Real estate VAT, lettings

The option to tax unfurnished lettings of business premises

The unfurnished letting of business premises is in principle exempt from VAT, which deprives the landlord of any deduction of input tax (works, acquisition, professional fees). Article 260, 2° of the CGI provides the remedy: the landlord may opt to tax its rents, unlock its right to deduct and secure the VAT position of the building through to its resale. The option is subject to precise formalities, is exercised building by building and, since a 2020 ruling of the Conseil d'État, may be tailored unit by unit. The firm structures, formalises and secures these options, from the lease to the sale.

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— In brief
Principle
Unfurnished lettings are exempt from VAT ; an option to tax is available under article 260, 2° of the CGI for premises used for business purposes
Benefit
VAT is charged on the rents in exchange for the deduction of input tax (acquisition, construction, works)
Form
Express declaration to the tax office, separate for each building ; the Conseil d'État accepts an option exercised in the registration filing, provided the building concerned is precisely identified
Scope
Building or property complex, with the ability to tailor taxation unit by unit
Revocation
Option revocable from 1 January of the ninth year following the year in which it was exercised
— 01

Without the option, input VAT is lost

Lettings of unfurnished premises are in principle exempt from VAT. That exemption is no advantage: a landlord who has not charged VAT on its rents can deduct no input VAT at all, neither the tax borne on the acquisition or construction of the building, nor that on works, nor that on fees and running costs. On a commercial building, the unrecovered tax frequently runs into hundreds of thousands of euros.

Article 260, 2° of the CGI offers the way out: persons who let unfurnished premises for the business needs of a tenant that is a taxable person, or, subject to conditions relating to the lease, of a non-taxable tenant, may opt to tax those lettings. The option is open to any landlord, including one that is not otherwise a taxable person, a family property company (SCI) for instance. It is, however, closed for unfurnished premises used as dwellings.

The trade-off is most often favourable where the tenant itself recovers VAT: the tax charged on the rents is neutral for the tenant, while the landlord recovers all of its input tax. It becomes more delicate with a non-recovering tenant (banking, insurance, healthcare, non-profits), for whom VAT on the rents is a dead cost: that is precisely where the ability to tailor the option unit by unit comes into its own.

The firm deliberately takes on a limited number of matters so as to guarantee the direct involvement of its partners on every file, and systematically assesses whether its involvement adds value before any engagement.

— 02

The option under article 260, 2° of the CGI, point by point

01

Scope of the option: who may opt, and for which premises

The option covers lettings of unfurnished premises granted for the business needs of a professional tenant ; it excludes residential use.

  • Lettings of unfurnished premises granted for the business needs of a tenant that is a taxable person for VAT ; for a non-taxable tenant, the option requires the lease to refer expressly to the landlord's option
  • Option open to any landlord, individual, SCI, commercial company, including a landlord that is not otherwise a taxable person: the option brings it within the scope of VAT for those lettings
  • Exclusion of premises used for residential or agricultural purposes: the option cannot cover unfurnished premises intended for residential or agricultural use, whatever the status of the tenant ; lettings of agricultural land and farm buildings fall under the separate option in 6° of article 260
  • Lettings of fitted-out premises for business use follow a different logic: they are taxable as of right, with no option required
02

Form and validity: an express option, formalities refined by the courts

The option takes the form of an express declaration to the tax office, separate for each building ; the Conseil d'État has clarified its contours.

  • The classic route: an option letter sent to the tax office with jurisdiction over the building, identifying the building concerned ; this is the safest route and the one the firm recommends
  • The Conseil d'État accepts that the option may be exercised in the company's registration filing, provided that document contains indications precise enough to identify the building concerned (CE 23 décembre 2011, n° 323189, Sté Mercedes)
  • Merely charging VAT on the rents or filing turnover returns is not always enough to establish an option: the intention to opt must be expressed unequivocally and be identifiable by the tax authorities
  • A defective option creates a twofold risk: disallowance of the deductions at the landlord's level and VAT wrongly charged at the tenant's level ; auditing the formalities is a prerequisite to any acquisition of a let building
03

Scope: building by building, tailoring unit by unit

The option is exercised and monitored per building or property complex ; its scope within the building has been relaxed by the courts.

  • The option is exercised building by building: a landlord owning several buildings makes a separate option for each of them and may opt for some only
  • The Conseil d'État has held that the option does not necessarily cover all the units in the building: the landlord may confine it to certain units, taxation not extending automatically to the others (to that effect, CE 9 septembre 2020, n° 439143)
  • This unit by unit scope makes it possible to tax the rents of VAT-recovering tenants while keeping in exemption the units let to tenants for whom VAT would be a definitive cost
  • The counterpart of tailoring: the landlord becomes a partly taxable or partly liable person at building level, with a prorated right to deduct and coefficients tracked unit by unit ; documenting the allocation of floor space becomes decisive
04

Duration, revocation and sale of the building

The option is a long-term commitment and shapes the VAT treatment of the resale ; it must be managed over the whole holding period.

