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May 17, 2006

THE SOCIETE CIVILE IMMOBILIERE ( The Real Estate Holding Corporation)

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The use of a French Civil corporation called a Sociètè Civile Immobiliere (hereinafter referred to as "SCI") has largely been used by American citizens as a vehicle for the purchase of real estate in an effort to retain as much flexibility as possible and in order to keep the applicable jurisdiction, to the extent possible, in the event of death or gifts, in the United States. There has increasingly been a knee-jerk reaction in the purchase of property to automatically do so through an SCI without either the proper preliminary review of the particular circumstances of the purchaser nor the tax preparation necessary both in France and in the United States prior to doing so. The SCI remains a viable vehicle for purchase in some, but not all situations.

This form of structure is a corporate real estate holding corporation.

I. BACKGROUND:

Pursuant to the ìConvention for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Giftsî signed in Washington on November 24, 1978, the shares of corporations holding real estate are deemed personal as opposed to real property and in the event of the death of one of the shareholders, the same is subject to disposition pursuant to the terms of the last Will and Testament of the decedent in his country of residence and likewise taxed for purposes of inheritance taxes, solely in his country of residence at the time of his death. Likewise, pursuant to the treaty, gifts of corporate shares have not been subject to the imposition of a gift tax in France by residents of the United States.

On December 8, 2004, there as signed by France and the United States ìProtocol Amending the Convention Between the United States of America and The French Republic For the Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Estates, Inheritances and Gifts, Signed at Washington on November 4, 1978î. At this time, although France has ratified the Protocole and notified the United States of its ratification, the final step necessary for the effectiveness of the Protocole- the ratification by Congress of the same and notification of such ratification to France has not occurred. It would be best for American interests in France that the same NOT occur. It was submitted to Congress for ratification by President Bush in December 2005, and to date no further word has been heard regarding the same.

The purpose of this Article is not to re-examine this Protocole, the basic information for which can be found in my prior Article, but rather to look at the SCI as the same applies at this time and to provide some basic information as to a corporate structure which remains a bit of a mystery for American clients.

II. THE CORPORATION:


A. Civil in Nature:SCIs are considered civil in nature and do not have a commercial or trading purpose by nature of its corporate purpose. An SCI is regulated pursuant to the provisions of French Civil Code, primarily Articles 1832 through 1873. The traditional corporate purpose may be described as follows:

The purchase, either by the bringing of capital or otherwise of all property, whether or not developed, and the management and administration of property pursuant to lease, letting or otherwise, of which the corporation may become an owner, the capital investment in said properties, notably by way of the construction of buildings thereon for any purpose whatsoever and all works of renovation, modernization, improvements or other thereon.

The primary purpose of the SCI is always related to real estate. It may not engage in other activities - ever.

B. Liability:

The SCI is a separate legal entity from its shareholders, and its ownership of assets are independent, not merging with the assets of its shareholders, but the SCI is unique among corporations in the sense that the liability of corporate shareholders are not, as is usually the case, either limited or unlimited in nature. The liability of each shareholder is in fact ìPartially Limitedî. That is to say that the shareholders are liable for the corporate debt in the proportion of the shares held by them, so collectively speaking, the shareholders are 100% liable. This has been an interesting point as to the tax treatment of the SCI for United States Tax purposes and certain preemptive measures may be taken so as to avoid the corporate level of taxation under the applicable Treasury Regulations.

C. Tax Consequences in an SCI:

Regardless of whether an SCI or other corporate structure is used for purposes of ownership of real estate, an accountant should be retained to prepare year-end financial statements and to proceed to the necessary filings as determined with that professional.

There is no corporate veil behind which corporate members may hide for tax purposes in an SCI. The same has a fiscal transparency and the French tax authorities looks to the shareholders of the SCI as to the taxable income, capital gains and other applicable taxes, unlike in a traditional commercial corporation. The shareholders are taxed as if the underlying asset was held in their own names.

1. Method of Taxation: An SCI may be taxed either as a corporation or, in the alternative, on the basis of taxation on physical persons, based on the activity of the corporation. To date, Americans have done much to try to retain the taxation on physical persons as a basis of imposition s opposed to corporate rate. In fact, not only is this often fallacious, it may in fact be against the shareholderís interests.

French tax law provides that in the event property is leased unfurnished, the same is subject to taxation on physical persons, but that if the same is furnished and routinely rented then it is taxed on a corporate level in that its activity is commercial even if its purpose strictly civil in nature. Although the corporate rate may be higher than the rate on physical persons, it is important to note that it is often an intellectual exercise in that the rentals are often for the purpose of covering expenses and not profit generating in the short-term.

It is also very important to note that a commercial corporation is NOT subject to the wealth tax, a tax often viewed as a penalty for having achieved financial success but in fact purported to be nothing more than a tax on the solidarity of the French community. Regardless, and not wishing to make this forum a stage for my political views (OK- I admit I find no possible logical reason for this tax), this tax is due is substantial and is totally avoidable by those who routinely rent their properties, which is true for about 90% of the villas in the Northern Leeward Islands.

The wealth tax table effective on January 1, 2006 and subject to yearly revision, is the following:

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Up to 750,000 € 0%
750,000 € to 1,200,000 € 0.55%
1,200,000 € to 2,380,000 € 0.75%
2,380,000 € to 3,730,000 € 1%
3,730,000 € to 7,140,000 € 1.3%
7,140,000 € to 15,530,000 € 1.65%
More than 15,530,000 € 1.8%


D. The Management of the corporation:

An SCI is managed by one or several ìgerantsî. There is no board of directors and the gerants are the persons who may bind the corporation contractually. They are the corporate representatives and may make day-to-day management decisions. The powers of the gerant may be limited in the Articles of Incorporation and the Gerant remains liable to the corporate shareholders for mismanagement and abuse of corporate assets.

E. Shareholders:

There must be a minimum of 2 shareholders in an SCI, regardless of the distribution of shares.

F. Corporate Capital:

Perhaps at first blush unimportant, this is an important issue to be discussed for purposes of taxation, inheritance and financing.

Conclusion: The above is intended to familiarize the American purchaser with an SCI. As stated at the head of this article, it is not always in the clients best interest to form such a structure and in order to best advise it is important for a client to be able to communicate his or her long terms goals regarding the property, the exact family situation and the estate planning to be undertaken as part of the purchase. The purchase of property in the Northern Leeward Islands can be an exciting adventure and end in a profitable return when carefully structured at its outset. Doing so later can be very costly.
Chantal Decombe-Greaux


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