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French Leaseback Tax Guide

What does French Leaseback mean?

Leaseback is a scheme developed by the French Government over 20 years ago to encourage good quality property development in tourist areas. Investors buy a freehold property and simultaneously sign a commercial lease contract with a property management company who will rent it for short term lets over a pre-determined period (generally 9-11 years).

The property must be used for the purpose of holiday accommodation for at least 20 years. In return, investors are entitled to a vat refund on the purchase price of the property (currently 19.6% for new buildings, 11-14% for refurbished buildings). This is done by either purchasing the property net of vat from the developer or by reclaiming the vat paid on purchase.

Commercial Lease

The Management company lets it out to tourists as part of their business activities. The owner of the property is therefore a commercial landlord and the management company your commercial tenant. You will therefore be taxed as a commercial landlord.

VAT

Prior to 2006, if you sold the property before 20 years or alternatively chose to live in it before the 20 year period had lapsed, you were required to refund a portion of the VAT reclaimed at the time of purchase, pro-rata over the number of years not let to tourists over 20 years. From 1 January 2006, the French law relating to VAT on leasebacks was changed to bring it into line with European Law.

It is now possible since 1 January 2006 to sell a leaseback on at any time without repaying the VAT which was recovered on the purchase provided the leaseback arrangements stay in place. The French Tax code provides that an assignment of property between two persons, who are both registered for VAT, is exempt from VAT when there is a transfer of an asset which includes a commercial lease.

The Leaseback scheme is such that you are guaranteed rents over the lease period. As you are a commercial landlord you have to charge vat at 5.5% on your rents. In the first year, VAT at 5.5% is payable to the government at the end of the year. VAT on expenses are reclaimable and the net amount paid over to the Tax office.

In subsequent years, the VAT office will bill you quarterly based on 25% of the previous years vat paid, any balance due on actual vat payable for the year will be settled at the end of the year.

Tax on Rental Income

You must declare both your French income and vat on rents at the end of the fiscal year (calendar year), even if you made a loss on renting.

You will be taxed as a commercial business because you are letting a furnished property under a commercial lease. Deductions are allowed against rent for building depreciation as well as loan interest charged on your French mortgage.

The management company will claim a deduction from their tax liability for the rents paid to you so the French Government will be aware you own the property.

You will also be obliged to declare your French rental income in your home country eg Ireland/UK. Calculating the tax due in Ireland/UK may be different to the French calculation but credit will be given for French tax paid against taxes payable in Ireland/UK.

Legal & Notary Fees

Older properties (older than 5 years) incur higher legal (Notaire’s fees) than new property ie up to 10% of purchase price for old buildings, up to 5% for new property (5 years or less). Legal fees, which are compulsory, comprise of:

  • Land registry fees of 1%
  • Registration tax of 0.615% for new (4.89% for older property (greater than 5 years)
  • Notaire’s work of up to 1.5% and
  • Mortgage registration fees of 1% of loan value (french mortgages only).

Property Tax International can organise the completion and filing of all necessary French tax returns in addition to advising on your property tax obligations in your home country. Please email info@ptireturns.com for more details or call 1890 931 931.

 

Property Tax International is a trading name of Taxback Returns which is part of the Taxback Group incorporating taxback.com providing financial services since 1996