  • The option takes effect under the conditions laid down by annexe II to the CGI and covers a minimum period ; it is revocable from 1 January of the ninth year following the year in which it was exercised
  • Revocation is no small matter: it ends the taxation of the rents and may trigger adjustments of the VAT previously deducted if the building is still within its twenty-year adjustment period
  • On the resale of a building let under an option, the transfer of the current lease to a purchaser continuing the taxed letting most often falls within the relief of article 257 bis of the CGI: no VAT on the price, no adjustment, the purchaser stepping into the shoes of the seller
  • Outside the relief, the seller weighs an exempt sale, triggering a clawback by twentieths, against subjecting the sale to VAT under the option of article 260, 5° bis of the CGI ; the letting option exercised upstream directly conditions that choice
— 03

Our approach

The firm acts across the whole cycle: assessing whether to opt in light of the tenants' status and the volume of input VAT, drafting the option letter and the VAT clauses of the lease, structuring unit by unit taxation with monitoring of the deduction coefficients, auditing the formalities of existing options on the acquisition of a let building, exit choices (revocation, article 257 bis, the option under article 260, 5° bis) and defending the arrangements in the event of a tax audit.

  • Option under article 260, 2°
  • Unfurnished business letting
  • VAT option letter
  • Unit by unit taxation
  • Right to deduct
— FAQ

Option to tax unfurnished lettings: your questions

Why opt for VAT when unfurnished lettings are exempt?

Because the exemption deprives the landlord of any right to deduct. Without the option, the VAT borne on the acquisition, construction, works or running costs of the building remains a definitive cost. The option under article 260, 2° of the CGI subjects the rents to VAT and, in exchange, opens the deduction of input tax. Where the tenant is itself a VAT-recovering taxable person, the tax charged on the rents is neutral for it: in the great majority of cases the option is then favourable to the landlord.

Who may exercise the option under article 260, 2° of the CGI?

Any person letting unfurnished premises for the business needs of a tenant that is a taxable person for VAT: an individual, an SCI, a commercial company, a property investment company. The option is open even to a landlord that is not otherwise a taxable person, a family property company (SCI) for instance ; the option is precisely what brings it within the scope of the tax for those lettings. Where the tenant is not a taxable person, the option remains possible provided the lease refers expressly to the landlord's option. Unfurnished residential premises are, on the other hand, excluded from the regime.

What form must the option take?

The reference route is an express declaration, separate for each building, in practice an option letter sent to the tax office with jurisdiction over the building, precisely identifying the building concerned. The Conseil d'État has nevertheless accepted that the option may be exercised in the company's registration filing, provided that document identifies the building concerned with sufficient precision (CE 23 décembre 2011, n° 323189, Sté Mercedes). The intention to opt must remain unequivocal and identifiable by the tax authorities: this judicial flexibility is a fallback in litigation, not a method, and the firm systematically recommends a formal option letter.

Does the option necessarily cover the whole building?

No. The option is exercised building by building, but the Conseil d'État has held that it does not necessarily extend to all the units: the landlord may confine its scope to certain units of the building (to that effect, CE 9 septembre 2020, n° 439143). It thus becomes possible to tax the rents of VAT-recovering tenants and to maintain the exemption for non-recovering tenants, banks, insurers, healthcare professions, non-profits, for whom VAT would be a dead cost. In return, this tailoring requires rigorous tracking of the deduction coefficients, unit by unit.

How long does the option bind the landlord, and how is it ended?

The option covers a minimum period and may only be revoked from 1 January of the ninth year following the year in which it was exercised. The revocation must be formalised with the tax office. It deserves to be quantified before any decision: the return to exemption may trigger adjustments of the VAT previously deducted where the building is still within its twenty-year adjustment period, and it deprives the landlord of the deduction on future expenditure.

What happens to the option when the let building is sold?

The option does not transfer automatically: a purchaser intending to continue the taxed letting must exercise its own option. Where the building is sold let, with the leases transferred, to a purchaser continuing the letting activity subject to VAT, the sale most often falls within the relief of article 257 bis of the CGI: no VAT on the price and no adjustment, the purchaser stepping into the shoes of the seller for the remaining adjustment period. Outside that case, the seller weighs an exempt sale, with a clawback by twentieths, against a sale voluntarily taxed under the option of article 260, 5° bis of the CGI.

What are the risks if the option is defective or cannot be found?

The risk is twofold. On the landlord's side, the tax authorities may disallow the deductions taken on the building, the letting being deemed exempt for want of a valid option, with reassessments and late-payment interest. On the tenant's side, the VAT charged on the rents was charged wrongly, which undermines the tenant's own deduction. This situation arises frequently on the acquisition of older let buildings, when the original option letter cannot be located: auditing the formalities of the options in place and, where necessary, regularising them is an indispensable prerequisite to the transaction.

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François Ouairy, avocat associé

Written by

Me François Ouairy, avocat associé en charge du bureau de Paris, expert en fiscalité immobilière, fiducie et fiscalité financière.

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