In a decision dated November 23, 20151, the French Administrative Supreme Court ended the litigation between the tax authorities and the operators of tourism residences regarding the assessment of the length of sublease term which determines the deduction of rents for calculating the added value to which the territorial economic contribution ("CET") is capped.
According to the French Administrative Supreme Court, the sublease rents paid by tourist residences to the owner were indeed deductible for calculating the added value up to global proceed of the sublease of the accommodations made available to the customer.
In the present case, the company Sara résidences de tourisme leased apartments in tourist residences for more than six months and subleased them to tourists (through tour operators) for shorter periods (from a few days to a few weeks), during winter and summer tourist seasons.
Pursuant to Article 1586 sexies of the French Tax Code, the intermediate tenant can deduct the rents relating to the property leased then subleased, within the limit of the amount of the proceeds from such subleasing, provided that the properties were subleased for a period of more than 6 months. The company Sara résidences de tourisme intended to apply this paragraph and introduced a litigation claim for 2010 for the purposes of tax relief under the cap of the "CET" based on the value added as defined above.
The tax authorities rejected this claim relying on their administrative guidelines already in force under the former Business Tax ("taxe professionnelle"), considering that the new text introducing the "CET" just legalized the existing guidelines. Pursuant to these guidelines, the tax authorities considered that the sublease period should be determined for each sublease agreement and not globally. In practice, the administrative position led to deprive the text of its full scope for tourist residences, to the extent the subtenant tourists stay in the residences only from few days to few weeks.
The Administrative Supreme Court, which confirms the position adopted by the Paris Administrative Court of Appeal2, rejects definitively the analysis defended by the tax authorities by stating that law provisions are "clear" and that when the same property was subleased several times during the relevant fiscal year, the subleased period was to be assessed overall and not separately for each sublease.
This decision ends a dispute of several years and reassures tourist residences operators about their local economic contribution, whose weight would have been difficult to bear for many of them if the tax judge had approved the position of the French tax administration. This core issue led the national association of tourism residences and seasonal accommodation (hereinafter "SNRT") to intervene in this dispute .
In that regard, from a procedural perspective, it is interesting to note that this is the first time that the Administrative Supreme Court has applied in tax litigation the right for a trade association that has a sufficient interest, taking into account the nature and the scope of the dispute, to intervene in the proceeding. In the case at hand, given the matter of principle at stake before the State Council, the "SNRT" was authorized to intervene in the proceedings.