The sale of building plots in France is to be subject to VAT, although sales between private individuals will continue to be exempt.
France currently exempts from VAT (TVA) the supply of building land (terrain à bâtir) where the land is sold by a person registered for VAT, but acquired by non-registered individuals in order to construct buildings intended for residential use.
The European Commission has recently instructed France to end this exemption as it is contrary to EU rules.
Sales that will now become liable for VAT include, for instance, serviced plots being sold by a developer to a private individual.
The EU VAT Directive 2006/112/CE lists the transactions exempt from the general principle that each delivery of goods or services is subject to VAT. This list includes some real estate transactions, but states specifically that the building land is excluded.
The Commission has given France two months to amend the legislation and if it does not do so within the time limit, the case is likely to be referred to the European Court of Justice.
The French Parliament seems to have tried to pre-empt the notice, as a proposal to change the rules was deposited last August.
Since then it has been slowly making its way through the French Parliament, contained in the Finance Bill for 2010.
It is proposed that the new law be applicable from 1st July 2010, having been brought forward from the date of 1st January 2011 that was initially envisaged, in all probability as a result of the pressure being imposed by the EU.
In order to comply with the EU Directive it will mean that all those registered for VAT will need to add 19.6% VAT to the sale price of the land.
If the buyer then undertook to build a property within four years (and then actually did so) they would be exempt from the payment of most of the stamp duty (droit d’enregistrement), amounting to around 5.09%.
The sale of building land between individuals not registered for VAT remains unaffected by this change. No VAT applies in these transactions.
The sale of building land for residential use between French companies (excluding SCIs) and property professionals is already subject to VAT and may also be liable to stamp duty if construction is not undertaken within four years.
At the present time, only the first sale of residential property constructed less than 5 years old is subject to VAT. Building land itself incurs no liability to VAT, provided it is sold by an individual.
You can read more in our comprehensive guide to Buying Property in France.