Real estate VAT — Election for taxation

The VAT election letter:
timing is critical

Several French real estate VAT regimes rest on an election made by the taxpayer: the VAT election available to landlords letting unfitted premises for professional use (article 260, 2° of the French Tax Code), the VAT election on the sale of a building completed more than 5 years ago (article 260, 5° bis of the French Tax Code), and the choice between applying article 257 bis (transfer of a going concern, outside the scope of VAT) and electing for VAT on the sale. The rules of form differ from one election to the other: the election under article 260, 5° bis must be expressed in the deed recording the transfer (CGI, Annex II, art. 201 quater), whereas the election under article 260, 2° is made to the tax office. Rules of substance apply as well (scope, duration of the election). A poorly framed election, whether made too late or drafted imprecisely, can lead either to the loss of the right to deduct input VAT, or to the collection of VAT that the purchaser cannot recover.

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— In brief
Lease election
Article 260, 2° of the French Tax Code: unfitted premises for professional use
Sale election
Article 260, 5° bis of the French Tax Code: buildings completed more than 5 years ago
Form
Sale: a statement in the deed. Letting: a letter to the tax office
Requirement
Sale: the election expressed in the deed (CGI, Annex II, art. 201 quater)
Interplay with 257 bis
No election where the going-concern regime applies
— 01

A formal mechanism with major economic consequences

The VAT election mechanism is one of the distinctive features of the French regime: for transactions that are exempt in principle, it allows the taxpayer to bring them voluntarily back within the taxable scope. The objective is generally to preserve the right to deduct input VAT (acquisition, works, expenses) which would otherwise be called into question (adjustment by twentieths, article 207 of Annex II to the French Tax Code).

The election is not without a counterpart, however: it entails the actual collection of VAT on future transactions. For lettings, this means the landlord charges VAT to the tenant (recoverable if the tenant is itself a taxable person). For sales, it means VAT is due on the sale price: recoverable by the purchaser if it is a taxable person, but a net cost if it is a final consumer. In practice, the choice therefore depends on the status of the counterparty.

The issues of form are essential: the election must be expressed in the form prescribed by the statute, failing which it is unenforceable. For a sale, article 201 quater of Annex II requires the election to appear in the deed recording the transfer, and to be expressed separately for each building, part of a building or real property right falling under the same regime for the purposes of articles 266 and 268 of the CGI. For a letting, the election is made to the tax office, by a declaration specific to each building. And the interplay with article 257 bis (transfer of a going concern) creates an additional layer of complexity.

— 04

Two case studies handled by the firm

Anonymised. Amounts are rounded. Documents and procedural records available on request, subject to professional secrecy.

SCI Z: a lease election recharacterised by the tax authorities

A French real estate company (SCI) subject to corporate income tax, letting an office building to a taxable person, had exercised the VAT election by letter in 2022 but with ambiguous wording. During a 2025 audit, the inspector considered the election unenforceable for lack of clarity, and issued a reassessment of the VAT deducted on the 2022-2024 works (around EUR 85k) plus an adjustment by twentieths on the acquisition value (around EUR 120k). The firm's work: (1) producing the history of exchanges between the shareholder and the tax authorities demonstrating a clear intention to elect, (2) analysing the administrative doctrine specific to the lease election (BOI-TVA-CHAMP-50-10), which calls for an express declaration identifying the lettings concerned, (3) formalising the election for the future, an election taking effect on the first day of the month in which it is made and being incapable of any retroactive effect (CGI, Annex II, art. 194). Outcome: the election was recognised and the reassessment abandoned, in exchange for a proper formalisation for future years.

Sale of a Paris office building: a mishandled interplay with article 257 bis, EUR 350k at stake

A property company sold an office building to another property company that continued the letting business. The deed, drafted by a notary, contained both an election under article 260, 5° bis AND a simultaneous reference to article 257 bis. On audit, the tax authorities raised the incompatibility and recharacterised the transaction as a transfer of a going concern outside the scope of VAT, leading to the reassessment of the VAT wrongly deducted by the purchaser and the transfer to it of the future adjustments of the tax deducted by the seller, who is relieved of them (article 257 bis of the French Tax Code; CGI, Annex II, art. 207, III-4-1°): EUR 350k in aggregate. The firm's work: (1) a joint audit of both taxpayers, (2) demonstrating that the conditions for a going concern were not met (a different activity, a substantial modification), (3) confirming the election under article 260, 5° bis as the applicable regime. Outcome: the elected VAT regime was upheld, the reassessment abandoned, and a corrective amendment to the deed formalised.

