France has not been correctly applying European rules on VAT for new home sales, and now risks legal action being taken by buyers.

A raft of new regulations have recently been rushed through the French Parliament that now bring French law into line with EU Directives on the application of VAT (Taxe sur la Valeur Ajoutée - TVA) to the sale of new homes and building land.

The measures were not due to come into effect until 2011, but France faced the prospect of substantial fines from the EU if it did not act quickly. The new law is, therefore, applicable from 11th March 2010.

Tax Avoidance

In a recent report on the whole issue, the French parliamentary finance committee commented that ‘tribunals had recently heard cases which highlighted the legal insecurity that exists’ …and that….’there was a contradiction between national legislation and EU law concerning 'TVAimmobilière.’

The report pointed to recent tax avoidance cases that had come to the notice of the French tax offices.

Under EU law only those registered for VAT are able to impose a VAT charge on buyers, but French law is specific in stating that it is not the seller who is liable for the tax, but the buyer.

In those tax avoidance cases known to the French authorities no VAT at all had been paid on the sale of a new property, as the seller was not liable under French law, and the buyer invoked European law to escape their own liability for the tax.

According to the report, ‘only’ several hundred thousand Euros had been lost to the public purse by this tax avoidance procedure, but that there was a risk that the situation could deteriorate rapidly.

New Rules

The greatest impact of the change in the law will be in relation to the sale of new homes under five years old between private sellers, as the regulations now remove the imposition of VAT on such sales.

However, in relation to other sales buyers will not see a difference, as they will continue to pay VAT on the sale of a new property under five years old if either:

1. i. The property is sold by a VAT registered property professional (developer, dealer) who will add the tax to the purchase price (or make the price inclusive of VAT).
2. ii. It is an off-plan property (Vente en l'état futur d'achèvement) then VAT is payable on the whole of the purchase price, irrespective of the VAT status of the seller.

Although in these two cases buyers will then be liable for VAT at the rate of 19.6%, they will pay a lower level of stamp duty of 0.715%, instead of at the normal rate of 5.09%.

Legal Cases

The issue, therefore, remains as to the legal position of those who have purchased a property and paid VAT for which they are not liable under European law, and whether they would be entitled to bring a legal action for the recovery of the VAT.

Vincent Morand a qualified notaire with UK based French property solicitors Ashton Graham states that: 'The fact that France has acknowledged, even tacitly, that the old rules did not comply with European regulations could give someone grounds to challenge the way their sale/purchase was fiscally treated on the basis that it did not comply with European regulations. Indeed, I understand that this is what was happening in the French courts before the law was changed.'

The original EU Directive on this issue dates from 1977, which was further reinforced by a Directive in 2006, so there has been a long-standing discordance between French and European law on this issue.

VAT on Building Land

In addition to the illegal VAT imposed on buyers of new property under five years old, the French parliamentary report also pointed out that in France the sale of building land was exempt from VAT, despite EU laws requiring that building land sold by a person registered for VAT should be passed on to the buyer.

The EU VAT Directive 2006/112/CE lists the transactions exempt from the general principle that each delivery of goods or services is subject to VAT. This list includes some real estate transactions, but states specifically that the building land is excluded.

The change in the law that now exempts buyers of new homes from VAT, also imposes VAT on building land (terrains à bâtir) sold by building professionals, such as developers and property dealers.

The sale of land not zoned for building (terrains non constructibles) also remains exempt from VAT, although a seller subject to VAT has the right to impose VAT on the purchase price of the land.

The new law also changes the definition of what constitutes 'building land'. 'A plot of land will be treated as a building plot and, therefore, in principle subject to TVA if it is a plot zoned for construction in the local plan', says Vincent Morand. 'The tax will no longer depend on the purchaser's intentions (building or not building) as was the case in the past, but on the planning status of the plot itself.'