French property and vat reclaim
Our clients purchasing new properties (off-plan and completely refurbished) often expect to reclaim the VAT paid on the price or on the works ;
This is indeed revealed to be very advantageous is practice as in addition to the lower purchase costs figure (1,74% +1500 instead of 6.91% + 1500 > ie. a saving of 5%), in terms of cash flow the purchaser pays only 80%, in a certain way this means a potential 25% payment lower than expected…..
We have therefore drawn up this note to summarise the corresponding mechanism.
In France, renting out furnished property is subject, upon choice, to VAT if the activity carried out in the property is itself subject to VAT. Renting furnished property for residential purposes is not subject to VAT.
However, these lettings become liable when they are carried out in similar conditions to those of accommodation establishments like hotels and run on a professional basis.
The following, therefore, are liable for VAT :
1. Accommodation services provided in graded tourist hotels,
2. Accommodation services provided in graded or registered holiday villages,
3. Accommodation services provided in certain graded tourist residences (tourist accommodation, contract for a duration of at least 9 years with a manager having subscribed to a commitment to promote tourism abroad),
4. The services of providing furnished property and on a regular basis, offering in addition to accommodation, at least three of the following services “parahotellerie” :
- To provide regular cleaning of the rooms (obviously at arrival and leaving but also upon request at any time),
- To provide a reception service : this can be provided by a third party eventually out of the property,
- To provide household linen,
- To provide breakfast for all the guests : this should be provided in conditions equivalent to a hotel with the possibility to use the services of a third party (baker for example)
5. Letting property (furnished or unfurnished) granted by a commercial lease to any accommodation provider, when the rented property falls into one of the four categories above.
6. Accommodation services provided in residential tourist villages, when they are to be used as tourist accommodation. Also, when they are rented with a contract for a duration of at least 9 years to a manager in the scope of a local renovation project.
Most of the local operators based in the ski resorts are now providing the relevant services and this is in practice very efficiently organised.
The advantage of paying VAT – VAT refund and potential risks
Subjecting rentals to VAT will allow the investor to recover the VAT which he paid beforehand. In practical terms, the investor will find that the French tax authorities will refund the amount of VAT which he paid at the time of purchase.
But, beware, as in exchange for deducting the VAT, the letting must be kept up for 20 years. If the property is sold before the end of this period, a fraction of the VAT which would have been deducted initially (1/20th per year or part of a year) must be repaid to the French tax authorities.
Resale of the property before the end of the 20 years
Exemption from VAT
Article 257 “bis” of the French Tax Code provides an interesting solution on this subject.
In accordance with this article, the VAT due by the vendor on resale is subject to an exemption.
This regime which concerns the sale of rented property applies when the following criteria are fulfilled:
– The rental payments must be subject to VAT,
– The purchaser must continue the on going lease or business. The fact that the lease be cancelled by the purchaser after the sale and that another lease be signed with possibly another tenant, will not have any impact as long as the interruption in the letting can be justified.
The sale will be considered as a neutral operation from a tax point of view. Its price will therefore be stipulated in the contract without reference to any VAT.
On the other hand, the commitment to rent the property out for 20 years will be automatically taken on by the purchaser who will have to pay back, at his expense, the fraction of the VAT initially refunded to the vendor when the lease comes to an end before the said 20 years period.