Should a non-resident buying real estate in France opt to own through a holding company? It is not just a matter of different strokes for different folks. It is of course possible to own it directly, that is, without using a holding company. There are substantive reasons for owning through a holding company, the most common being the desire to circumvent the French forced heirship rules. The forced heirship rules result in all issue (children, grandchildren, etc.) of the owner(s) having an enforceable right to a pre-determined share in the property effective at the owner’s death — all issue, including those from a former marriage and issue from within or without wedlock. Use of a holding company usually allows an estate to be structured without the impact of the forced heirship rules, hence its attraction.
If heirship is not a consideration, then it may be acceptable to own the real estate directly.
What types of holding companies are most common? The SCI (société civile immobilière) is the most commonly used. It is a simple French company that allows two or more shareholders to own the property in proportions as they determine. A U.S. LLC or S-Corp is also possible. Why one and not the other? Numerous considerations may come into play. If a non-French entity is used, the owners must usually file an annual form with the French tax department providing information about the property and current owners. The cost of not doing so is a potential 3% annual tax based on the current value of the real estate.
Retaining a special fiscal representative at the time of eventual sale of the property by a non-resident is required no matter how the real estate ownership is structured – holding company or not. The cost of the fiscal representative is up to 1% of the sale price of the property. While this cost is an offset against taxable capital gain (i.e., a basis adjustment), it is a consideration.
There was formerly the mistaken belief that ownership through a holding company resulted in no inheritance tax in France. However, ownership of property through a holding company has no mitigating impact on the taxability of the real estate in France at the time of death. French law and the U.S. – France estate tax treaty provide that for purposes of the French inheritance tax, ownership through a holding company is tantamount to owning the underlying property itself.
Prior to July 2011, ownership of holding company stock by one’s family trust made eventual estate administration easier and usually less costly. Since that date, however, French real estate owned directly or indirectly by a U.S. trust or any other trust requires annual reporting of the trust to the French tax department and introduces complications and possible future tax costs that should be avoided at all costs. So, adding a holding company to the miox in order to eventually lodge the shares of the holding company in a trust no longer makes sense.