Rent from an SCI to the operating company: setting the right amount

Quick answer. The rent your operating company pays to your SCI must reflect the property's open-market rental value. Excess rent on an overpriced lease is added back and non-deductible for the company (an abnormal act of management); an underpriced rent exposes the SCI to a reassessment for lost income. The rule: a justified, documented, regularly reviewed rent.

The structure is a classic and sound one for wealth planning: you own your business premises through an SCI, and that SCI leases them to your operating company. On paper, the mechanism shields the property from operating risks and organises an income stream separate from your director's pay. But one question alone determines the tax safety of the whole arrangement: what amount should the rent be set at?

It is rarely the first question directors ask, yet it is the one the tax authorities look at first when landlord and tenant are connected parties. Setting the rent "by feel", to fine-tune cash flow or shave a result, exposes you to a reassessment on both sides. This article sets out the method for fixing a rent from an SCI to an operating company that withstands an audit, and the abnormal-act-of-management principles that frame the exercise.

When the landlord and the tenant are one and the same economic person (you, on both sides), there is no spontaneous market negotiation. On the face of it, nothing stops you from setting a rent of 1,000 euros just as easily as 5,000 euros for the same premises. It is precisely this freedom that draws attention: the price is no longer arbitrated by a third party, it is decided by a single will that has a tax interest in shifting it one way or the other.

The authorities know this, and the tax courts review whether the price charged between connected parties is normal. The leading reference is the Conseil d'État ruling of 21 December 2018, no. 402006 (Croë Suisse), which sanctions a significant and unjustified gap from the market price. Applied to rent, the reasoning is simple: a marked, unexplained gap between the rent charged and the open-market rental value gives rise to a presumption of an abnormal act of management.

To grasp the issues specific to the SCI-plus-company structure, our articles on holding business premises through an SCI and on choosing between a corporate-tax and an income-tax SCI for business premises set the wealth-planning backdrop against which the rent question arises.

The mistake is not the same depending on the direction of the gap, and it does not hit the same entity. The table below summarises the two scenarios.

On the corporate-tax company side, overpriced rent is the case most often reassessed: the rent expense must be incurred in the interest of the business. Beyond market value, the excess no longer is, and the authorities add it back to the taxable result.

On the SCI landlord side, rent that is too low or free is more subtle. The abnormal-act-of-management theory applies fully to businesses subject to industrial-and-commercial-profits rules or to corporate tax; for an SCI taxed under income tax in the property-income category, the authorities have other grounds to correct a clearly understated rent, and the unreceived portion of rent may be analysed as a gift. The SCI's tax regime therefore changes the reassessment mechanics, without ever providing a blank cheque to charge an accommodating rent.

To gauge the real cost of a gap, keep in mind the scale of tax penalties and surcharges of 10, 40 or 80%: on top of the additional tax come late-payment interest and, where there is a deliberate breach, a surcharge that changes the order of magnitude of the bill.

Here is the step-by-step approach to set and secure the rent between your SCI and your operating company.

1. Determine the property's open-market rental value. Before any figure, think market: what rent would an independent landlord obtain for these premises, at this location, in this condition, for this use. That is the reference point for the whole analysis.
2. Gather comparable references. Collect objective evidence: listings for similar premises in the area, available rent databases, a valuation opinion from a property professional, or even an expert appraisal where the stakes warrant it.
3. Draw up a compliant written lease. A proper commercial or professional lease records the letting: term, amount, charges, review conditions. The absence of a written lease is itself a sign of fragility.
4. Set a rent within the market range. The amount retained must sit within the band the comparables justify, neither at the optimistic ceiling nor at an accommodating floor. It is the rent you could defend before a third party.
5. Document and archive the supporting evidence. Keep the comparables, the valuation opinion, the signed lease and the internal note explaining the calculation. Proof is built when the rent is set, not on the day of the audit.
6. Review the rent periodically. The market moves; a rent frozen for ten years ends up drifting from reality. Frame the review in the lease and update the supporting evidence.
7. Have the amount validated by your chartered accountant. A professional eye on the consistency of rent against value, surface area and condition of the premises, and on the cross-effect for both landlord and tenant, secures the decision before it is set in the accounts.

In practice. Do not look for a universal "rate per square metre": it does not exist, the price depends entirely on location, condition and use. What matters is not a scale but the method and the traceability of the reasoning that led to the amount.

Support on these matters falls within both corporate taxation and legal advice on leases and structures, two complementary engagements for calibrating an SCI-plus-company arrangement.

In our files, the risk almost never comes from an intent to defraud, but from a rent set once and for all, with no file behind it. The amount may have been reasonable at the outset; without retained comparables and without review, it becomes indefensible five years later. The winning reflex runs counter to intuition: you do not defend a rent by setting it low "to be safe", you defend it by setting it right and keeping proof that it was.

Many directors reason only from the operating-company side, thinking "deductible expense, so good for me". They forget the mirror effect: a rent inflated to ease the company's result raises the SCI's taxable income by the same amount, and weakens the deduction on the tenant side. Conversely, slashing the rent to relieve the operating company's cash flow deprives the SCI of normal income and opens the way to a correction. The trade-off only makes sense taken on both sides at once, alongside your strategy for moving cash up to a holding company without friction.

• Atypical or bespoke premises. Workshop, technical space, very specific surface: comparables are scarce. This is precisely where a valuation opinion or an expert appraisal comes into its own, because the market offers no obvious benchmark.
• Review during the lease. Indexation or a triennial review must stay consistent with the market: an escalation clause that lets the rent drift well beyond its real value can, over time, recreate an abnormal gap.
• Income-tax SCI versus corporate-tax SCI. The tax regime changes the reassessment grounds and the effect of an understated rent, without ever permitting an accommodating rent. The regime choice is decided upstream; our articles on the tax advantages of an SCI and on the abnormal act of management and risky operations shed light on this choice.
• Works and fit-out borne by one party. Who funds what between landlord and tenant affects the normal rent: premises delivered fitted out do not let at the same price as bare premises. The split must be consistent with the amount retained.

During an audit of rent between connected parties, the inspector compares the rent charged to the open-market rental value, checks whether a written lease exists, and examines how the amount is justified and how it fits the surface area, condition and use of the premises. The significant and unjustified gap is the trigger; the documentation kept is, conversely, the best buffer. A well-run bookkeeping and accounts-review engagement, where the lease and its supporting evidence sit in the permanent file, makes a real difference on audit day.

A director sets the rent paid by the company to his SCI "by guesswork", around 30% above what the local market charged, to move cash up to the property side. Everything works for several years, until a tax audit. With no comparables and no justification for the amount, the rent in excess of market value is added back to the company's result: non-deductible, additional corporate tax, late-payment interest. The same amount would have been perfectly defensible had it been set within the market range and documented from the outset.