Ask Miranda: Have there been any changes to the “3% Tax” on an SCI?

Question: Have there been any recent changes or are any coming to the “3 percent tax”, as applied to an SCI, either with regard to the rules or the forms that must be filed each year?

Answer: As far as I know there is nothing planned to change the 3% tax rule for French property at this time. But, for most Western buyers, the rule is a formality more than anything else, and establishing your exemption from the tax is relatively straightforward.

The basic rule is that any entity – French or foreign – that owns property in France is subject to annual tax of 3% of the market value of the property. The law is not particular to SCIs, but concerns any company, partnership, trust or otherwise.  The stated objective behind the law’s enactment was to ensure that French taxpayers did not evade inheritance and gift taxes by owning their property through intermediary entities located in foreign countries. In the end, the law has given the French authorities a nearly comprehensive ability to monitor all investment in French real estate.

If the underlying foreign legal entities that own the property (whether through an SCI or direct ownership) are established in a jurisdiction whose tax administration cooperates with the French tax authorities pursuant to an applicable tax treaty (including the United States, the European Union, Switzerland, etc.), mere disclosure of the identity of the individual members/stakeholders in the entity will exempt the application of the 3% tax. Certain entities are exempt by their nature, such as NGOs, pension funds and the like.

If you purchase property through a foreign company that owns the property in Paris through an SCI, you can secure the exemption with a simple one-time “letter of engagement” addressed to the Service des Impots des Entreprises for the applicable arrondissement, agreeing to provide the identities of all the underlying individual owners upon request by the French administration. If you bought through an SCI but you own the SCI shares in your own name (rather than through a foreign entity), the 3% tax doesn’t apply to you.

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