In a decision on February 15, 2016, the French Administrative Supreme Court ruled on apportioning the value of a real estate property between the land and buildings. This decision needs to be compared with another decision handed down the same day about the same subject matter (French Administrative Supreme Court, 9th and 10th subsect., Feb. 15, 2016, No. 380400, Sté LG Services)
In this case, in March 1999, a company purchased an office property complex located in Paris in order to resell it after partial demolition and rebuilding. Once the works were completed, the company leased the property complex, as of June 2002, and depreciated on a straight-line basis the construction work performed. To determine the value of the land and buildings to record in the balance sheet, the company applied a 30/70 ratio to the purchase price of the property complex, based on a study performed by AFREXIM. The tax authorities disputed this ratio and used a 49/51 ratio, which they applied not to the price of the real estate complex on the date on which it was recorded in the balance sheet, but to the sum of the purchase price and the cost of the works carried out between 1999 and 2002.
In a decision on February 6, 2013, the Paris Administrative Court of Appeal ruled in favor of the tax authorities’ position, but used a land/building ratio of 40/60. The French Administrative Supreme Court set aside the appeal decision and stated the conditions on which a breakdown ratio may be challenged.
First, it pointed out that, for a property complex, a distinction should be made between the value of the land, which is not depreciable, and the value of buildings, which is depreciable. Then, the Administrative Supreme Court established a hierarchy among the various valuation methods the tax authorities may use to dispute the breakdown used : the comparative method based on other transactions, the valuation method based on the rebuilding costs or the analysis of the accounting information from other taxpayers’ balance sheets. Moreover, the Court held that the taxpayer may dispute the tax authorities’ position either by explaining the breakdown it used or by demonstrating that the tax authorities' method itself or its implementation is erroneous.
Lastly, the French Administrative Supreme Court held that the value of the land must always be determined on the date on which it was recorded in the property’s balance sheet, even if the land was purchased for the purpose of demolition/rebuilding or transformation.