(Paris Administrative Court of Appeal, 6 February 2019, n° 18PA01278 and n° 18PA01279)
The Paris Administrative Court of Appeal ruled, in two judgments dated 6 February 20191, that a real estate dealer may only recover VAT on the acquisition of a real estate asset completed more than five years prior at the time of its resale subject to conditions. As a reminder, the sale of such a real estate asset which has been completed more than five years prior is, in principle, exempted from VAT, unless the seller opts otherwise in the deed of sale. Moreover, acquisition VAT ("input VAT") is only deductible for the purchaser if it is directly and immediately linked to one or more downstream transactions/activities that are eligible for deduction2 (e.g., rental subject to VAT upon election of the landlord).
In the present case, the Claimant company had acquired real estate assets that were completed more than five years prior and had committed to reselling them within five years (i.e., in order to benefit from the real estate dealer regime with respect to real estate transfer tax3). These buildings were recorded as inventories and were rented-out pending their resale, with the exercise of the election to submit this rental to VAT.
The input VAT was immediately deducted by the taxpayer and this approach was challenged by the tax authorities.
The Court considered, in light of the fact that the buildings had been recorded as inventories in the accounting, that the company had clearly expressed its intention to link them directly and immediately to their resale — which in the present case was exempt from VAT. In the same way, according to the Court, the mere declaration of the company's intention to elect in the acquisition deed is not effective; the option for taxation can in fact only be formulated in the deed of resale and not before. In this context, the buildings could not be considered as being directly and immediately linked to a transaction/activity subject to VAT before the exercise of this option.
Furthermore, the Court of Appeal also refused to justify the full deduction of VAT on the ground that the property can be assimilated to a fixed asset4. This provision only allows for progressive regularization of the right of deduction and not an immediate recovery of the entire tax credit resulting from the acquisition. In any event, the Court pointed out in this case that the operator did not yet comply with the conditions set for the implementation of this assimilation. This analysis, without depriving the operator of the right to deduct VAT, nevertheless entails bearing costs that must be taken into account before any major operation.
On a theoretical level, the question always arises as to the justification for the difference in VAT treatment between inventories of less than five years and more than five years when the trader clearly expresses in the notarial deed, published at the time of purchase, his intention to resell the latter with VAT. The value of this official declaration does not seem to be any weaker, and reflects the "implicit" intention to sell a new building within five years of its purchase.