Real estate taxation, non-profit sector

Real estate held by non-profit organisations: VAT, payroll tax and local taxes

An association, a foundation or an endowment fund that owns a building enjoys no blanket tax immunity: each tax follows its own logic. The letting of unfurnished premises is exempt from VAT (article 261 D, 2° of the CGI), with an option to tax available where the tenant is a business (article 260, 2° of the CGI); in return, the absence of VAT liability exposes the organisation, as an employer, to the payroll tax (taxe sur les salaires, article 231 of the CGI). Rental income may fall within the scope of the commercial taxes if management is not disinterested or if the profit-making activity becomes preponderant (article 206, 1 bis of the CGI), hence the value of rigorous sectorisation. Property tax and the CFE, finally, follow their own exemption rules. The firm structures the real estate holdings of non-profit organisations and secures each of these aspects.

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— In brief
Organisations
Associations, foundations and endowment funds owning or operating real estate
VAT
Unfurnished lettings exempt (article 261 D, 2° of the CGI), option to tax available where the tenant is a business (article 260, 2°); furnished or equipped lettings follow a separate regime
Payroll tax
Payable by employers not liable to VAT, or liable on less than 90% of their turnover (article 231 of the CGI)
Commercial taxes
Exemption conditional on disinterested management and the preponderance of non-profit activities (article 206, 1 bis of the CGI); sectorisation of profit-making activities
Local taxes
Property tax due save for targeted exemptions; CFE limited to profit-making activities
Structuring
Direct ownership, subsidiary, fiducie or endowment fund depending on the objectives
— 01

Non-profit status does not shield the building: each tax has its own tests

The exemption from the commercial taxes enjoyed by non-profit organisations rests on the criteria of article 206, 1 bis of the CGI: disinterested management, significantly preponderant non-profit activities and, for ancillary profit-making activities, a revenue allowance whose threshold, indexed each year, stands at 81,051 euros in the version of the article currently in force. Real estate puts this fragile balance to the test: substantial rents, quasi-hotel operations or the letting of equipped rooms can tip the organisation, in whole or in part, into the scope of corporate income tax, VAT and the CFE.

As regards VAT, real estate ownership follows its own rules, distinct from the regime for associations under article 261, 7 of the CGI. The letting of unfurnished premises is exempt (article 261 D, 2° of the CGI), whatever the status of the landlord; the organisation may nonetheless opt to charge VAT where the premises are let unfurnished for the business needs of a tenant liable to VAT or, subject to a clause in the lease, of a tenant not liable to VAT (article 260, 2° of the CGI). Furnished lettings for residential use are in principle exempt, whereas lettings combined with quasi-hotel services or covering equipped premises are taxable.

These VAT choices drive a second, often overlooked tax: the payroll tax. Article 231 of the CGI imposes it on employers who are not liable to VAT, or who were not liable on at least 90% of their turnover for the year preceding the year in which the remuneration is paid. An organisation letting property exempt from VAT and employing staff therefore bears the payroll tax; exercising a VAT option on the rents changes the taxable-turnover ratio and, with it, the employment cost of the structure.

The firm deliberately takes on a limited number of engagements in order to guarantee the direct involvement of its partners in every matter, and systematically assesses the relevance of its involvement before accepting any engagement.

— 02

The four aspects of non-profit real estate, point by point

01

VAT: unfurnished lettings, the option and furnished or equipped lettings

The VAT regime of the rents does not depend on the landlord's status as an association but on the nature of the letting.

  • Unfurnished lettings exempt from VAT (article 261 D, 2° of the CGI), with no right to deduct input VAT on works and building charges
  • Option to tax (article 260, 2° of the CGI) where unfurnished premises are let for the business needs of a tenant liable to VAT; the option is exercised premises by premises and opens the right to deduct input VAT
  • Fitted-out or equipped lettings (rooms with equipment, equipped business premises): taxable as of right, with the favourable consequences for VAT recovery
  • The exemptions specific to non-profit organisations (article 261, 7 of the CGI: services provided to members, six charity or fundraising events) do not, in themselves, cover the landlord activity: each rental flow is analysed separately
02

Payroll tax: the flip side of the VAT exemption

Article 231 of the CGI applies to remuneration paid by employers outside the scope of VAT or only marginally liable to it.

  • Tax payable by employers not liable to VAT or liable on less than 90% of their turnover for the year preceding the year in which the remuneration is paid
  • Computed by applying the taxable-turnover ratio: the proportion of receipts that did not open a right to deduct input VAT determines the share of salaries taxed, under a progressive scale
  • Associations and certain assimilated organisations benefit from a specific annual allowance, updated periodically, which neutralises the tax for small employing structures
  • The VAT option on the rents and the creation of distinct business sectors change the taxable-turnover ratio: the VAT decision must always be quantified net of payroll tax
03

Commercial taxes and sectorisation of profit-making activities

Article 206, 1 bis of the CGI governs the overall exemption; sectorisation makes it possible to ring-fence what must be ring-fenced.

