(February. 13, 2014, no. 12PA04569, 9th ch., Sté Sara Résidences de Tourisme)

In an unprecedented decision, the Paris Administrative Court of Appeal made a ruling on the dispute between the operators of a tourism residence and the tax authorities involving assessing the length of a sublease, which determines the deduction of rents for calculating the added value and the cap of the territorial economic contribution ("CET").

In the present case, a company, Sara Résidences de Tourisme, whose business consisted of subleasing apartments to tour operators in tourism residences located at several ski resorts, had requested that the tax authorities confer on it the benefit of the CET cap. To this end, the appellant based its arguments on Article 1586 sexies of the French Tax Code, which provides that, when the property leased by the taxpayer is subleased for more than 6 months, the rents are deductible in the amount of the proceeds from such subleasing. In this respect, the company argued that it had indeed leased the apartments for more than 6 months (199 days) during the relevant fiscal year.

The tax authorities, who did not dispute the sublease period as such, argued that this period had to be assessed not overall, but separately for each sublease concluded by the company. The individual subleases were not for more than 6 months.

The Court of Appeal logically ruled against the tax authorities, stating that the sublease period was to be assessed overall and not separately for each sublease and for each apartment. Thereby adopting the opinion of its Public Rapporteur, the Court of Appeal opted for an economic approach. Indeed, because this involves short-term leases, and the tourist season is necessarily split into two separate periods, winter and summer, using a 6-month period for each of these periods would amount to depriving tourist operators of the benefit of the aforementioned provisions of Article 1586 sexies. As the Rapporteur points out, this is contrary to legislative intent, as the Minister of the Economy at that time had presented this mechanism as an improvement in the rules for taking rental charges into account to calculate the added value for the purposes of the CET cap.

Please note that the tax authorities appealed to the French Admistrative Supreme Court against this decision.