Building leases (long term)
Builing leases are leases that:
- grant the lessee a right in rem;
- whereby the term is between 18 and 99 years;
- requiring the tenant to build on the leased land and transfer the real estate assets to the lessor at the end of the lease.
The lease may, in addition to the handover of the buildings at the end of the lease, provide for payment of rents, either on stipulation of or during the lease.
The main advantage of a building lease is that is allows the lessor to remain the owner of the land without itself having to build the structures of which it will ultimately be the owner.
A building lease allows the lessee to construct and enjoy a building for a period of time without having to finance the acquisition of the land.
A special tax regime is applicable
On stripulation of the lease:
- exemption from land tax (TPF),
- VAT is applied at the lessor's option. If such option is taken, the VAT base corresponds to:
- - on the one hand, the value of the right of handover of the real estate assets at the end of the lease (a valuation must be made), and
- - on the other, the rent paid over the term of the lease.
- VAT is (under ordinary law) payable on conclusion of the lease on the portion based on the value of the right of handover of the buildings and, as regards rents, on their collection;
- In practice, the advantage of the option is limited to cases where the lessor bears VAT on the land (e.g. if it carried our studies or development works or installed mains services) in order to secure its right to deduction of VAT.
During the term of the lease:
- to the lessor: rents are taxed according to the regime under ordinary law;
- to the lessee: it is the owner of the real estate assets until the end on the lease; as a result, it will write down all of these without taking into account the value of the land. The depreciation period corresponds to the term of the lease or to the normal period of use of the real estate assets, if shorter.
On expiry of the lease:
- to the lessee: real estate assets must be confirmed as removed from its balance sheet (normally fully depreciated) and VAT may be payable as in the case of disposals of real estate;
- to the lessor: handover of the real estate assets will constitute taxable proceeds that, pursuant to article 33 ter of the FTC , correspond to the cost price of construction for the lessee, with application of an allowance of 8% per year for the term of the building lease running beyond 18 years (total exemption if the lease ≥ 30 years). The resulting profit on handover of the real estate assets may be spread out if not fully exempt on account of the term of the lease.
Case where the rights of the parties are transferred during the lease: They will be taxed in the same way as a disposal of a real estate asset (article 1378 ter of the FTC):
- with regard to the lessee's rights, the transfer is subject to the rules of ordinary law, particularly VAT and land tax;
- with regard to the lessor's rights, the transfer is subject to land tax as if it concerned land that had not been built on (as the lessor did not participate in the construction operation), unless the purchaser is also the tenant.
Particular attention must be paid where the lease is terminated before it expires, especially if the lessor regains the rights of the lessee before expiry of the lease, or if the lease is extinguished through a merger of “lessee” and “lessor”, as the rulings of the Council of State hold that, in such cases, the handover of the buildings in tax terms occurs directly before the extinction of the lease and that the lessor’s assets thus attract taxation on the corresponding income.