In France, as elsewhere in Europe, furnished lettings are, in principle, exempt from VAT sales tax (TVA - Taxe sur la Valeur Ajoutée). That means landlords do not charge VAT on the rent and cannot recover VAT on expenses.
Nevertheless, under European law, if, under the domestic legislation of a Member State, a furnished letting competes with the hotel sector it must be subject to VAT.
Article 135 of the European Directive on VAT states that automatic taxation will apply for the supply of "accommodation, as defined by the legislation of the Member States, which are carried out in the hotel sector or sectors with a similar function".
In France, this has been interpreted in statute law to mean that where at least 3 of 4 services are being offered as part of the letting, the letting is considered para-hôteliere, and VAT must apply.
The 4 services concerned are :
- The provision of breakfast;
- Regular cleaning of the property;
- Provision of linen;
- Reception of the customer, which need not be by the landlord.
This is set out in Article 261 D 4° of the tax code, which states: "Sont exonérées de la taxe sur la valeur ajoutée :
4° Les locations occasionnelles, permanentes ou saisonnières de logements meublés ou garnis à usage d'habitation. Toutefois, l'exonération ne s'applique pas : Aux prestations de mise à disposition d'un local meublé ou garni effectuées à titre onéreux et de manière habituelle, comportant en sus de l'hébergement au moins trois des prestations suivantes, rendues dans des conditions similaires à celles proposées par les établissements d'hébergement à caractère hôtelier exploités de manière professionnelle : le petit déjeuner, le nettoyage régulier des locaux, la fourniture de linge de maison et la réception, même non personnalisée, de la clientèle."
Although it may seem surprising that some landlords wish to charge VAT, where they have undertaken major works to the property, for which VAT of 20% has been paid, a VAT charge of a reduced rate of 10% on rent paid for the accommodation might make commercial sense.
In a case heard in the courts, a landlord of a furnished holiday letting (location de meublé de tourisme) contested the way in which European law had been incorporated into French law, arguing that it went further than was required.
The landlord had claimed a large reimbursement of VAT, which was refused by the tax authority on the grounds that he only offered 2 services – breakfast and cleaning – which did not meet the minimum legal requirement.
After his case was initially refused by the local tribunal, the court of appeal scratched their heads about it and, in a procedure very rarely used, referred it up to the Supreme Administrative court, the Conseil d’Etat, for an opinion on the legality of the VAT rules.
Last month they rendered their verdict, coming down in favour of the plaintiff, by indicating that by imposing 3 services out of 4 the current legal definition of 'para-hôtellerie' is too restrictive.
This definition results in exempting from VAT activities that are limited to 2 out of 4 services even though they compete with hotels.
Nevertheless, the court has somewhat left matters in the air, by not coming up with a new definition of what constitutes para-hôtellerie, stating that pending new legislation to bring the law in line with the European Directive, each case would need to be considered on its merits.
As a result, landlords of furnished lettings who wish to be registered for VAT could argue that although they may not provide at least three services, they offer similar services to those in a hotel. The offer should ideally include overnight stays.
There is currently a draft law being considered in Europe that would more systematically make services provided through digital platforms subject to VAT, including short-term accommodation, irrespective of the level of services. It is, therefore, possible no changes in law in France will be made until that law is in place.
