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France - The new French reverse-charge mechanism for import VAT
A new reverse-charge mechanism for import VAT has been implemented in France which may benefit French, EU and non-EU companies which hold a VAT registration in France. This mechanism allows cash flow savings as import VAT is collected and deducted simultaneously on the CA3 monthly VAT return instead of being “physically” paid to the French Customs.
What is the mechanism?
This new legislation in Article 1695 of the French tax code has been implemented as part of the Amended Finance Act for 2016. This mechanism has a wider application than was initially expected as it may be used by French, EU and non-EU established companies which hold a French VAT number. In order to do so, such entities will need to make a request to the French Customs office where the import is being effected.
The reverse-charge mechanism for French import VAT merely allows for the import VAT not to be paid at the point of importation. Instead, the VAT is accounted for on the French VAT return (to collect and deduct Input and Output VAT simultaneously) by way of a simple option, even if the computation of the import VAT due is still completed on the import form called IMA. This new reverse-charge mechanism only affects the collection of VAT and has no effect on the tax point, the tax base or the tax computation.
What conditions must be fulfilled?
Prior approval from the French Customs authorities is required before this mechanism can be used, but authorisation is, in practice, straightforward to obtain by operators. To benefit from this new mechanism, companies need to fulfill the following criteria:
French and EU established companies:
- Hold a French VAT registration;
- must not be subject to the VAT simplified system of taxation;
- must have performed at least four imports into the EU during the last twelve months preceding the application;
- be able to demonstrate that they have a management/control system for their Customs and tax entries enabling the follow-up of the import transactions: in practice, the applicant has to certify this process is managed/controlled on the application form (by ticking a box);
- prove that they have not been guilty of any significant or repeated infringements of the Customs law and/or taxation rules over the last twelve months: this condition is directly analysed by the French Customs authorities based upon the records available from the respective French authorities;
- prove that the business has been financially solvent during the last twelve months. This condition concerns applicants who have either been in a default payment position towards the French tax and Customs authorities or those who have been the subject of collective insolvency proceedings. If the applicant has been established for less than twelve months, its solvency will be assessed based on the information available on the day of the request. This condition is also directly analysed by the French Customs authorities regarding information available from the relevant databases.
If the company has the authorized economic operator (AEO) certification, the above conditions are deemed to be fulfilled.
Companies not established in the EU:
- must have a French VAT registration;
- must not fall under a VAT simplified system of taxation;
- shall request the application of the mechanism through a Customs representative established in the EU which has the AEO certification and who will implement it on their behalf at the time of the importation.
For companies who are not established in the EU, a French VAT representative will have to be appointed in order to apply the reverse-charge mechanism on their French VAT returns. In any case, all these conditions will be checked by the French Customs authorities and if they are met, the authorisation is granted within a maximum of two months.
What are the practical consequences?
The major advantage of the new reverse-charge mechanism is to avoid paying the import VAT at the time of importation of the goods.
The implementation of the new mechanism will lead to very significant savings in terms of cash flow, notably for companies not established in France who cannot charge VAT on the sales performed there and which are (in the majority of cases) in a VAT credit position. For such companies, it will no longer be necessary to request VAT reimbursements.
The French Customs authority has indicated that operators benefiting from the reverse-charge mechanism for import VAT retain the option to choose to use either this new regime, or the VAT free purchase regime quota (AI2) and the so-called “42 Regime”, which allows for the import to be treated as VAT exempt when the importation of goods is followed by an Intra-EU supply.
Nevertheless, from a practical point of view, the new reverse-charge mechanism for import VAT is more interesting than the VAT free purchase quota and the so called “42 Regime”. Indeed, the reverse-charge mechanism is not restricted by a quota (i.e. VAT free purchase regime). Furthermore, there is no obligation that imported goods are intended for an intra-EU supply (i.e. “42 Regime” and VAT free purchase regime) or for onward export outside EU (i.e. VAT free purchase regime).
To conclude, this new reverse-charge mechanism reflects the willingness of French Customs administration to strengthen the attractiveness of conducting business in France, by adopting incentivising measures to relieve the cash flow burden of paying import VAT at the time of importation. This new mechanism is similar to those which have already been implemented in Belgium and the Netherlands.
Having said that, please note that it is still possible to postpone the payment of the import VAT after the deduction of import VAT on the monthly VAT return through the use of a deferment account procedure, with a single payment option. The deferment account facility is still in force and offers similar benefits in respect of cash flow.
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