Validation of the identity condition under the VAT margin regime on immovable property
In a decision of 27 March 2020, the French Supreme Court (Conseil d’Etat) confirmed the position of the French Tax Authorities (FTA) concerning the identity condition that must be met to apply the VAT on margin regime on sales of immovable property.
As a reminder, in principle, the sale of immovable property is subject to VAT on the total sale price.
However, in the case of the sale of building land or the sale of buildings completed more than five years ago (if option for VAT-taxation), Article 268 of the French Tax Code provides the possibility (in accordance with Article 392 of the VAT Directive) to apply VAT on the margin (that is on the difference between the purchase and the sale prices) if VAT on the initial purchase was not recovered.
Position of the FTA limiting the scope of the VAT on margin regime
Aside from the condition concerning the non-recovery of VAT on the initial purchase, in 2010 the French Administrative Guidelines added the condition related to the legal identity of the immovable property (characterisation as building land or as buildings completed more than five years ago) between the time the property is acquired and the time the property is resold. Therefore, if the identity criteria are not met, the French Tax Authorities (FTA) would systematically apply VAT on the total price. This condition introduced in 2010 was strengthened by several ministerial responses issued in 2016 and 2017 indicating that the condition of identity concerns the legal qualification and also the physical characteristics (surface).
View of the French Courts of Appeal and ministerial response
Contrary to the FTA’s position, French Courts of Appeal have consistently adopted a more flexible approach to the VAT margin scheme. Cases determined since 2017 by the Courts of Appeal have held that, for example, in the case of plot division, modifications of the physical or legal characteristics of the immovable property do not exclude the application of VAT on margin.
On 17 May 2018 the so-called “Vogel” ministerial response softened the identity condition by deleting the identity of physical characteristics.
Within the framework of resolving the divergence between the FTA and the Court of Appeal’s case law, the French Supreme Court has validated the application of the identity condition.
Indeed, in a case about a plot division, the Supreme Court held that the modification of the physical and legal characteristics of the immovable property is an obstruction to the application of the VAT margin scheme.
Decision of the Supreme Court - A first step towards the clarification of the VAT on margin regime
In its recent decision, the Supreme Court stated the conditions to benefit from the VAT margin scheme and validated the FTA’s identity condition. However, the Supreme Court went further than the FTA’s position. The Supreme Court also adopted the physical aspect of the identity condition that had been abandoned by Vogel ministerial response.
In practice, taxpayers should take care to clearly define the criteria leading to the identity condition, notably to secure construction on building land.