US Tax of SCPI in France
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US Tax of SCPI in France
Just as the United States has various different types of entities and investments that taxpayers can use to invest in property (S-Corp, LLC, REIT, etc.), most foreign countries have similar investment vehicles as well. When it comes to France, it can get very complicated from a US tax perspective due to all the various types of investments in France such as the PEA, PEL, and Assurance Vie. And, while the Assurance Vie is one of the more complicated investment vehicles — at least from a US tax perspective — the Société Civile Immobilière (SCI) is also very complicated for US tax and reporting purposes as well. That is because from a technical standpoint, even if the intention is not to be treated as a foreign asset similar to a foreign asset (FATCA Form 8938), a foreign corporation (Form 5471), or a foreign partnership (Form 8865), there may still be some significant US reporting requirements. Let’s look at some of the basics.
What is an SCI?
An SCI is a type of investment in French that is used to invest in real estate. Depending on the specific type of SCI, the investment may contain just one property or multiple properties — it may also include income-generating properties, but that is not a prerequisite. In addition, the SCI in France that is considered a non-trading company, so it is not used for commercial purposes. In other words, the purpose of the asset is to purchase real estate for specific investors in the SCI in order to obtain beneficial treatment under France tax laws — while not holding the ownership directly (making transfers easier) or operating it as a business per se. Whether or not the SCI is used to purchase rental properties or a primary residence will also have U.S. tax implications as well.
One important aspect of the SCI is that it is technically a company, and so shares are issued – this is despite the fact that it is also referred to as a general partnership and not a corporation. Thus, the term ‘shareholder’ can get confusing for US investors. In other words, the owners of the SCI are considered shareholders, but the entity is referred to as a ‘partnership’. In addition, an investor in an SCI is typically only limited to their investment when it comes to losses. For example, if a person acquires interest in an SCI, their ownership is limited to the percentage of their ownership in the SCI – in other words, acquiring an SCI is not similar to becoming a general partner in the U.S., which can result in significant liability beyond the investment amount (aka a large downside). Ownership and transfer of shares can be limited as well – since it requires the approval of all the members — but easier than having to sell the property (vs transfer of the shares)
Which US International Reporting Forms Should be Filed?
This is where it can get very complicated due to the lack of continuity between foreign and domestic tax law. In general, when a US person owns a foreign asset such as a foreign company, they file Form 8938 (FATCA) unless they have a significant ownership percentage that thrusts them into one of the Form 5471 or Form 8865 categories. Noting, Forms 5471 and Form 8865 are much more complicated than form 8938 — and require significantly more time and resources for taxpayers to prepare the form. Depending on the specific ownership percentage and whether the SCI is deemed a foreign partnership or foreign corporation can impact the reporting. Moreover, whether or not the SCI holds multiple real estate investments (and/or income-producing properties) can touch upon other reporting pitfalls as well, such as Form 8621 issue. Thus, whether the SCI is reported on Form 8938, 8865, 8621, or possibly 5471 is something that should be determined on a case-by-case basis.
Current Year vs Prior Year Non-Compliance
Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
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