Civil partnerships (SCI/SCP) and occasional furnished rental activity – French Administrative court of Marseille, 3 May 2018


The French “Société Civile Immobilière” (SCI) is a popular vehicle for purchasing real estate in France together with Monegasque civil partnership (SCP).

An SCI/SCP is a property company set up to own, manage and lease real estate.

SCIs/SCPs are considered “civil” in nature with a primary purpose related to rea estate; ordinarily they do not have a commercial or trading purpose and are not subject to corporate taxes.

In case the SCI/SCP carries out directly a furnished rental activity, the SCI/SCP could be subjected to Company Income Tax in France.

Indeed, the French Tax Authorities consider that a furnished letting provided by an SCI is a commercial activity according to various French Court Cases: “Conseil d’Etat “CE” February 1st, 1984 and CE February 5, 1986.

In the recent decision dated 3 March 2018, the Appeal Court of Marseille had to decide on the furnished rental activity carried out directly by a French SCI.

In this regard, the key point was to know whether or not this rental activity has been performed on an ancillary and non-habitual basis.

Following a tax audit, the French Tax Administration demonstrated that the French SCI had carried out a furnished rental activity.

The facts were as follows:

- The French property owned by the SCI was not rented out for 10 years, i.e. since the acquisition of the Villa in 1999;

- In 2008, the French SCI intended to sell the French property and rented it out twice to the same person who was interested in purchasing the Villa;

- The first rental was made in 2009 for 1 month (from July 20, 2009 to August 20, 2009);

- The second rental was made in 2011 for less than 2 months (from July 10, 2011 to September 1, 2011).

For the French Tax authorities and the Administrative Court of Nice, this activity was the main activity of the French SCI. Accordingly, they challenged the tax regime from individual to French Company Income tax with the severe tax consequences applicable: taxation of latent capital gain, taxation of a benefit-in-kind for the free use of the property, Capital Gains Tax under Corporate tax, dividends, Property depreciation, ….

However, the Appeal Court of Marseille has considered that in absence for the French SCI to have the intention to exploit a business and build a customer base, the entity cannot be treated as having habitually rented out furnished premises and, therefore, as having mainly exercised a commercial activity.

Therefore, the decision applied by the Court of Marseille is in favor of the French SCI.

However, please note that this decision does not represent any significant interest for the furnished rental activity performed by French SCI / Monaco SCP after 01/01/2017.

Indeed, on 29/12/2016 French law has been changed and since 01/01/2017 any furnished property rental income is taxable as business profits, even if its owner undertakes it only once (see the article 35 of the French Tax Code).

Accordingly, any French SCI / Monaco SCP performing such rental activity will then be considered as a commercial company from French tax law standpoint.

Please note that the taxpayer can put in place various alternative legal structures that could avoid all these problems.

For example, an SCI/SCP may rent out unfurnished property to an ad hoc French commercial structure that could be incorporated in order to perform furnished lettings to third party.

Alternatively consideration could be given the creation of a specific vehicle for purchasing and carrying out a furnished rental activity under the scope of the special tax regime of professional landlords (“loueur en meublé professionnel”) representing some significant advantages for capital gains taxation savings and wealth tax exemption.

Should you have any queries in regard to any of the information given in this note, please do not hesitate to contact us.