VAT — Deduction coefficients (mixed activities)

VAT deduction proration:
the 4 coefficients of art. 271

For taxpayers who carry out both transactions giving rise to a deduction right and transactions not giving rise to one (mixed activities: real-estate companies, banks, insurers, training organisations, partly public-sector entities), the deduction of input VAT is computed under a system of coefficients (French Tax Code ann. II art. 205 to 210): liability, taxation, admission, deduction. A single misclassified coefficient propagates the error along the entire chain and mechanically distorts the calculation of the deduction right. The firm secures the coefficients for groups with mixed activities.

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— In brief
Core provisions
French Tax Code art. 271, 273 + ann. II art. 205 to 210
Final coefficient
Deduction = Liability × Taxation × Admission
BOFiP
BOI-TVA-DED-20-10 (deduction) + BOI-TVA-DED-20-20 (distinct business sectors)
Adjustments
Annual (French Tax Code ann. II art. 207) + over 5 or 20 years for buildings
Penalties
French Tax Code 1727 + 1788 A in the event of a deliberate error
— 01

Getting the calculation right starts with getting the sectorisation right

The deduction of VAT rests on the principle of allocation: VAT is deducted on goods and services used for transactions giving rise to a deduction right. For a fully taxable person (retail, conventional industry), the coefficient is 1 and the deduction right is complete. For a taxable person who is partly exempt (a property company letting both offices subject to VAT and housing outside VAT, a bank, an insurer, a professional training provider), the calculation becomes a chain of coefficients applied in sequence.

Our conviction: the quality of the proration calculation actually depends on the granularity with which the activities are carved up. A split that is too broad (e.g. a single overall property activity) produces a global coefficient that overstates or understates the deduction right depending on the assets. A split into distinct business sectors (French Tax Code ann. II art. 209) makes it possible to allocate input VAT directly to the relevant sector, a solution that is almost always more favourable to the taxpayer.

For mixed property companies (housing outside VAT + offices or retail premises subject to VAT), the split into distinct business sectors has become standard practice. For banks and insurers, specific rules apply (banking: French Tax Code 261 C, which exempts most banking transactions). For training organisations, the analysis must be combined with the exemption under article 261, 4, 4°-a of the French Tax Code.

— 03

Case study handled by the firm

Mixed property company, 12 M€ turnover: 5 years secured, savings of around 150 k€

A family property company holding buildings let both with VAT (offices, retail premises) and outside VAT (housing), with turnover of 12 M€. An internal review revealed deduction coefficients computed inconsistently between 2020 and 2025: a global coefficient applied to all input VAT, with no split into distinct business sectors. The firm's work: (1) reconstruction of the liability, taxation and admission coefficients by business sector (VAT property / non-VAT property / overhead costs), (2) split into distinct business sectors (French Tax Code ann. II art. 209), with VAT on office works directly deductible, VAT on housing non-deductible, and VAT on overheads deducted under the proration, (3) orderly voluntary disclosure on the following return with an explanatory letter, (4) a provision of 90 k€ booked for potential reassessments. The tax authorities accepted the disclosure with late-payment interest only (1727), without any surcharge. Estimated net saving: around 150 k€ compared with a litigation scenario in which the sector split would have been rejected and an unfavourable global coefficient applied.

— 02

The 4 coefficients in practice

1. Liability coefficient (French Tax Code ann. II art. 206-II)

Measures the share of use for transactions within the scope of VAT (as opposed to out-of-scope transactions: subsidies not linked to a price, dividends, and so on). For an asset used exclusively for in-scope transactions, the coefficient is 1. For an asset used for purely out-of-scope activities, the coefficient is 0. Setting it correctly requires a detailed analysis of the sources of income.

2. Taxation coefficient (French Tax Code ann. II art. 206-III)

Measures the share of taxed transactions within total in-scope transactions. Calculation: taxed turnover / (taxed turnover + exempt turnover not giving rise to a deduction right). The coefficient is 1 if all transactions are taxed, 0 if all are exempt without a deduction right (banking, insurance). It is computed annually on the basis of the past financial year, with an adjustment the following year.

3. Admission coefficient (French Tax Code ann. II art. 206-IV)

Reflects the specific exclusions and limitations of the deduction right laid down by the French Tax Code: passenger vehicles (coefficient 0 save for exceptions), accommodation expenses, business gifts above 73 € (coefficient 0 otherwise), exempt services... It is the most complex coefficient because it depends on the precise nature of the good or service. See BOFiP-TVA-DED-30.

4. Deduction coefficient = product of the three

The deduction coefficient applicable to a given good or service is the product of the three preceding ones: Liability × Taxation × Admission. If the result is below 1, input VAT is not fully deductible and the non-deducted balance remains borne by the taxpayer. Annual adjustments are mandatory (French Tax Code ann. II art. 207). For buildings, the adjustment runs over 20 years (twentieths) where the coefficient varies.

— Frequently asked questions

What is the difference between the proration and distinct business sectors?

The proration (a global taxation coefficient) applies to a taxable person who does not keep separate accounts per activity. Distinct business sectors (French Tax Code ann. II art. 209) make it possible to allocate input VAT directly to each sector: VAT deductible at 100 % for assets of the taxed sector, at 0 % for those of the exempt sector, and under the proration for mixed expenses. The split into distinct business sectors is almost always more favourable. Conditions: separate accounts must be kept and a specific declaration filed with the local tax office (SIE).

How is the adjustment of the coefficients computed?

For assets other than buildings: an adjustment is made the following year if the final coefficient differs from the provisional one. For buildings: the adjustment runs over 20 years (twentieths, French Tax Code ann. II art. 207). If the coefficient varies by more than 10 points in a financial year compared with the initial coefficient, a fraction of the VAT initially deducted must be repaid (or supplemented) each year. This is a point to monitor for property companies whose asset mix is changing.

Can my coefficient vary from one year to the next?

Yes, depending on how taxed and exempt turnover evolve. The calculation is made each year on the basis of the past financial year. For buildings and capital goods, a change in the coefficient triggers an adjustment of the deductions initially made (twentieths for buildings, fifths for other fixed assets). For current expenses, the coefficient applies month by month without any retroactive adjustment.

Are holding companies concerned?

Yes. Mixed holding companies (active involvement plus mere shareholding) are a specific case. Pure holding companies (mere holding of shares) are not subject to VAT and do not deduct input VAT. Active holding companies that take part in the management of their subsidiaries and invoice them for services are taxable persons, with deduction under the coefficient system. The analysis interacts with the single taxable person regime (French Tax Code 256 C, since 2023), which can neutralise certain proration issues for VAT-grouped structures.

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Mixed activities to secure?

A confidential initial discussion: audit of the coefficients, calibration of the split into distinct business sectors, and an orderly voluntary disclosure where necessary.

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