Posted on 21 August 2023
Are you a potential homeowner looking to benefit from France’s value-added tax (VAT) rebate incentive? The VAT rebate incentive is available to those looking to purchase property in France, and you can save thousands of euros. This unique program encourages property development and boosts local real estate markets by providing buyers with a reduction in Value Added Tax on newly constructed properties. This comprehensive guide will explore the details, eligibility criteria, benefits, application process, and potential impact on French property markets.
About the VAT Rebate on Property in France
1: Understanding VAT in France
Value Added Tax, commonly known as VAT, is a tax imposed on goods at each stage of production or distribution. The standard VAT rate in France is 20%, but there are reduced rates for certain goods and services. VAT is usually borne by the end consumer and collected by businesses, making it an essential source of revenue for the French government. French VAT is commonly known by the three-letter Abbreviation of TBA, which stands out as Taxe sur la valeur ajoutée.
2: How Does the Vat Rebate Work on French Property Purchases?
A while back, France had significant problems. They couldn’t keep up with the growing tourism industry. (France is the world’s most popular tourist destination). There was a severe lack of hotel accommodation. Hence France introduced the Vat scheme to boost real estate markets and provide tourists with more overnight accommodation. Also known as “résidence de tourisme” or “tourism residence,” this investment model combines two types of property ownership with rental income and reduced VAT.
Leaseback Properties in France: Leaseback properties, or résidence de Tourisme, is a property investment model where an investor purchases a property in a designated tourist area of France, such as a coastal region or a ski resort. The property is then leased back to a management company or operator responsible for renting and maintenance.
In return, the investor receives a guaranteed income, typically over a fixed period. Additionally, they can apply for a 20% Vat refund. Leaseback properties play a significant role in French real estate markets by promoting tourism and property development in tourist regions. They provide a win-win situation for investors, management companies, and local economies.
Classic Freehold Homes in France: This occurs when the owner doesn’t sign with a management company, but instead decorates the property as they wish and either handles the rentals themselves or opts out to a specific rental company.
3: The VAT model involves several key elements
Property Purchase: An investor buys a property within a development that offers various amenities and services to attract tourists.
Rental Agreement: The investor signs a commercial lease agreement with a management company or operator. This agreement outlines the lease terms, including both parties’ rental income, duration, and responsibilities. Alternatively, the owner can arrange their own rental arrangements.
Rental Income and Vat Refund: One main attraction is guaranteed rental income. The management company commits to paying the investor a fixed rental amount, regardless of the occupancy rates. In addition, the owner receives 20% of the VAT back over a fixed period.
Managed Services: The management company manages property maintenance, administration, and renting to tourists. This relieves the investor from the day-to-day responsibilities of property management.
Personal Usage: Typically, leaseback investors can use the property for several weeks each year. However, this usage is usually defined in the contract and may vary.
4: Benefits of Leaseback Properties and the VAT Rebate in France
- Investors receive a predictable income over the lease term, providing financial stability.
- The management company takes care of property upkeep, tenant management, and administrative tasks, relieving investors of these responsibilities.
- Leaseback properties are often located in prime tourist areas of France, which can attract consistent rental demand.
- The primary advantage is the financial relief provided to buyers, as the reduction in VAT can amount to a significant sum. This makes property ownership in France and the sales price more accessible to more individuals.
- By incentivizing property purchases, the government encourages developers to engage in construction projects, stimulating economic activity and creating jobs in the construction sectors.
- Increased Demand: The incentive can lead to increased demand for newly constructed properties, which, in turn, drives growth
- Reduced taxes: Owners of VAT rebate properties don’t have to pay Taxe d’ Habitation and Cotisation Foncières des Entreprises French property taxes.
5: Eligibility and Considerations
- Leaseback properties are typically located in areas with strong tourism potential, such as ski resorts, coastal regions, or historical towns.
- Investors commit to a fixed lease term, during which they cannot sell or use the property for personal purposes beyond the stipulated usage rights.
- Exiting a leaseback arrangement before the end of the lease term can be complex and may involve financial penalties.
- While income is often guaranteed, it might not cover all expenses like taxes and maintenance.
- It must be a new build property in France that is fully furnished
- The owners can’t live on the property for more than 182 days a year.
- The owner must rent the property to tourists for 3 weeks in summer and 9 weeks in winter.
- Owners must commit to renting out the property for at least 20 years.
- One of four services must be offered to qualify as a rental – reception, linen, bed changing, cleaning, or breakfast.
- If you sign with the construction company, they generally insist on the décor and design as the development will be a planned holiday resort.
6: Signing Contracts with Rental Management Companies
Most property buyers who want to take advantage of this scheme buy with construction companies, which will also handle the bookings and apply for the rebate. In addition to that, they hold all the rental services as mentioned above. Be sure to check what their annual charges are, though. This is typically known as Para hotel services.
7: How do I Get the VAT Back After Buying?
Typically, construction companies and developers in France will apply for the VAT rebate if you sign a commercial lease with them to handle the rental aspect. If using based on your own rental management, apply at each of the staged payments, or wait until the end of 20 years and complete your application.
8: Impact on the French Property Market
- Increased Demand: The incentive has increased demand for newly constructed properties, driving growth in the real estate markets of France.
- Regional Development: The policy has led to property development in regions of France that were previously less attractive to buyers, helping to balance economic growth across the country.