  • Exemption conditional on disinterested management and on the significantly preponderant character of the non-profit activities; ancillary profit-making receipts benefit from an allowance whose threshold, indexed each year, stands at 81,051 euros in the version of the article currently in force
  • Sectorisation: non-preponderant profit-making activities may be grouped in a distinct sector, alone subject to corporate income tax and the CFE, the non-profit activity remaining exempt
  • Allocating the building to the profit-making or the non-profit sector has consequences for depreciation, the deduction of expenses and VAT
  • Beyond a certain level of development of the profit-making activity, transferring it to a subsidiary subject to corporate income tax protects the organisation's tax regime; the relations between the organisation and its subsidiary must remain balanced
04

Property tax, CFE and structuring of ownership

Local taxes follow their own exemptions; the method of ownership is chosen according to the project.

  • Property tax: it is payable by the owner, including an association; the exemptions are targeted and depend on the nature of the property or its use, with no general exemption for non-profit organisations
  • CFE: it applies only to self-employed professional activities; an organisation whose activity remains non-profit stays in principle outside its scope, sectorisation confining the tax to the profit-making sector alone
  • Methods of ownership: direct ownership by the association or foundation, a real estate subsidiary subject to corporate income tax, a fiducie to isolate and secure an asset, or an endowment fund receiving the building by endowment or gift
  • Real estate patronage: making premises available free of charge to an eligible organisation may, under the conditions of article 238 bis of the CGI, open the right to the patronage tax reduction for the providing company, on the basis of a prudent and documented valuation
— 03

Our approach

The firm acts across the entire chain: non-profit status audit of the organisation and its real estate operation (disinterested management, preponderance, revenue allowance), VAT qualification of each rental flow and assessment of the option under article 260, 2° quantified net of payroll tax, implementation of sectorisation or transfer to a subsidiary, choice of the holding vehicle (direct ownership, subsidiary, fiducie, endowment fund) and securing of local tax exemptions. The firm also assists organisations whose tax regime is challenged in the course of a tax audit.

  • Non-profit organisations
  • Rental VAT
  • Payroll tax
  • Sectorisation
  • Endowment funds and fiducie
— FAQ

Real estate of non-profit organisations: your questions

Must an association letting a building charge VAT?

In principle no, where the premises are let unfurnished: the letting is exempt from VAT under article 261 D, 2° of the CGI, whatever the status of the landlord. The association charges no VAT but cannot deduct the VAT borne on works and charges. It may, however, opt to charge VAT (article 260, 2° of the CGI) where the premises are let for the business needs of a tenant liable to VAT, which opens the right to deduct input VAT. Lettings of fitted-out premises or combined with quasi-hotel services are, for their part, taxable as of right.

Why does an association acting as landlord pay the payroll tax?

Because the payroll tax (article 231 of the CGI) is payable by employers who are not liable to VAT, or who were not liable on at least 90% of their turnover for the year preceding the year in which the remuneration is paid. An association exempt from VAT on its rents and on its activities, but which employs staff, therefore falls within the scope of the tax. An annual allowance specific to associations and assimilated organisations softens its impact for modest structures. Exercising a VAT option on the rents changes the taxable-turnover ratio and must always be quantified with this parameter factored in.

Can substantial rents make the association liable to corporate income tax?

Yes, in two situations. If management is not disinterested or if the real estate operation is carried on under competitive conditions comparable to those of a commercial operator, the activity becomes profit-making within the meaning of article 206, 1 bis of the CGI. And if the profit-making activities become preponderant, the entire organisation tips into the commercial taxes. Below that point, ancillary profit-making receipts benefit from an allowance whose threshold, indexed each year, stands at 81,051 euros in the version of the article currently in force. The qualification is assessed case by case, in particular for lettings granted at market conditions.

What is sectorisation and when should it be used?

Sectorisation consists in ring-fencing, for accounting and tax purposes, the profit-making activities of an organisation whose non-profit activities remain preponderant: only the profit-making sector is subject to corporate income tax and, where applicable, to the CFE, the organisation keeping its favourable regime for the remainder. It requires a precise allocation of resources, including the building, between the two sectors. Where the profit-making activity grows to the point of threatening the non-profit preponderance, transferring it to a dedicated subsidiary becomes the appropriate tool.

Does an association or a foundation pay property tax and the CFE?

Property tax is payable by every owner, including a non-profit organisation: there is no general exemption for associations, only targeted exemptions depending on the nature of the property or its use, to be verified case by case. The CFE, by contrast, applies only to professional activities carried on on a habitual basis: an organisation whose activity remains non-profit stays in principle outside its scope, and sectorisation makes it possible to confine the tax to the profit-making sector alone.

Is it better to place the building in an endowment fund or a fiducie?

The two vehicles serve different needs. The endowment fund receives the building by endowment or gift and applies its income to a public-interest mission, within a tax framework favourable to donors; it suits a lasting wealth-planning and philanthropic approach. The fiducie transfers the building into a ring-fenced estate managed by a fiduciary, in pursuit of a management, protection or security objective defined in the agreement. The choice depends on the origin of the asset, the desired governance, the tax regime of the flows and the reversibility sought; it must be addressed upstream, before any transfer.

Can a company make premises available to an association free of charge?

Yes, and this provision of premises may constitute a gift in kind eligible for the patronage tax reduction of article 238 bis of the CGI, where the beneficiary organisation is eligible and the arrangement is granted without consideration. The valuation of the gift, generally established by reference to the rent the company forgoes, must be prudent and documented, and the arrangement formalised. The consequences for the providing company (VAT, expenses relating to the premises) and for the beneficiary organisation must be examined before signature.

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