French law change 'Will boost leaseback sales'
A little-known modification to French law relating to VAT on leasebacks means that they can be sold on at any time without tax penalties; according to international tax specialist, Sykes Anderson.
The change, to bring it into line with European Law, was applied on 1st January 2006. The French Tax Code was modified by the French Finance Act of 2005, with a new article (article 257 bis of the French Tax Code). “This is a surprisingly little-known modification but the changes for leasebacks are attractive,” said David Anderson of Sykes Anderson. “In short it has been possible since 1st 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 which will almost always be the case.”
Under French leaseback rules, when a property is bought off-plan and leased back to a management company, buyers are allowed to reclaim the VAT paid upon the purchase. For example, on a €100,000 leaseback property, the buyer will pay VAT at 19.6% (i.e. €9,600.00 TVA). This can be recovered from the French taxman if the buyer leases back their property to a management company (because the buyer is able to register for VAT and will in turn have to pay French VAT on the rents at 5.5%).
However under, article 210 of the French Tax Code (annexe 2) if the property is sold within the first twenty years after the completion of the construction, the buyer will have to pay a proportionate amount of the VAT back to the French taxman. If the property mentioned above is sold after 10 years of ownership, the buyer will have to pay €9,800.00 (19,600 / 2 = 9,800) back to administration. This has put off some investors in France because under the rule they would be tied in for 20 years.
This modification means that it might become more popular because it has removed the restriction on the resale of leasebacks, as Anderson explains: “Article 257 bis of the French Tax Code contained difficult wording and its meaning was slightly ambiguous. However, in a recent publication, the French Tax Administration confirmed that the assignment of a leaseback fulfils the conditions mentioned in this article, when the leaseback continues to be carried on by the new owner of the property.
“Thanks to [the modification], when the owner of a leaseback property sells his property to someone who will carry on this leaseback – almost always the case - the seller will not have to pay the VAT back. This is also permitted in the first 5 years after completion of the building. This important change to the French Tax Code will bring a greater liquidity to the resale market for leasebacks and is to be welcomed.”
Nick Leach, from French leaseback specialist Pierre & Vacances, observes that the law change may give the impression that resales are more liquid but they already are fairly liquid. "This wasn't a deal breaker before," he says, "but it made people think about it a bit longer. It certainly deterred the flippers so may not be case from now on."
By removing a potential barrier to a sale, this law change may also make leasebacks more appealing to IFAs because of the increased liquidity of resales.