- Job Creation: The surge in construction projects has created job opportunities aiding overall employment rates.
9: Can I sell the French Property Before the 20 years?
Yes, you can. The new owner will receive the rest of the VAT if they want to continue the rent. If they don’t, you will be liable to part that part of it back.
10: But What About Other French Property Taxes?
Investing in real estate in France can be a rewarding venture. Still, it’s essential to understand the various taxes associated with property ownership in the chosen location. Property taxes are a significant consideration in France for residents and non-residents who own property. France levies several property taxes, each serving a different purpose and calculated differently:
- Taxe d’Habitation: This is assessed on residential property occupants, whether the owner or a tenant. It covers local public services and amenities, including garbage collection, street cleaning, and lighting. Owners under the VAT scheme don’t pay this for the first two years.
- Taxe Foncière: The taxe foncière supports local services based on theoretical rental value.
- Taxe sur les Terrains de Nature Agricole (TENNA): This tax on agricultural land applies to property owners who hold agricultural land that isn’t used for farming.
- Taxe Additionnelle à la Taxe Foncière sur les Propriétés Non Bâties: This additional tax on non-built properties is calculated like the taxe foncière.
The calculation of property taxes in France involves various factors, including the value, location, and designated use (residential or non-residential). The tariffs are assessed by local authorities and can vary from one region to another. Non-resident property owners should know their obligations and the potential impact on investment returns.
Seek professional advice to navigate the complexities and ensure compliance. The French government periodically reviews and updates property tax regulations. Staying informed about law changes is essential to accurately assess liabilities and plan accordingly.
11: Can I use a mortgage to buy a VAT leaseback property in France?
Yes, buyers and investors can use mortgages to buy a leaseback property in France, similar to how you would finance purchasing traditional immovable property. However, French banks and lenders often have specific criteria for funding leaseback properties, regardless of the Vat status. The terms and conditions may vary on factors like location, the leaseback program, and your own financial situation.
Lenders will review the leaseback agreement as part of the mortgage application process. They may want to ensure the lease terms are favourable and sufficient to cover mortgage payments. The loan-to-value ratio, which represents the percentage of what you borrow, might differ from traditional properties. Some lenders may offer lower LTV ratios due to their unique investment nature.
The interest rates and terms differ from standard residential properties. As with any mortgage application, provide thorough financial documentation, including proof of income, assets, and liabilities. Lenders will assess financial stability and capacity to repay the loan. Some lenders may require additional insurance coverage to mitigate risks associated with fluctuations or potential damages.
Lenders may inquire about exit strategies, especially if the lease term is not aligned with the mortgage term. They want to understand how you plan to manage the property once the leaseback arrangement ends.
12: Will I pay Tax in France on the rental Income?
You will pay tax on rental income in France. The mortgage interest can be offset against the revenue. The amount depends on the income and expenses for the year. Even if there is a loss and no gain, tax is due for the current year. The country where the property is located determines the tax liability for rental income. Both residents and non-residents are liable for income tax on French rental earnings.
Non-residents should submit yearly returns to the French authorities and declare their income to their country’s authorities. France has double-taxation agreements to avoid being taxed twice on the same income for residents of the UK or Ireland. The rate is 20% for income up to €27,519 and 30% for income beyond this level. These rates apply to the net income. The deadline for submitting personal non-resident returns is May.
13: What About Capital Gains Tax if I Sell Early?
The standard capital gains rules will apply. The taxation of capital gains varies based on factors like the type of property, duration of ownership, and individual’s tax status. Generally, there is a distinction between short-term ownership (less than 6 years) and long-term ownership (more than 6 years).
If selling within the first 6 years of ownership, the capital gains will be treated as part of your overall income and subject to applicable income tax rates. However, remember that to be eligible for the VAT scheme, the rental duration must last 20 years. Hold the property for more than 6 years. You may qualify for reduced rates that are specific to real estate transactions.
Non-residents of France will be subject to a withholding tax at the time of sale. The withholding tax rate is determined by the country of residence and any applicable tax treaties between France and that country. For residents of France, capital gains rates range from 19% to 36.2%, depending on ownership duration and specific allowances. Capital gains rates may be reduced for long-term ownership. Renovation, improvement, or maintenance expenses may also be deducted from the tax calculation. The rates change, so consult up-to-date information or tax professionals.
The VAT rebate incentive for French property promotes ownership, stimulates construction, and boosts economic growth. By providing buyers with a reduced VAT on newly constructed properties, the government encourages investment in real estate and supports job creation. However, potential buyers in France should carefully assess their long-term plans and navigate the application process with diligence. As the French property market continues to evolve, the VAT rebate incentive in France remains a significant factor for consideration when exploring real estate opportunities.
Use Our Services
We are Skiing Property, and we sell homes in the French and Swiss Alps. If you are looking to capitalise on the VAT rebate incentive for newly constructed property in France, contact us today and chat with an agent. Alternatively, see our portfolio of ski apartments and chalets for sale. Each listing contains the location, price, home features and also contact details to arrange viewings.
About Buying Ski Property in France: With an extensive list of places to choose from, anyone buying ski property in France should know it is an attractive market with a good deal of new build, modern homes for sale, but the location of your new home is just as important as the actual home itself. Usually, people look for easy access to resort from nearby airports and train stations, a range of bars, restaurants and shops and guaranteed alpine snowfall. However, the French property market is revolutionising itself.