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Service France
Please note that taxation and property are complex subjects and you should not take or refrain from taking any step without full independent advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it.
In our experience, this is one of the more misunderstood areas. VAT is always complex and most people never have cause to think about it. We simply understand that as consumers we pay an extra 17.5% (in the UK; 19.6% in France) on most goods or services we purchase, and that's it. Notably, there is no VAT on residential property in the UK.
So it can come as a surprise to find that there is, in principle, VAT on residential property in France. But . there are many exceptions to this rule, such that it is more often not applied than applied.
The basic rule. In essence, the rule of when it is applied is quite straightforward. Any sale of a property prior to its completion - "completion" to be explained later - is subject to VAT. The first sale of a property within five year of its completion is also subject to VAT. Any subsequent sale, even within five years of completion, and any sale at all more than five years after completion is free of VAT. (These rules do not apply if a property trader - a "marchand de biens" - is involved.)
There is nothing that precludes a property being subject to VAT more than once. There is a misconception that anyone who has acquired a property, and paid VAT, prior to its completion, will not have to charge VAT on that property's resale. This is incorrect. It is only if this resale falls more than five years after completion that it will be free of VAT.
Any price quoted is deemed to include VAT and the contract will usually state this. Therefore, although the buyer nominally pays the VAT it is the seller who really bears its burden since in most cases he has to offer the property at a market price in order to sell. For example, if flats in a certain area are going for €200,000 and the seller wants to make sale, he will not be able to set a price much above this. However, if he, unlike other sellers, is obliged to charge VAT then he will have to "take the hit". However, he will however in principle be able to recover his input VAT (see below) which will improve his position. Also, it is worth bearing in mind that in many areas clusters of new build properties have been built, all of which will be subject to VAT on the same terms, so there may not be an inherent disadvantage in having to charge VAT.
The rate. VAT is charged here at the French rate of 19.6%. As the price is deemed to include VAT, the price net of VAT will be 19.6/119.6 x the quoted price, or 83.6% of the quoted price. Therefore, in the above example, the seller would only receive €167,200; the balance of €32,800 would be output VAT.
What is "completion"? The French tax administration has specified that this is when it is regarded as habitable or when it is occupied, even partially, if earlier. Different parts of a building may be "completed" at different times. As the meaning of completion is quite important - since it sets the five-year clock running, see above - some case law has clarified it. Thus a building can be completed even when its insides have yet to be decorated, provided the builder has completed his work and connected the property to the water supply.
Renovations. You may think that completion can only occur when the property is first built. This is wrong. A complete renovation - where only the roof and walls have been left standing - is regarded as giving rise to a new "completion", starting a new five-year clock. We have seen sellers surprised to be told by their notaire that they will have to charge VAT on sale, thus effectively reducing their anticipated profit by 16.4%. This is a difficult area with plenty of scope for extra expense which good advice could help to alleviate.
Input VAT. Anyone who has to charge VAT on sale will perforce have incurred some VAT either on their purchase of the property or on the renovations in the case above (although these often only incur VAT at the lower rate of 5.5%). Input VAT (the VAT the seller has paid out in respect of the property) is in principle deductible from output VAT (the VAT the seller receives for the property) and only the difference need be paid to the French government. Needless to say, keep all of your receipts (also for capital gains tax purposes).
Leasebacks. By making various undertakings, a buyer can recover the VAT he has paid. This has been popularised under the leaseback scheme but can be achieved outside of it. Please see our related article on newbuilds in France.
The good news. Any sale where VAT is payable is partially exempt from stamp duty, to the extent that stamp duty is only payable at 0.615% (0.715% from 1 st January 2006). This compared the usual rate of 4.89%.
The good news 2. There is no double tax in the area of VAT. No VAT is therefore payable in the UK in respect of French property.
Ultimately, there is no substitute for keeping comprehensive records and taking advice early in this as in every other area of tax law.
Sykes Anderson LLP can advise on French property VAT.