VAT is an indirect tax on consumption. It is intended only as a cost to the end consumer and to remain neutral throughout the production chain of goods or services. 

To ensure such neutrality, the VAT paid on the acquisition of a good or a service is deductible by the person who pays for it insofar as such person uses the good or service for an activity actually subject to VAT (i.e. use for generating turnover subject to VAT): see Article 271 of the FTC).


Owing to the way it works, VAT raises a particular problem: despite its apparent cost (20% of the rent), the lessor has an interest in seeing it applied (whereas for the tenant the VAT will either be neutral or constitute a cost). This issue (and the relationship between lessor and tenant) is even more critical for rentals of bare business premises, as the application of VAT is optional (see hyperlink  Acquisition / Disposal > Real estate asset > VAT  ). 

Thus, if a building generates turnover subject to VAT (in this case because it is rented, with VAT applicable to rents), the VAT borne by the owner on its acquisition, works and maintenance costs (upstream VAT / deductible VAT) may be set against the VAT charged on rents (downstream VAT / collected VAT), with any excess of deductible VAT reimbursable by the French Treasury department. 

In regards to VAT, it is the principle that counts, regardless of whether the deductible VAT exceeds the collected VAT: this may therefore produce a “losing” situation for the Treasury (e.g. the acquisition of a building whose price is subject to VAT), even if this is rare in practice, relating to situations where capital gains cover long periods. 

This principle gives rise to 2 consequences:

  • For the lessor, it is always preferable for rent to be subject to VAT:

    • - this reduces the cost of charges and investments by 20% as the VAT on the purchase price can be deducted,
    • - in addition, in most cases, if VAT does not apply, CRL is applicable, which will also have a financial impact ( see hyperlink Rentals > VAT and CRL > CRL).
  • For the tenant, the answer depends on its own VAT status:

    • - either its activity is (fully) subject to VAT and there is no problem bearing the VAT charge on the rents (as the tenant can deduct it or claim a refund – there is thus no actual cost),
    • - or its activity is not (or not fully) subject to VAT and the application of VAT to the rents will mean an additional 20% on the rental charge (less if its activity is partially subject to VAT).

In this case and if the VAT option has been applied to the rental, (see hyperlink  Acquisition/Disposal > Real estate asset > VAT > Option to apply VAT ) , it may be worth further analysing the situation in order to compare the net cost of the two solutions (VAT / no VAT) for each party, with one (the tenant) bearing a surcharge on the rent, while the other (the lessor) cannot deduct VAT on the costs related to the building.

This analysis will permit an objective assessment of the best option for the parties with regard to the overall tax burden. It may subsequently be possible to reach an agreement on the level of the rent to allow both parties to share the overall tax savings resulting from the choice of whether or not to subject the rents to VAT.

This approach is of course only relevant if the option regarding the application of VAT to rents is available (as in the case of bare premises rented for use as business purposes).

It may be necessary to adopt (if the law so permits) a scalable solution: the VAT situation may evolve during the term of the lease. For example, it may be that the VAT is not applicable during the first period, while the rents subsequently become subject to VAT if major works, representing a significant VAT charge, are carried out by the owner. 



Office building, over 15 years old, rented to a tenant who cannot deduct VAT: 9-year lease, annual rent €700,000 net of tax (no indexation) 

Costs incurred by lessor: 

  • Acquisition of building in N: €10,000 net of tax; no VAT 
  • Various annual charges: €200,000 net of tax; €40,000 VAT 
  • Works in N+5: €2,500,000 net of tax; €500,000 VAT 

Calculation of tax cost (VAT / CRL): 

  ♦Option 1: rent subject to VAT 

  • Cost to owner = 0 (VAT is deductible) 
  • Cost to tenant = €1,260,000 (€700,000 X 20 % X 9 years) → VAT 
  • Total cost = €1,260,000 

  ♦Option 2: rent not subject to VAT 

  • Cost to owner = €860,000 (€40,000 X 9 years + €500,000) → VAT not deductible on annual charges and works 
  • Cost to tenant = €157,500 (€700,000 X 2.5 % X 9 years) →CRL 
  • Total cost = €1,017,500 

  ♦Option 3: rent subject to VAT only from N+5 

  • Cost to owner = €200,000 (€40,000 X 5 years) → VAT not deductible on annual charges from N to N+4 
  • Cost to tenant = €647,500 (€700,000 X 2.5 % X 5 years + €700,000 X 20 % X 4 years) → CRL from N to N+4 then VAT from N+5 to N+8 
  • Total cost = €847,500


Scope of application

Except where business premises are leased bare, the application of VAT depends on the objective situation; neither the owner nor the tenant have the right to opt for or against its application.  

