VAT on rents: French High Court confirms one option per lot
CE, 9 septembre 2020, n° 439143, 8e et 3e chambres réunies, SCI EMO
In a decision of 9 September 2020, the French Supreme Court has confirmed the ability of lessors to opt for VAT on the rental of unfurnished professional premises on a lot-by-lot basis rather than on a global basis.
In application of Article 261D of the French Tax Code (FTC), the rental of unfurnished professional premises is, in principle, exempt from VAT. However, the lessor can opt for VAT taxation, pursuant to Article 260.2° of the FTC.
The VAT option is applicable on a global basis, regardless of the nature of the lessee and its ability to recover French VAT incurred on the rent. Indeed, the French Administrative Guidelines provide that the VAT option applies to all the premises (which are not excluded from the scope of the VAT option) a lessor owns in a given building.
In the case SCI EMO, the company rented out to several lessees several unfurnished commercial premises located in the same building. The lessees used the premises for their own activities. SCI EMO opted for the VAT Taxation on only certain premises unambiguously designated by SCI EMO.
The French Tax Authorities (FTA) considered that the option for VAT applies to all the premises located in the building since the VAT option is global. On this basis, the FTA issued a VAT reassessment corresponding to VAT not charged on the rental of some premises.
The French Supreme Court concluded that based on Article 137 of the VAT Directive, which does not specify under what conditions and according to what modalities the scope of this VAT option may be restricted, and the recent European Court of Justice (ECJ) case law, the French VAT regulation allows a lessor to opt for VAT taxation of only some of the premises located in the same building.
This decision, which will certainly allow lessors greater flexibility in their real estate investments, has important practical consequences, notably with respect to past VAT options.
Indeed, the current regime provides that the VAT option may only be terminated nine years following the fiscal year in which it was exercised. The question, therefore, is whether it is possible to modify options already exercised or to denounce them in order to be able to make new ones (which could be limited, for example, to lessees that are entitled to recover incurred VAT) without having to wait for the termination period.
We will have to closely follow the administration's comments and clarifications following this decision.