VAT — Distinct business sectors

Distinct business sectors:
the key tool for optimising mixed-activity VAT

For taxpayers carrying on several distinct economic activities, article 209 of annex II to the French Tax Code provides a sectorisation mechanism that allows the right to deduct to be calculated sector by sector, instead of applying a single overall coefficient. This mechanism is almost always favourable to the taxpayer because it prevents the dilution of the deduction coefficient. Article 209 of annex II now covers the entire regime (both mandatory and optional cases); the former article 213 of annex II has been repealed.

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— In brief
Governing text
French Tax Code, annex II, art. 209 (former art. 213 repealed)
Mandatory sectorisation
Mixed property companies, certain exempt activities
BOFiP
BOI-TVA-DED-20-20
Benefit
A taxation coefficient specific to each sector
Conditions
Separate accounts + filing with the tax office (SIE)
— 01

Sectorisation: the most powerful optimisation lever in mixed-activity VAT

For a taxable person carrying on multiple activities, calculating the right to deduct using a single overall coefficient can produce economically absurd results. Example: a property company deriving 80% of its turnover from taxed activities (offices, retail) and 20% from exempt activities (residential housing) would apply an overall coefficient of 0.80 to all of its input VAT, including the VAT on works carried out on the offices, which should in fact be deductible in full.

Sectorisation (French Tax Code, annex II, art. 209) solves this problem by allocating input VAT to each sector. VAT on office works: 100% deductible (taxed sector). VAT on residential works: non-deductible (exempt sector). VAT on general overheads (head office, accounting): deduction proration across the two sectors. Depending on the structure of the activities, the benefit can reach 10 to 30% of additional recoverable VAT.

Our conviction: all mixed property companies, active holding companies, training organisations and partially taxable public bodies should be sectorised. The initial complexity (setting up separate accounts, filing with the tax office) is largely outweighed by the additional VAT recovered, often a six-figure amount in the very first year for significant groups.

— 03

A case handled by the firm

EUR 45m hotel property company: sectorisation, EUR 480k of VAT recovered over 3 years

A property company holding a portfolio of 6 hotels (turnover EUR 12m, 10% VAT) and 4 residential buildings (turnover EUR 3.5m, exempt), historically structured without sectorisation and applying an overall coefficient of approximately 0.77. An internal audit revealed a loss of deduction rights on the major hotel fit-out works carried out in 2022-2024 (approximately EUR 12m of input VAT). Our strategy: (1) implementing a retroactive sectorisation with a regularisation request filed with the tax office (SIE), (2) rebuilding the accounting allocation of expenses by sector (hotels subject to VAT / exempt residential / overheads), (3) obtaining the full deduction of VAT on the hotel works (initially deducted at 77%, now at 100%), a differential of 23% x EUR 2.4m, approximately EUR 550k. Outcome: a net recovery of EUR 480k after taking into account the late-payment interest (French Tax Code, art. 1727 R) paid by the tax authorities on the additional refund.

— 02

5 typical sectorisation cases

1. Mixed property company (non-VAT residential + VAT retail/offices)

The most frequent case. Sector 1: residential housing, exempt (French Tax Code, art. 261 D, 4°), input VAT non-deductible. Sector 2: retail units, offices and car parks subject to VAT, 100% deductible. Sector 3: general overheads (head office, accounting, audit), prorated on the turnover of sectors 1 and 2. Sectorisation makes it possible to maximise the deduction on fit-out and maintenance works relating to the taxed assets.

2. Mixed active holding company

A holding company that manages a securities portfolio (an out-of-scope or exempt activity) AND invoices services to its subsidiaries (a taxed activity) must sectorise. Sector 1: portfolio management, non-deductible. Sector 2: services to subsidiaries, deductible. Sector 3: general overheads, prorated. The interaction with the VAT group (single taxable person) regime (French Tax Code, art. 256 C) must be analysed if the group has opted for VAT grouping.

3. Training organisations and non-profit entities

Professional training organisations covered by the exemption in art. 261, 4°, a, that also carry on ancillary commercial activities (sale of course materials, consulting, private services) must sectorise. Sectorisation may allow them to recover VAT on the capital expenditure dedicated to the commercial activity (equipment, premises). Condition: keeping separate accounts.

4. Partially taxable public bodies

Local authorities and public bodies are in principle outside the scope of VAT (French Tax Code, art. 256 B), except for their economic activities carried on in competition with the private sector (water, sanitation, car parks, paid school catering, ticketing). Sectorisation distinguishes out-of-scope activities (schools, roads) from taxed activities. The FCTVA compensation mechanism applies to non-taxable persons.

5. Mandatory sectorisation (French Tax Code, annex II, art. 209)

Certain activities must be sectorised: (a) transactions exempt under art. 261 D (letting of residential property, letting of undeveloped land), (b) certain farming activities under election, (c) international passenger transport by air or sea. Failure to sectorise is sanctioned by the denial of the deduction on the assets allocated to the non-sectorised activity.

— Frequently asked questions

What are the conditions for a valid sectorisation?

Three cumulative conditions (BOFiP-TVA-DED-20-20): (1) distinct economic activities within the meaning of VAT law (not merely separate administrative units), (2) separate accounts allowing expenses and assets to be allocated to each sector without ambiguity, (3) filing with the tax office (SIE) through the VAT return or by an election letter. If any of these conditions is not met, the taxpayer is treated as a single unit and the overall coefficient applies.

Can sectorisation be revoked?

Yes. Sectorisation can be abandoned by filing with the tax office (SIE), generally with effect from the following financial year. But caution: abandonment may trigger adjustments on capital assets (twentieths for buildings, fifths for other assets). In practice, sectorisation is almost always kept in place once implemented: the administrative burden is marginal and the economic benefit is recurring.

Can a distinct sector be created purely for optimisation purposes?

The BOFiP requires economically distinct activities: a purely accounting split of a single activity designed to optimise the coefficient may be recharacterised by the tax authorities. However, where activities are genuinely distinct (residential vs offices, portfolio management vs services to subsidiaries), sectorisation is entirely legitimate and the tax authorities cannot refuse it. The boundary is assessed case by case, which makes a prior analysis essential.

Are sectorisation and the VAT group regime compatible?

The single taxable person regime (French Tax Code, art. 256 C, in force since 2023) consolidates the VAT of a group at the level of the head entity. Within that single taxable person, sectorisation remains available: each entity within the perimeter keeps its qualification as a distinct sector provided the conditions are met. The combination is complex to structure: sectorisation and VAT grouping are complementary tools, not substitutes.

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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.

© BENSAID Avocats — The information on this site does not constitute legal advice and is no substitute for personalised tax analysis.