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Reform of VAT on Real Estate
The first Amendment Law for 2010, originally adopted by the Parliament on 25 February 2009 provides for an overhaul of the rules with regard to VAT on real estate. The new rules are applicable from 11 March 2011 onwards. Taxand France examines the key elements of this new regime.
New Scope of Application
In order to improve clarity and to comply with the EU directive 2006/112, real estate assets are, as a general rule, placed within the general scope of VAT and no longer subject to a specific regime. From 11 March 2010 all deliveries (for example, contributions or sales) made by VAT taxable persons (legal entity or individual) in the course of an economic activity are subject to the standard VAT rules to the extent that they are related to:
- new real estate assets
- comparable real estate rights
- building land.
The following operations automatically enter into the scope of real estate VAT:
- self-deliveries: taxable persons are required to make self-deliveries of new real estate assets which have not been sold within two years of completion. In practice, this obligation to make a self-delivery should apply in particular to property in stock held by builder / developers. If no self-delivery is performed, a fine amounting to 5 % multiplied by the ratio between the costs or expenses, not subject to VAT, included in the basis for taxation of the self-delivery and the full amount of this basis for taxation would apply.
- sales of new property purchased through off plan sales (under the VEFA regime) and self-deliveries of certain government-subsidised housing provided that it is built outside the scope of an economic activity.
Besides, a taxable person may opt to subject to VAT: (i) sales of property that does not meet the definitions above (i.e., new real estate assets or building lands) as well as (ii) long building leases.
Finally, the concepts of new real estate assets and building lands have been revised:
- a real estate asset that was completed within the 5 previous years is considered as new, regardless of any transfer occurred during that said period
- the concept of building land is defined on an objective criterion ("plots of land on which buildings may be permitted pursuant to a zoning plan, any other zoning document that may serve to this effect, a map of the commune or by the provisions of the French urban planning code) whereas the former criterion referred to the commitment of the purchaser stated in the contract to erect buildings within a 4 year-period (i.e., subjective criterion).
New rules of identification of the Taxpayer
In order to ensure that the French VAT treatment is in line with EU directive, the taxpayer is, in every circumstance, the person carrying out the taxable transaction (i.e. the seller or the contributor of an asset). In practice, this new provision should have a huge impact on property developers who will have to anticipate the potential consequences of this measure on their cash flow (they will have to pay the VAT and will therefore no longer be able to use the reverse charge mechanism).
Change of the Rules Applicable to Property Registration Duties
The former general rule provided that the application of registration duties depended on whether the VAT on real estate was applicable. When VAT was applicable, the transactions were either exempted from registration duties or subject to a reduced rate of 0.715%. If no VAT applied, the registration duties were due at a 5.09%. Besides, a favourable regime existed for buy and resale operations provided that the initial purchaser took a commitment to resell the real estate assets within a 4-year period. In case that period was not observed by the purchaser, the registration duties became retro-actively chargeable.
From 11 March 2010, as a general rule, the system of registration duties is adapted to make it independent from the VAT regime. Hence, in certain circumstances, VAT and registration duties could both be due at the same time. That will be, in practice, the case where a purchaser bought an old real estate asset after having elected to VAT regime but without a commitment of this purchaser to build or resell within a 5-year period.
Besides, the resale period to be met in order to benefit from the reduced rate of registration duties (0.715%) is increased from 4 to 5 years for the buy and resale real estate transactions. In addition, the possibility of substituting the undertakings to build and to resell becomes more flexible.
Expected impact for key real estate players
This reform has been awaited by many key players in the French real estate sector. It should enable foreign real estate funds to optimise their tax models when investing in the French real estate sector by reducing their exposure to the French VAT (19.6%). Also, it should offer new structuring opportunities for new developments or redevelopments of existing assets and also for block sales.
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