The VAT deduction coefficient in real estate

It is the proportion in which the VAT charged on a good or service is deductible (Annex II to the CGI, Article 205). It results from the product of three coefficients defined in Article 206 of the same annex: the liability coefficient, the taxation coefficient and the admission coefficient. A deduction coefficient of 0.60 means that 60% of the input tax is deductible. For a building, this coefficient is determined asset by asset and governs both the initial deduction and the adjustments throughout the twenty-year period.

The liability coefficient answers the question of scope: in what proportion is the building used for transactions falling within the scope of VAT, as opposed to private uses or out-of-scope activities, such as the mere receipt of dividends by a holding company. The taxation coefficient then applies, within the in-scope transactions alone: it measures the share of transactions carrying a right to deduct, that is, for a landlord, the share of taxed rents relative to exempt rents. The two coefficients are multiplied together: a building wholly assigned to an economic activity but let exclusively on a VAT-exempt basis has a liability coefficient of one and a taxation coefficient of nil, and therefore no right to deduct at all.

Where the building is used concurrently for transactions carrying a right to deduct and for transactions not carrying that right, the taxation coefficient is determined on a flat-rate basis, in accordance with Article 206 of Annex II to the CGI: it results in principle from the ratio between the turnover relating to transactions carrying a right to deduct and the total turnover of transactions within the scope of VAT. In real estate practice, creating distinct sectors and directly allocating identifiable expenses to a specific use often yields a more faithful result than applying a global flat rate to all expenses.

When the expense is incurred, the taxable person does not yet know the year's actual figures, in particular its turnover. It therefore deducts the tax on the basis of provisional coefficients, estimated in the light of the building's expected use. These coefficients are then fixed as definitive coefficients in the light of the year's actual figures, within the time limit set by the regulations, and the initial deduction is corrected accordingly, in either direction. The definitive coefficient for the reference year becomes the building's reference coefficient for the entire adjustment period.

Article 207 of Annex II to the CGI requires an annual adjustment where the difference between the product of the year's liability and taxation coefficients and that of the reference coefficients exceeds, in absolute value, one tenth. The adjustment relates, for each year concerned, to one twentieth of the initial tax for a capitalised building. It works both ways: a landlord whose VAT-registered tenant is replaced by an exempt tenant repays a fraction of the tax; conversely, exercising an option to tax the rents during the period may open up an additional deduction. This monitoring must be carried out building by building for twenty years.

Yes, within certain limits. The main lever is the option to tax the rents of bare premises let for business use, which turns exempt rents into taxed rents and raises the building's taxation coefficient accordingly. The tenants must still be able to deduct the VAT thus charged, which is not the case for exempt tenants such as banks, insurance companies or healthcare professionals. Creating distinct business sectors also prevents an exempt activity from contaminating the coefficient applicable to the expenses of a building wholly assigned to taxed lettings. These choices must be prepared in advance, because their effects are felt over the entire adjustment period.

A holding company that merely receives dividends carries on an activity outside the scope of VAT: its liability coefficient is affected accordingly for shared expenses. Where it takes an active part in the management of its subsidiaries by invoicing them for services, or where it lets buildings with VAT, those transactions carry a right to deduct. The whole challenge then lies in allocating expenses correctly: direct allocation to taxed transactions where possible, a documented allocation key for overheads, and sectorisation where appropriate. Reassessments in this area most often target allocation keys deemed insufficiently substantiated.