Tax on lease back property 

From 1 January 2006, the French law relating to VAT on leasebacks was changed to bring it into line with European Law. The French Tax Code was modified by the French Finance Act of 2005, with a new article - namely article 257 bis of the French Tax Code.

This is a surprisingly little-known modification but the changes for leasebacks are attractive.

In short, it has been possible since 1 January 2006 to sell a leaseback on at any time without repaying the VAT which was recovered on the purchase provided the leaseback arrangements stay in place - which will almost always be the case.

	What are the changes to French law regarding VAT on leasebacks?
	Article 257 bis of the French Tax Code provides, amongst other things, that an assignment of property between two persons, who are both registered for VAT, is exempt from VAT when there is a transfer of an asset which includes a commercial lease.

	What does this mean? What was the situation beforehand?
	In France, when you purchase a property off-plan with a leaseback to a management company, your tenant, which rents it out for you - a so called 'leaseback' - you are allowed to reclaim the VAT paid upon the purchase.

Example: You buy a new leaseback property for 100,000 Euros. Under the French rules, you will pay VAT at 19.6% i.e. 19,600.00 Euros TVA. You will be able to recover this VAT from the French taxman if you lease back your property to a management company. This is because you are able to register for VAT and will in turn have to pay French VAT on the rents at 5.5%

However under article 210 of the French Tax Code (annexe 2) when you sell the property within the first twenty years after the completion of the construction, you had to pay a proportionate amount of the VAT back to the French taxman.

Example: You sell the property mentioned above after 10 years of ownership. You will have to pay 9,800.00 Euros (19,600 / 2 = 9,800) back to administration.

Obviously, this situation was not very attractive for potential investors in France, because under this rule they were tied in for 20 years. It put a break on re-sales of leasebacks.

However, article 257 bis of the French Tax Code, contained difficult wording and its meaning was slightly ambiguous. And in a recent publication, the French Tax Administration confirmed that the assignment of a lease-back fulfils the conditions mentioned in this article, when the lease-back continues to be carried on by the new owner of the property.

	What are the practical consequences of this article?
	Thanks to article 257 bis of the French Tax Code, when the owner of a leaseback property sells his property to someone who will carry on this leaseback - almost always the case - the seller will not have to pay the VAT back. This is also permitted in the first five years after completion of the building.

This important change to the French Tax Code will bring a greater liquidity to the resale market for leasebacks and is to be welcomed.

Please note that French tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

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