— 03

Who may elect, when, for what, and with what risks

01

Who may elect

Taxable persons for VAT purposes, in respect of certain transactions that are exempt in principle, provided they act in the course of an economic activity within the meaning of article 256 A.

  • Landlords of unfitted premises for professional use (article 260, 2°)
  • Sellers of buildings completed more than 5 years ago (article 260, 5° bis)
  • Legal entities subject to VAT on their other activities
  • Individual landlords: no exclusion in principle, provided they act in the course of an economic activity
  • A non-taxable tenant: the election is valid only if the lease refers to it (article 260, 2°, b of the French Tax Code)
02

When to elect

The timing and the formal requirements differ depending on the framework. An election made in the wrong form may be unenforceable.

  • Lettings: a specific declaration to the tax authorities, per building
  • Sales: a statement of the election in the deed recording the transfer (CGI, Annex II, art. 201 quater)
  • Lettings: at any time, including in anticipation; effective on the first day of the month of the election, with no retroactivity
  • A minimum election period specific to the chosen framework (not to be confused with the term of the lease)
03

What to elect for

The trade-off rests on the recovery of input VAT and the status of the counterparty.

  • Preserving the right to deduct (acquisition, works, expenses)
  • Avoiding the adjustment by twentieths (article 207 of Annex II to the French Tax Code)
  • The actual collection of VAT is neutral if the tenant or purchaser is a taxable person
  • A net cost to bear if the counterparty is a final consumer
04

Risks of getting it wrong

The consequences of a poorly framed election are economically and fiscally significant.

  • Unenforceability of the election: reassessment of the VAT collected plus adjustment of the deduction
  • A mishandled interplay with article 257 bis (going concern): double taxation or a wrongly applied exemption
  • No contractual coordination: a dispute over the net price (is the VAT recoverable?)
  • A missed audit of prior deductions: a net saving of zero, or even a negative one
— 02

5 mistakes to avoid with real estate VAT elections

Each mistake can prove costly: rejection of the election, VAT reassessments, adjustments by twentieths, litigation.

1. An informal or ambiguous election

The election must be explicit: expressed in the deed recording the transfer for a sale (CGI, Annex II, art. 201 quater), made to the tax office for a letting. Wording such as "the sale will be subject to VAT if necessary", or inconsistencies between the VAT clauses and the other tax clauses, weakens the election: a conditional clause does not express the election the statute calls for.

2. A lease election made too late

For the letting of unfitted premises for professional use (article 260, 2° of the French Tax Code), the election must be notified to the tax authorities through a specific declaration for each building (or each relevant group of buildings). The election takes effect for a minimum period which is not to be confused with the term of the lease. No time limit confines it: it may be made at any time, including in anticipation. It does, however, take effect on the first day of the month in which it is made to the tax office (CGI, Annex II, art. 194), with no retroactive effect whatsoever: input VAT borne before that date does not become deductible on that ground alone.

3. A sale election that contradicts article 257 bis

Where the sale forms part of a transfer of a going concern within the meaning of article 257 bis (a sale to a taxable person who continues the business), the transaction is outside the scope of VAT and the election under article 260, 5° bis is not applicable. The deed must decide: either it records that the conditions of article 257 bis are met, or it expresses the election under article 260, 5° bis. The two statements cannot be reconciled, since the relief applies by operation of law wherever it is due.

4. An election made without coordination with the purchaser

The seller's election is only effective if the purchaser can recover the VAT charged, or is a final consumer who accepts the cost. An election exercised without consulting the purchaser can turn a sale into a dispute over the net price. The price clause in the preliminary agreement must expressly address the treatment of VAT (VAT inclusive, exclusive of VAT plus VAT, VAT recoverable or not by the purchaser).

5. An election made without auditing the prior right to deduct

Before electing for VAT on a sale, the VAT previously deducted on the building (acquisition, works) must be audited. Absent an election, an exempt sale triggers an adjustment by twentieths (article 207 of Annex II to the French Tax Code). The election neutralises that adjustment but requires VAT to be collected. The economic trade-off depends on the net balance between the VAT collected and the adjustment avoided.

