properties are in good condition to attract and retain tenants with solid profiles.

4.Respect the rental regulations

Make sure that all your properties comply with current legal and regulatory standards, especially in terms of safety, comfort and equipment for furnished rentals. Stay up to date on legislative changes that may affect your business, such as local short-term rental regulations.

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LMNP's alternatives and complementary strategy

Alternatives and strategies complementary to the status of Non-Professional Furnished Renter (LMNP) can enrich the approach of a real estate investor, offering additional opportunities for tax optimization and asset management. Among these options, the Family SARL, joint ownership, and other legal structures have distinct characteristics that can interact in a beneficial manner with the LMNP.

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The family SARL in addition to the LMNP

A family SARL is a specific form of limited liability company, reserved for members of the same family. It allows you to carry out a commercial activity, such as furnished rentals, while opting for the taxation of profits under income tax, in the Industrial and Commercial Profits (BIC) category, comparable to the LMNP.

Advantages:

Tax optimization: the distribution of profits between members potentially makes it possible to reduce overall taxation, thanks to the progressiveness of income tax.

Family management: it facilitates the management and transmission of real estate assets within the family, while protecting the personal assets of the partners.

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Is indivision a viable option?

Joint ownership occurs when several people own real estate together. This formula can be considered for the possession of an LMNP property, allowing simplicity of implementation and flexibility in organization.

Advantages:

Simplicity and flexibility: indivision does not require the creation of a complex legal structure and allows a certain flexibility in the management of the property.

Reduced costs: fewer formalities and structural costs compared to a company.

Disadvantages:

Unanimous decisions: all major decisions have to be taken unanimously, which can be complex in practice.

Risk of conflicts: deadlock situations and potential conflicts require good understanding and clear communication between co-owners.

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Other legal structures and their interactions with the LMNP

Other legal structures can also be considered in addition to or as an alternative to the LMNP, each offering specific advantages according to the objectives of the investor.

EURL/SARL: for investors wishing to create a furnished rental business individually or with partners outside the family. These structures offer a clear separation between personal and professional assets, but are subject to corporate tax, unless you opt for income tax in the case of a EURL.

SCI to IS: Although SCI is traditionally used for empty rentals, opting for corporate tax theoretically makes it possible to carry out a furnished rental business. However, this option requires particular attention in terms of management and taxation.