VAT obligatory 


VAT optional 

Fully-fitted business premises

Residential premises (bare or furnished, without services)

Bare business premises

VAT option 

  • Minumum term: end of the 8th calendar year following that in which option is exercised 
  • Scope: entire real estate asset (i.e. bare part used for business purposes) 
  • Importance of formalities 
  • Effective date: 1st day of the month in which the option is exercised (following latest amendment in January 2014) 

Furnished residential premises + hotel-style services

 Bare plots 

Garages (whose rental is not closely linked to that of premises rented without VAT)


Bare premises used for business purposes

The rental of such premises is subject to VAT if the owner so chooses (Article 260, 2° of the FTC). This optional imposition of VAT on rents is an exception (the rule is VAT exemption), although in practice it affects a very large number of rented buildings. 

Conditions for exercising the option

Minimum period: the option may be cancelled by the owner as of 1 January of the ninth year following that in which it was exercised.

Scope: it must apply to an entire property (e.g. a building operating independently) within the limits of the bare premises contained that are being used for business purposes (e.g. apartments in the building concerned are not covered by the option).

Exemptions: if parts of the bare business premises are rented to persons who are not subject to VAT (see below), the VAT will – notwithstanding the option – only apply to the relevant rents if the tenant has expressly consented to this. Otherwise, notwithstanding the option exercised for the building, rents payable by such tenant will not be subject to VAT.



Persons not subject to VAT: these are persons not pursuing business activities, such as the state or certain not-for-profit organisations. They are not to be confused with persons pursuing a business activity that is expressly exempt from VAT, such as insurers or banks. These exempt taxable persons (within the scope of VAT) are thus different from non-liable persons (outside the scope of VAT).


Date of options: For rental activities, the option must be exercised no later than the end of the month in which the activity begins (Article 194 of Annexe II to the FTC ). In the event of the acquisition of a building that is already leased, the option must be exercised before the end of the month of acquisition (unless the regime under Article 257 bis of the FTC applies).

It can be exercised prior to acquisition.

Proof of option: This is essential, as the mere collecting of VAT on rents (even over several years and / or where VAT is refunded because the rents are subject to VAT) is no proof of the option (although this is the assumption).

In practice, it is necessary to exercise the option by means of registered letter with acknowledgment of receipt, retaining proof of notification of the option. This document will be particularly necessary if the property is later sold (see hyperlink  Acquisition/Disposal > Real estate asset > VAT > VAT settlements).

If the option is exercised later on, the building owner is at risk of losing part of the VAT charged on the price of the building through the application of the 1/20th rule ( Acquisition/Disposal > Real estate asset > VAT > VAT settlements). Exercising the option during the month following the beginning of the activity will thus entail the loss of at least 1/20th of the VAT charged on the acquisition of the building concerned (as the activity is not reasonably subject to VAT during part of a calendar year, namely the month in question, during which the building is not being used for an activity subject to VAT). 

Premises assigned to hotel-style activities

N.B.: rental of buildings for residential use, whether bare or furnished, is always exempt from VAT with no option available (Article 261 D, 4°, of the FTC).

Exception to this situation → rentals corresponding to a hotel or hotel-style activity (VAT obligatory: Article 261 D, 4° a. to d. of the FTC). 

This affects:

  • hotel and catering establishments;
  • holiday villages;
  • tourist residences and similar;
  • furnished rentals with services. 

In the latter case the application of VAT is conditional upon:

  • on the one hand, the dwellings being rented furnished to the end user; and

  • on the other, at least 3 of the 4 following services being offered with such rental:
    • - breakfast,
    • - reception,
    • - regular cleaning of the premises,
    • - supply of bed linen. 

These services may be:

  • at the discretion of the occupant (optional); and/or
  • outsourced to external providers, but they must be offered to the occupant by the operator (no direct contact is permitted between subcontractor and occupant).



These services must be provided under conditions similar to those existing in the hotel trade.

