In this article, we delve into the tax treatment of rental income through corporate entities, shedding light on the distinctions between companies subject to Income Tax (IR) and those subject to Corporate Tax (IS). Our focus is exclusively on companies registered in France.
Companies subject to income tax (IR)
These encompass family SARLs, SCI IRs, and similar entities. When real estate investments are structured through income tax-based companies, like Family SARLs or SCI IRs, rental income is taxed at the shareholder level according to their respective shares of the company’s capital. In other words, if a shareholder owns 50% of the company, they are accountable for 50% of the profits or losses.
Differentiating unfurnished and furnished rentals
The primary distinction lies in the type of rental: unfurnished or furnished. Income from unfurnished properties falls under “revenus fonciers” (property income), while furnished rentals are treated as a commercial activity generating “BIC” (Industrial and Commercial Profits). The tax implications are as follows:
- Unfurnished Rentals (Revenus Fonciers): Deductible expenses, including loan interest and management fees, can reduce the taxable base, which is the gross rental income. Revenus fonciers are then subject to the progressive income tax scale, along with social levies CSG and CRDS at a rate of 17.2%.
- Furnished Rentals (Revenus BIC): In furnished rentals, income is subject to the “régime réel” (real regime) of taxation, allowing for a broader range of deductible expenses and the possibility of amortizing the property to significantly reduce taxable profit. However, BIC income is also subject to the progressive income tax scale and the 17.2% social levies.
It’s essential to note that not all forms of income tax-based companies allow furnished rentals. Due to their commercial nature, furnished rentals can only be carried out through a Family SARL if one wishes to remain under IR taxation. In other cases, opting for IS taxation becomes mandatory.
Companies subject to corporate tax (IS)
These encompass SCI IS, SAS, SARL, and similar entities. When real estate investments are made through companies subject to corporate tax, such as SCI IS, SAS, or SARL, there is no differentiation based on the type of rental, be it unfurnished or furnished.
Taxation under the IS regime
Rental income is subject to the standard IS tax rate, akin to any commercial company, which translates to 15% for profits up to €42,250 and 25% for profits exceeding that threshold. The advantage lies in the ability to reinvest profits at a tax rate often more favorable than the progressive income tax scale. However, distributing profits to shareholders may entail levies, potentially resulting in double taxation.
Consequences of furnished rentals for an SCI transitioning to IS taxation
For any SCI renting a furnished property, the commercial nature of furnished rentals leads to an immediate change in the tax regime. This change is not automatic, and it must be initiated by the taxpayer themselves, under the risk of unpleasant surprises, especially during property sales. The transition to the IS status of an SCI significantly alters the calculation of capital gains, transforming it from an individual assessment to that of a commercial company subject to IS. The implications can be unfavorable to property owners, especially when they are unaware of this change.
Importance of maintaining accurate accounting records
Proper accounting practices are vital, regardless of the company’s legal form. They enable precise tracking of income and expenses, maximize tax deductions, and ensure compliance with tax regulations. This is particularly critical for companies subject to IR, where justifying property expenses or BIC is essential, as well as for companies subject to IS, where precise accounting is essential to determine taxable income. Additionally, maintaining proper accounting records is crucial, even when the property is not rented, for effectively managing shareholders’ current accounts and ensuring financial transparency.
The role of general meetings
General meetings are pivotal in the management of real estate companies. They serve as a platform for discussing and deciding on profit distribution among shareholders. The distribution can carry substantial tax implications, especially for companies subject to IR, where shareholders are taxed individually based on their share of profits.