VAT and Public bodies in France

Anne GROUSSET Tax PartnerCMS- Bureau Francis Lefebvre

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SCOPE OF VAT

3 Types of operations

Operations falling out of the scope of VAT– Social, educational, administrative, cultural, sport

services are out of the scope of VAT if the exclusion from taxation does not create distortion of competition.

Some operations which are out of the scope of VAT can be taxable to VAT upon election

Operations which are subject to VAT according to French tax code provisions

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Operations out of the scope of VAT

The French Tax Code (FTC) did not implement as such art 4.5 of the 6th Directive

According to the FTC, operations are out of the scope of VAT:– If they consist in services listed in article 256B of the

FTC (the French tax doctrine considers that some operations are by nature out of the scope of VAT).

– If those services are rendered by public entities

– If their exclusion from the scope of VAT does not create distortion of competition

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Operations subject to VAT

Operations that do not meet the requirements defined in art. 256 B of the FTC are in the scope of VAT– Golfs, attraction parks, music and theatre festivals ….

The French Tax code indicates that certain operations are in any case subject to VAT:– delivery of gas, electricity and energy, transports of

goods, transports of persons, water services in towns of more than 3000 inhabitants ….

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Operations subject to VAT upon election

The election for VAT is limited to certain operations– Those operations are listed by the FTC: water supply for

small towns, cleansing, collecting and processing the household rubbish when this service is paid through a fee and not through a tax,

The election for VAT must be done for each activity distinctly

The election for VAT last at least for a 5 years period and is renewed by tacit approval

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Consequences of the election for VAT

Right to deduction

VAT returns per taxable activity

Each taxable activity must constitute a sector of activity– The question of the internal financial transfer between

sectors of activity

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VAT deductions In France, VAT suffered by local public bodies on

expenses can be refunded through 3 means:– By application of the regular VAT rules if the public entity

performs taxable operations;

– Through the VAT transfer of right of deduction in the case where a private operator manages the public service through a specific contract: “affermage” or “concession”;

– Through a compensation granted by the State to local public bodies reimbursing VAT suffered on their investment expenses incurred for their non taxable activity : the “Fonds de compensation de la TVA” ie VAT compensation fund.

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The transfer of the right of deduction

Only applicable in the case of “affermage” or “concession” contracts– Concession and affermage are regarded by French tax

authorities as operations out of the scope of VAT. applies to investment expenses incurred by a public

bodies VAT is recoverable by the private operator on the basis

of a certificate issued by the public body the private operator reimburses the deducted VAT to

the public body

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The VAT compensation fund

It is a subsidy and not a VAT reimbursement The compensation fund is granted to limited public

bodies: essentially local public bodies To be eligible to the attribution of the Compensation

fund expenses must:– be investment expenses

– not be used for a taxable activity

– the investment must belong to the public body

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VAT compensation fund

VAT is refunded 2 years after the expenditure If the use of the investment changes (ex: if the

investment is used for a taxable activity), the attribution of the compensation fund must be regularised

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The VAT compensation fund

The public body must send a return claiming the refund of the input VAT indicating– the actual investment expenses for which the

compensation fund is claimed for

– the nature of the operations which are out of the scope of VAT

– the nature and origin of the subsidies granted to the public body that must reduce the allowance of the compensation fund