Property VAT, deed drafting

VAT clauses in the deed of sale of a building: the tax treatment is written into the deed

When a building is sold, the tax regime of the transaction is not established after the fact: it is fixed in the deed. The option to tax an exempt sale is exercised in the deed (article 260, 5° bis of the CGI), the application of margin-scheme VAT or VAT on the full price is recorded there, the resale commitment (article 1115 of the CGI) and the building commitment (article 1594-0 G of the CGI) are given there, and the article 257 bis relief is customarily mentioned there. A missing, ambiguous or contradictory clause exposes both seller and buyer to VAT reassessments, forfeiture of preferential registration duty regimes and late-payment interest. The firm drafts and audits the tax provisions of deeds of sale, working alongside the notary.

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— In brief
Principle
The VAT and registration duty treatment of a property sale is governed by the tax clauses of the deed
Option
The option to tax an exempt sale is exercised in the deed recording the transfer (article 260, 5° bis of the CGI)
Taxable base
VAT on the full price or on the margin (article 268 of the CGI): the regime applied is recorded in the deed
Commitments
Resale commitment (article 1115) and building commitment (article 1594-0 G) given in the deed, conditions of the preferential regimes
Risks
VAT reassessments, forfeiture of the preferential regime, late-payment interest (article 1727 of the CGI), liability claims against the drafters
— 01

The tax regime of a property sale is decided when the deed is drafted

Property VAT and registration duties form a system of options, commitments and waivers whose common feature is that they are formalised in the deed of sale. The option to tax a sale that is exempt in principle (article 260, 5° bis of the CGI) must be mentioned in the deed recording the transfer, as required by article 201 quater of annex II to the CGI. The resale commitment of article 1115 of the CGI and the building commitment of article 1594-0 G of the CGI, on which the preferential registration duty regimes depend, are given in the deed. The VAT waiver of article 257 bis of the CGI, which applies to transfers of a going concern, is customarily recorded by a mention in the deed, both parties being liable for the tax.

This formal dimension is not incidental. An omitted option is never presumed: the sale remains exempt, with the VAT adjustments that this can trigger for the seller. A resale commitment missing from the deed deprives the buyer of the preferential regime they believed secured. A margin-scheme VAT mention applied to a transaction that fell under the full-price regime, or the reverse, distorts the taxable base and paves the way for a reassessment. Consistency between the tax clauses, the status of the parties and the history of the property is therefore the first check to carry out before signing.

The consequences of defective drafting unfold on several fronts: VAT reassessments against the seller or the buyer, forfeiture of the preferential regimes for registration duties with payment of the duties from which the transaction had been relieved, late-payment interest under article 1727 of the CGI, and, where applicable, liability claims against the drafters and contractual disputes between seller and buyer over who ultimately bears the tax. The cost of a tax review of the deed is out of all proportion to the cost of a reassessment.

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

— 02

The tax clauses of the deed, one by one

01

The option to tax and the taxable base: full price or margin

The sale of a building completed more than five years ago is in principle exempt from VAT; the seller, if a taxable person, may opt for taxation, and the deed records the base applied.

  • The option under article 260, 5° bis of the CGI must be mentioned in the deed recording the transfer (article 201 quater of annex II to the CGI) and is exercised separately for each building, fraction of a building or property right: an option formulated elsewhere or after the fact exposes the parties to the regime being challenged
  • The option makes it possible in particular to avoid VAT adjustments for the seller and, where applicable, to open a deduction right for the buyer
  • Margin-scheme VAT under article 268 of the CGI applies only to certain sales, in particular where the seller's own acquisition did not carry a deduction right; its application is subject to conditions and must be verified against the history of the property
  • The deed must record without ambiguity the regime applied: VAT on the full price, margin-scheme VAT or exemption, an incorrect mention being a classic source of reassessments
02

Resale commitment and building commitment

The preferential registration duty regimes for buyers who are taxable persons rest on commitments given in the deed, and failing to honour them has a price.

  • The resale commitment of article 1115 of the CGI, given in the deed by the taxable buyer, opens a preferential registration duty regime, on condition that the property is resold within the statutory five-year period, reduced to two years for certain resales by lots
  • The building commitment of article 1594-0 G of the CGI, also given in the deed, is the condition for the duty exemption attached to acquisitions intended for construction, subject to proving completion of the works within the four-year period, which may be extended on request
  • The legislation provides for substitution and extension mechanisms between the two commitments; using them requires properly formalised requests and mentions
  • Failure to honour the commitment triggers forfeiture of the preferential regime: the duties from which the acquisition had been relieved become payable, together with late-payment interest under article 1727 of the CGI
03

The mention of the article 257 bis relief

Where the sale forms part of the transfer of a going concern between VAT payers, the VAT relief is customarily recorded in the deed.

  • Article 257 bis of the CGI provides relief from VAT on transfers of a totality of assets, or part thereof, carried out between VAT payers, a frequent case being the let building sold with its leases to a buyer who continues the VAT-taxable letting activity
  • Practice calls for an express mention in the deed recording that the sale forms part of such a transfer and that the parties intend to place themselves under this regime
  • The qualification as a going concern is strictly assessed: a relief mention attached to a transaction that does not meet the conditions exposes the parties to a VAT reassessment
  • Conversely, charging VAT on a transaction covered by the relief creates a symmetrical risk, as wrongly invoiced tax is not necessarily deductible for the buyer
04

Transfer certificate for the deduction right and warranty clauses

Beyond the regime of the sale itself, the deed and its schedules deal with the fate of the input VAT and the allocation of tax risk between the parties.