— 05

The firm's approach

The firm secures VAT elections at every stage: a prior audit of the right to deduct and of potential adjustments, the economic trade-off between election and exemption, the drafting of the deed clauses and of the election letter to the tax authorities, and follow-up in the event of an audit or a challenge.

On complex transactions combining an election with article 257 bis (transfer of a going concern), the firm structures the drafting so as to avoid any ambiguity between the two regimes; the case law penalises wording that leaves the analysis to the tax authorities.

The VAT election is rarely complex in theory; it is almost always poorly exercised in practice. Three more lines in the deed, and the stakes run into hundreds of thousands of euros.
— François Ouairy, partner, VAT & real estate taxation practice
— Frequently asked questions

Everything you need to know before exercising a VAT election

When should VAT be elected on a letting of unfitted premises?

The election under article 260, 2° of the French Tax Code is relevant where: (a) the tenant is itself a taxable person for VAT purposes and can therefore recover the VAT charged; (b) the landlord has deducted, or wishes to deduct, the input VAT (acquisition, works). Without the election, the letting is exempt and the landlord has no right to deduct. The election must be notified to the tax authorities and is in principle valid for a minimum period with a continuation commitment. No time limit confines the election, which may be made at any time, including before the building is acquired; it takes effect on the first day of the month in which it is made, with no retroactivity (CGI, Annex II, art. 194). Where the tenant is not a taxable person, the election is valid only if the lease refers to the landlord's election (article 260, 2°, b of the French Tax Code).

When should VAT be elected on the sale of a building completed more than 5 years ago?

The election under article 260, 5° bis is relevant where the seller has previously deducted the input VAT on the building and an exempt sale (the default regime, article 261, 5) would trigger an adjustment by twentieths (article 207 of Annex II to the French Tax Code). The election neutralises the adjustment but requires VAT to be collected. The trade-off depends on the status of the purchaser (a taxable person recovering the VAT, or a final consumer bearing the cost) and on the net balance.

How should the election be worded in the deed of sale?

The election must be expressed in the deed recording the transfer (CGI, Annex II, art. 201 quater), and separately for each building, part of a building or real property right falling under the same regime for the purposes of articles 266 and 268 of the French Tax Code. Recommended standard wording: "In accordance with article 260, 5° bis of the French Tax Code, the seller elects for the application of VAT to the present sale. The sale will be subject to VAT at the rate of 20% calculated on the price exclusive of tax". The price clauses must be consistent (VAT inclusive, or exclusive of tax plus VAT), and the cost-allocation clauses must address the treatment of VAT.

How does the election interact with article 257 bis?

If the sale forms part of a transfer of a going concern between two taxable persons (article 257 bis), the transaction is outside the scope of VAT and the election is not applicable. If the conditions of article 257 bis are met, this must be expressly stated in the deed ("a sale forming part of the transfer of a going concern within the meaning of article 257 bis of the French Tax Code"). A clear exclusion of the election must accompany that statement in order to avoid any ambiguity.

What happens if the election is poorly worded?

The tax authorities may deny the effect of the election and recharacterise the transaction as exempt under the ordinary rules (article 261, 5). Consequences: (a) the VAT collected is recharacterised as VAT wrongly invoiced (article 283, 3 of the French Tax Code), non-deductible by the purchaser and borne definitively by the seller; (b) the adjustment by twentieths becomes applicable again (article 207 of Annex II to the French Tax Code). The financial stakes can be considerable. Careful drafting is crucial.

Can an election be revoked?

For lease elections, yes, subject to conditions and once the minimum period has elapsed. For sale elections, the question does not arise: the election takes effect on the date of the deed and is spent. However, in the event of the nullity of the deed or a retroactive termination, the treatment of the VAT collected and deducted must be analysed on a case-by-case basis, often at the cost of complex adjustments.

How should the advisability of an election be assessed?

Three steps: (1) mapping the input VAT deducted on the building since its acquisition (amounts, dates, potential adjustments by twentieths); (2) qualifying the counterparty (a taxable or non-taxable purchaser, its ability to recover the VAT); (3) modelling both scenarios (election or exemption) and deciding on the basis of the net balance. This audit must be carried out before the preliminary agreement is signed.

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A VAT election to assess or to secure?

An initial confidential discussion to audit the prior right to deduct, weigh election against exemption, and secure the drafting of the deeds.

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