VAT and compensation for early cancellation of a lease

14 JUNE 2016

VAT & compensation for early cancellation of a lease:
ruling confirmed!  

In our newsletter of 18 September 2015, we focused on the application of VAT to compensation paid in case of early cancellation of a lease.

Additional tax of 0.60% in Ile-de-France region

7 JUNE 2016

Scope of additional tax of 0.60% in Ile-de-France region: the French Tax Authorities (FTA) states that it will not apply where the purchaser gives an undertaking to resell!  

By way of reminder, the amending Finance Law for 20151 introduced a new, additional tax on registration fees (droits d'enregistrement) or land registry tax (Taxe De Publicité Foncière – TPF) of 0.60%, to be collected by the Ile-de-France region.

This measure was codified in article 1599 sexies of the French Tax Code (FTC) and applies to transfers made on or after 1 January 2016.  

Charge on capital gains realised on real estate assets by non-residents...

27 APRIL 2016

Charge on capital gains realised on real estate assets by non-residents: period for claims now 2 years to challenge the differential treatment non-residents underwent!  

By means of a ruling dated 15 April 2016 (no. 385737), the Conseil d'Etat (French highest administrative court) has held that the time limit, in which to claim a refund of the difference between the tax paid by a resident of a third-party state under the charge of 33.33% at that time applicable under article 244 bis of the French Tax Code (FTC) and the taxation resulting from the application to the base rate of 16% (now 19%) for residents of states that are party to the Economic European Area (EEA1) was 2 years, and not 1 year as claimed by the French Tax Administration (FTA).

"Les Essentiels" : Development operations

22 March 2016

"Les Essentiels" : Development operations: building works, acquisition and resale

Training in partnership with the EFB on the tax aspects of development operations.

Levy on the creation of offices...

23 FEBRUARY 2016

Levy on the creation of offices in Ile de France:
Common sense prevails in respect of restructuring operations where surface areas are changed! 

On 30 December 2015, the (French) Conseil d'Etat ruled that "in the event of a restructuring that is not comparable to the reconstruction of buildings used as offices, ..., only those surfaces usables as office floor space that exceed those of the building before restructuring will be subject to the levy".

The levy on creation of offices, commercial and storage premises was reformed by the amending finance law for 2015. This reform substantially modifies the rates applicable to the various zones, which are themselves redefined. Nevertheless, the levy's field of application remains unchanged. The reform of the levy is thus unlikely to impact the scope of the Conseil d'Etat ruling, which related to the previously applicables rules.

◊This decision, which relates to the field of application of the levy in the event of works realised on an existing building, represent a move in favour of the taxpayer! 

In order to uderstand the effects, it is necessary to set out the context.

The contexte 

A French SCI (real estate investment company) carried out works on a building constructed in 1970 and enlarged in 1991: the usable floor space of the building is 10,861 m2 with a total SHON [gross floor space] of 14,656 m2. Payment of the levy was due on the surface area of 10,861m2 for the building.

New works, begun in 2009, reduced the usable floor space by 505 m2 (i.e. to 10,356 m2 following the works). However, improvements resulting from the operation created 1,491 m2 of usable office space, while nearly 2,000 m2 were removed (i.e. a net reduction of 505 m2).

In a decision of 18 May 2011, the planning authorities set the amount of the levy due by the SCI at €363,804 on the basis of 1,491 m2 created, without taking into consideration the space removed. The SCI, holding that no levy was due given that there was a net reduction in the usable space subject to the levy, challenged the demand, but its request was rejected by the Tribunal Administratif.

The Decision of the Conseil d'Etat  

The SCI brought the case before the Conseil d'Etat, which upheld its claim for the ruling to be overturned, and once more referred the matter to the Tribunal Administratif.

This follows the position advocated by the Reporting Judge who, in his Conclusions, stated: “the ruling [of the Tribunal Administratif de Cergy-Pontoise] must be faulted as it has refused to establish whether the restructuring of the building led to a net increase in the spaces assigned to such purpose within it”.

In this context, the Conseil d'Etat lays down several principles regarding the application of the levy to the creation of offices in the Ile-de-France region:

  • The restructuring of premises for office use within the same building cannot be likened to the construction of such premises unless this leads to an increase in the total usable floor area”; and therefore

  • only those surfaces usable as office floor space that exceed those of the building before restructuring will be subject to the levy”.  

→Office spaces created in the context of works is not thus de facto subject to the levy on the creation of offices “without establishing whether [the works] led to a net increase in the usable areas assigned to such purpose within the building”.

Drawing on the concept of “net increase” contained in the conclusions of the Reporting Judge, the Conseil d'Etat ruled in favour of an overall computation of the building spaces.


What lessons can be learned?  

  • In the event of the creation/demolition of surface areas in an existing building, only the net surface area created may be subject to taxation.

  • This ruling does not apply to demolition/restructuring operations: these however automatically benefit from exemption (article L 520-7 of the Code de l'Urbanisme).

  • It remains to be seen:

    • How the term “building” will be construed in the calculation of the net surface area, especially in the case of complex real estate developments.

    • What will be the reference surface for offices: the ruling refers to the surface area of the building prior to works.

In this particular case the office space prior to the works was the same as that already subject to payment of the levy. There is frequently a difference, however, with the surface area previously subject to the levy being less than the actual surface area.

In this case, it appears not uncommon that the French Tax Authority has referred to the surface area previously taxed. There are thus grounds to challenge the statute of limitations regarding the levy applied to previous operations. ◊ This question still remains open! 

What can now be done? 

  • For new operationsthis new ruling will apply with the levy only charged on the net space created (with uncertainties still regarding the notion of “complex”, pre-existing surface, etc.)
  • For previously realised operations or for those where a collection notice has been issued,  if the claim period is still open, →make a contentious claim for repayment of the excess amount.