  • Where a sale not subject to VAT takes place during the adjustment period, the seller may transfer to the buyer a fraction of the original tax by way of a certificate (annex II to the CGI, article 207, III); the content of this certificate determines the buyer's deduction
  • The seller's representations on the VAT history of the property (terms of acquisition, deductions taken, works, past adjustments) must be verified, as they underpin the regime applied
  • The clauses allocating the burden of VAT and duties, the price clauses (VAT in addition or inclusive) and the cross-warranties determine who ultimately bears any reassessment
  • The notary receives the deed and handles the formalities; the tax adviser secures the qualification of the transaction and the drafting of the clauses, the two roles being complementary
— 03

Our approach

The firm intervenes before signing: audit of the VAT history of the property and of the status of the parties, determination of the applicable regime (exemption, taxation on the full price or on the margin, article 257 bis waiver), drafting or review of the tax clauses of the preliminary agreement and of the notarial deed in liaison with the notary, formalisation of the option under article 260, 5° bis, of the commitments under articles 1115 and 1594-0 G and of the transfer certificate for the deduction right. The firm also assists the parties when the tax authorities challenge the regime applied or when seller and buyer dispute who bears a reassessment.

  • VAT clauses of the deed
  • Option under article 260, 5° bis
  • Margin-scheme VAT
  • Commitments under articles 1115 and 1594-0 G
  • Article 257 bis
— FAQ

VAT clauses in the deed of sale: your questions

Why are the VAT clauses of the deed of sale so important?

Because in property matters, the tax regime does not follow from the nature of the transaction alone: it depends on options, commitments and mentions that are formalised in the deed. The option to tax an exempt sale is exercised in the deed (article 260, 5° bis of the CGI), the resale and building commitments are given there (articles 1115 and 1594-0 G of the CGI), and the article 257 bis waiver is customarily recorded there. An omitted or poorly drafted clause therefore directly changes the tax owed by the parties, sometimes for very significant amounts.

What happens if the option to tax was not formalised in the deed?

The option under article 260, 5° bis of the CGI must be mentioned in the deed recording the transfer, as provided by article 201 quater of annex II to the CGI. Failing that, the sale of a building completed more than five years ago remains exempt from VAT, which can trigger a clawback of the tax initially deducted by the seller if the building is still within its adjustment period, and deprive the buyer of deductible VAT. Repairing a missing option after the fact is a delicate exercise: the question must be settled before signing, at the preliminary agreement stage.

How do you know whether the sale falls under margin-scheme VAT or VAT on the full price?

Margin-scheme VAT under article 268 of the CGI is a derogatory regime, subject to conditions relating in particular to how the seller acquired the property, and especially the absence of a deduction right on that acquisition. The analysis requires reconstructing the history of the property: how it entered the seller's estate, the regime applied upstream, any transformations. The deed then records the regime applied. A margin mention applied wrongly, or the reverse, distorts the taxable base and is a classic ground for reassessment in a tax audit.

What are the consequences if the resale or building commitment is not honoured?

The buyer loses the preferential regime they had benefited from: they become liable for the registration duties from which the acquisition had been relieved or reduced, together with late-payment interest under article 1727 of the CGI. The legislation provides for extension and substitution mechanisms between the resale commitment (article 1115) and the building commitment (article 1594-0 G), but using them is subject to conditions of form and time that must be anticipated before the deadline, not after.

Is the mention of article 257 bis in the deed compulsory?

The relief under article 257 bis of the CGI applies when its substantive conditions are met: transfer of a totality of assets, or part thereof, between VAT payers, with the buyer continuing the business. Practice nonetheless calls for an express mention in the deed, recording that the parties place themselves under this regime and securing each party's reporting treatment. What matters most remains the qualification: a relief mention does not protect a transaction that fails to meet the conditions, and its absence weakens the parties' position in a tax audit. The mention must therefore rest on a prior analysis.

What is the purpose of the deduction right transfer certificate attached to the sale?

Where the sale is not subject to VAT and takes place during the adjustment period, the seller may transfer to the buyer a fraction of the tax that was charged on the building, corresponding to the remaining years (annex II to the CGI, article 207, III). This transfer operates through a certificate stating the amount of tax the recipient is entitled to deduct. Its delivery and content determine the buyer's deduction: a missing, late or incorrect certificate causes this right to be lost or weakened, even though the clawback was borne by the seller.

Who is liable if the tax clauses of the deed contain an error: the notary or the tax adviser?

The roles are complementary. The notary, as drafter of the notarial deed, owes a duty to advise and handles the formalities, particularly for registration duties. The tax adviser works on the qualification of the transaction, the choice of regime and the drafting of the corresponding clauses, especially in complex transactions (property dealers, let buildings, restructurings). If an error occurs, the burden of the reassessment is first allocated between the parties under the clauses of the deed, and professional liability may then be pursued according to the faults committed. The best protection remains a tax review before signing.

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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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