Crunch the numbers

David Anderson looks at the implications of the new VAT regulations in France for property transactions

Important changes came into effect in France from 11 March 2010 in the way VAT and stamp duty operate on property transactions. The new regime is generally to be welcomed and presents a number of opportunities, especially for speculators buying, improving and then selling on older properties. The changes bring France into line with EU rules on VAT and were implemented hurriedly. As such, full commentary on them by the French Revenue is still awaited.

Main changes

From 11 March 2010 the seller is liable for VAT

The general rule is that VAT is payable if the seller is registered for VAT

Special rules that previously only benefited registered property dealers – marchand de biens – have been abolished and anyone can now benefit from them.

Building land

An objective test has been introduced for building land’, i.e. land that has planning permission. Under the old rules, even if the seller was registered for VAT (say a developer), VAT did not have to be charged on sales of such property as long as the buyer was an individual. If the buyer was a company, including an SCI, VAT had to be charged. This issue usually came up in the case of plot sales, in which the buyer was to be legally the builder, and usually meant the purchase had to be in the buyer’s personal name so that stamp duty and not VAT was payable.

This exception from VAT has now gone and all sales of building land are subject to VAT at 19.6% payable by the seller, which will increase the price of plots. VAT is on the whole price if the seller originally bought from a VAT-registered person and reclaimed the VAT on the purchase, or on the margin if bought originally from an unregistered person. This makes sense as the VAT is being passed through to the ultimate buyer if the seller had recovered it when he bought the land.

Stamp duty is payable by the buyer at 5.09% if the seller had originally bought the land from a non-VAT-registered person and 0.715% if the seller bought from a VAT-registered person. Because the buyer is being charged VAT on the whole price, stamp duty is reduced.

The effect of this will be negative for non-VAT-registered (i.e. end user) buyers of plots.

New buildings

If a VAT-registered person (e.g. developer) sells a new’ building (less than five years old), VAT at 19.6% is payable on the purchase price. Previously it was only the first sale of such new’ buildings that fell within VAT. The buyer pays stamp duty at 0.715%.

There is no change here.

If a non-VAT-registered person sells a new building (which includes one that has been very substantially renovated) then there is generally no VAT. This is a major change from the previous rule, which required VAT to be paid on all new buildings. Stamp duty is payable at 5.09%. VAT may be payable in certain cases.

Old buildings

Generally, no VAT is due on transactions involving old buildings (i.e. those that are more than five years old), even if the seller is VAT registered, although a VAT-registered seller can elect to charge VAT. Stamp duty is payable at 5.09% in all cases.

Re-sales and rebuilding

There are special stamp duty treatments for buyers in certain circumstances. Those who provide an undertaking when buying to build a property on the land within five years will be exempt. If a buyer provides an undertaking to re-sell within five years, a reduced rate of 0.715% applies. These special exemptions previously only applied to people registered as property dealers – a marchand de biens. This change should give rise to more informal property speculation. The French position is more attractive than the position in the UK, where a property speculator/developer has to fund the stamp duty on a purchase.

Other tax issues

Assuming a UK developer/ speculator opts for Scenario 2 (in the examples opposite), so that he can keep his capital funding costs low, and buys an old building from a private seller, registers for VAT and sells on to a non-VAT-registered buyer, what are the other

tax issues?

Keeping it very simple and doing everything in his one name, he will be subject to income tax on the gain in France as he will be viewed as a dealer. He will also have a liability in the UK as a UK resident but will be able to deduct the French liability against any UK liability. He should not be liable to any French national insurance as he is not French resident.

If he uses a UK company he will be within French corporation tax as a dealer and be able to deduct this against UK corporation tax.

Examples

The examples below show the total VAT and stamp duty cost for property bought for €100,000 with works of €30,000 (all at 5.5% rate, which comes to €1,650) and sold on for €200,000 – the buying and selling prices including VAT if applicable. In other words, the speculator has had to pay €100,000 plus costs to buy the property and has to market the property at €200,000 plus fees on sale.

They show that the best approach for the speculator keen to minimise VAT and stamp duty is to register for French VAT and deal in renovating old buildings without carrying out works that are so substantial you create a new building.

Scenario 1 – Purchase of an old building by a non-VAT-registered person from a non-VAT-registered seller – then sold on to a non-VAT-registered person.

1. Stamp duty on purchase at 5.09%.

2. Stamp duty on sale at 5.09%.

3. No VAT recovered on works.

4. Total tax cost: €5,090 + €10,180 + €1,650 = €16,920.

In practice, the speculator will fund only €5,090 plus €1,650 – a total of €6,740. This is because most buyers will accept they have to pay the stamp duty on the €200,000 price.

Scenario 2 – Purchase of an old building by a VAT-registered person from a non-VAT-registered seller, then sold as an old building to non-VAT-registered buyer.

1. Stamp duty on purchase at 0.715% as buyer undertakes to sell on within five years.

2. Stamp duty at 5.09% paid by buyer when sold on.

3. VAT recovered on works.

4. Total tax cost: €715 + €10,180 = €10,895.

In practice, the speculator will fund only €715 because most buyers will accept they have to pay the stamp duty on the €200,000 price.

Scenario 3 – Purchase of land by a VAT-registered person from a non-

VAT-registered seller – then sold on as new building to a non-VAT-registered buyer.

1. No stamp duty on the purchase as buyer undertakes to build.

2. VAT on €200,000 (inclusive) when sold: €32,775 (i.e. €167,225 + €32,775).

3. Buyer pays 0.715% stamp duty.

4. VAT recovered on works.

5. Total tax cost: €32,775 + €1,430 = €34,205.

In practice, the speculator will fund only €32,775 because most buyers will accept they have to pay the stamp duty on the €200,000 price.

Scenario 4 – Purchase of land by non-VAT-registered person from non-VAT-registered seller – then sold on as a new building to a non-VAT-registered buyer.

1. Stamp duty at 5.09% on original purchase by seller.

2. Stamp duty at 5.09% on purchase by buyer.

3. No recovery of VAT on works.

4. Total tax cost: €5,090 + €10,180 + €1,650 = €16,920.

In practice, the buyer will pay stamp duty so the cost to the speculator is €5,090 + €1,650 = €6,740

Scenario 5 – Purchase of land by a VAT-registered person from a non-VAT-registered seller – then sold on as a new building to non-VAT-registered buyer.

1. No stamp duty on purchase – engagement to build.

2. VAT on €200,000 (inclusive) when sold: €32,775 i.e. €167,225 + €32,775.

3. Stamp duty on sale price at 0.715%.

4. VAT on works recovered.

5. Total tax cost: €32,775 + €1,430 = €34,205.

In practice the speculator will fund only €32,775 because most buyers will accept they have to pay the stamp duty on the €200,000 price.