VAT — Deduction coefficients (mixed activities)

VAT deduction proration:
the four coefficients of article 206 of Annex II

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
Consequences
Late-payment interest of 0.20 % per month (French Tax Code art. 1727, III), halved where a corrective return is filed voluntarily before the reassessment period expires and on the regularisation and payment conditions laid down by that same provision, the benefit of the reduction being retained where the public accountant accepts a payment plan for the principal duties (French Tax Code art. 1727, V); a 40 % surcharge in the event of a deliberate breach (French Tax Code art. 1729, a)
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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.

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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.

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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 transactions giving rise to a deduction right within total in-scope transactions. Calculation: at the numerator, the turnover from transactions giving rise to a deduction right, including subsidies directly linked to their price; at the denominator, the turnover from all taxable transactions, including those same subsidies; both terms of the ratio leave aside disposals of capital goods and incidental exempt property and financial transactions (French Tax Code ann. II art. 206, III, 3, 3°). Exports and intra-Community supplies, although exempt, give rise to a deduction right (French Tax Code art. 271, V) and are in principle counted in both terms of the ratio, subject to the exclusion of disposals of capital goods. The coefficient is 1 if all transactions are taxed, 0 if all are exempt without a deduction right (banking, insurance). It is applied provisionally during the year, then definitively fixed before 25 April of the following year (French Tax Code ann. II art. 206, V, 2).

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), services relating to goods that are themselves excluded from the deduction right (French Tax Code ann. II art. 206, IV, 2, 10°)... 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. For capital goods, an annual adjustment is due in fifths over five years, and in twentieths over twenty years for buildings held as fixed assets, where the product of the liability and taxation coefficients for the year departs by more than one tenth, in absolute terms, from the product of the reference coefficients (French Tax Code ann. II art. 207, II).

— 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: a plurality of activities that are not subject to identical rules for VAT purposes, certain sectors being in addition constituted by operation of law (French Tax Code ann. II art. 209, I). Sectorisation is neither an election nor an approval: it applies by operation of law, with no prior authorisation from the tax authorities (BOI-TVA-DED-20-20, § 120). French Tax Code ann. IV art. 40, 2, still in force, further provides that the business must, within fifteen days, declare its sectors to the tax office, as well as any change resulting in the creation of an exempt sector; the published guidelines, for their part, state that the constitution of distinct business sectors does not have to be declared to the authorities. In practice, filing the declaration is the prudent course. In any event, the accounts must track each sector in separate accounts (French Tax Code ann. II art. 209, I).

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). That annual adjustment is due only where the product of the liability and taxation coefficients for the year departs by more than one tenth, in absolute terms, from the product of the reference liability and taxation coefficients (French Tax Code ann. II art. 207, II, 4 and V, 2); a fraction of the VAT initially deducted is then 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. 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, there is no adjustment in fifths or twentieths, but the deduction made during the year remains provisional: it is adjusted when the coefficients are definitively fixed, in principle before 25 April of the following year, subject to the specific time limits laid down by that same provision (French Tax Code ann. II art. 206, V, 2).

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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