Where VAT is applicable to the provision of accommodation, the rate is typically 10% (the 5.5% rate is applicable in specific cases, e.g. retirement homes). 

It is the final use of accommodation that is taken into account in determining whether VAT applies. Thus if a real estate asset is owned by an owner-investor who leases it to an operator in the hotel or hotel-style trade, VAT will necessarily apply (i.e. there is no option), usually at a rate of 10%, to rents due to the owner by the operator (and of course to those received by the operator). 

This scheme is regularly used by non-professional landlords of furnished premises whereby investors, who are often (but not always) individuals, acquire new serviced accommodation for rental to an operator. One of the main benefits of this scheme is that, although the underlying asset is a residential building, the VAT applicable to the acquisition price can be deducted by the investor on account of the specific nature of its exploitation.

VAT base

VAT is normally based on the amount of the rent. The rebilling of rental charges can, in tax terms, be considered:

  • either as a complementary rental charge, with the amount calculated on the basis of the charges borne by the owner of the building,
  • or as rebilling by the owner of charges advanced on behalf of the tenant.

The second solution (the “disbursement” mechanism) is more common: in this case, the owner directly rebills the tenant the charges incurred on its account, i.e. rebilling an amount either gross or net of tax depending on whether the charge in question was gross or net of tax. In the case of gross rebilling the tenant may deduct the VAT charged by suppliers on the basis of the charges rebilled (the lessor itself makes no deductions). 

For this mechanism to apply, the conditions of 267, II. 2° of the FTC  must be met:

  • charges and rebilled charges must be booked by the lessor as third-party items, not as proceeds and charges;
  • rebilling must be on a euro-for-euro basis;
  • accounts must be rendered for these amounts;
  • the payment of charges must correspond to a mandate given to the lessor by the tenant (a lease is in particular regarded as such a mandate). 

The disbursement mechanism will not apply to charges that are by their nature due by the owner on its behalf and for its own account (e.g. land tax or the office tax in the Ile-de-France region: note that, as these charges are net of tax, rebilling will be inclusive of VAT under a lease subject to VAT).

The disbursement mechanism (involving, among others, rebilling inclusive of VAT) has the effect that the date of deduction of the relevant VAT by the tenant will be the date that the accounts are rendered. This may then result in the VAT charge having to be borne for a relatively long period.

Another option (to the first one mentioned above) is to consider rental charges as costs borne by the owner on its own account and to treat their rebilling as a complementary rental charge. In this case, provided the lease is subject to VAT, the owner may deduct VAT invoiced by service providers and will bill VAT on rents and charges to the tenant.

This solution has the advantage of simplicity and speed in terms of deduction, as the tenant may deduct the VAT in question as soon as it is charged.

On the other hand, it is of no interest if the rental is not subject to VAT (the owner cannot deduct VAT on charges) and it may even be disadvantageous for tenants who cannot fully recover the VAT (because their activity is not fully subject to VAT): thus the main drawback of this method is that charges originally exempt from VAT, or subject to VAT at a reduced rate, will be subject to VAT at the rate under ordinary law.

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The rental guarantee is the agreement by which the vendor of a building guarantees the buyer a certain level of rent for a specified period calculated from the date of the sale. 

Following the sale, this guarantee will apply according to the rental situation of the building: 

  • if the building remains vacant, the vendor will pay the entire guarantee to the buyer; 
  • if the building is rented, the vendor will pay the buyer any difference between the amount of rent under the rental guarantee and the rent actually received by the buyer. 

The question arises as to whether VAT applies to such payments. 

From a legal point of view, it is reasonable to see this not as a form of rent (as the vendor receives no rent from the buyer), but as a reduction in price (as the sale is the only legal and economic exchange between the buyer and the seller). The rental guarantee should therefore reduce the VAT base that could be applied to the sale (see VAT). 

In practice, it is not uncommon for the buyer to want the rental guarantee to be deemed revenue for accounting purposes so that its investment can be regarded as generating proceeds and profitability as from its acquisition. In this case, the question is whether such revenue can and/or should be subject to VAT. There is no clear answer and it is resolved on a case-by-case basis.

This document and the information it contains are intended to provide as complete and accurate information as possible. It is however theoretical in nature and must undergo all necessary checking prior to its application. FiscalImmo and its authors cannot in any circumstances be held liable on the basis of this document.