Finance leases, lease-purchase and VAT: the ordinance of 27 July 2026 keeps the Mercedes criterion in article L. 211-36 of the CIBS

Update of September 1, 2026. This article was published on July 9, 2026, before the corrective CIBS ordinance. That ordinance has since been issued: it does not amend Article L. 211-36 and therefore maintains the codification of the Mercedes criterion. Section 6, newly added, draws the consequences; Sections 1 to 5 report the state of the debate as it stood before July 28, 2026.

1. The July 8, 2026 update: a continuation of traditional analysis

On July 8, 2026, the tax authorities published a new version of BOI-TVA-CHAMP-10-10-40-10 regarding the supply of tangible movable property.

Under the heading of "transactions not treated as supplies of goods", paragraph 100 confirms established French policy: the transfer of property, whether movable or immovable, under a leasing contract governed by Articles L. 313-7 et seq. of the Monetary and Financial Code or a hire-purchase agreement is not considered a supply of goods.

According to the authorities, these contracts are analyzed as "a lease accompanied by a simple option for the lessee to purchase at an agreed price that takes into account, at least in part, the payments made as rent" .

The transaction is therefore treated as a lease followed, where applicable, by a supply occurring at the time the option is exercised, with the authorities specifying that the purchaser is not necessarily the former lessee.

Upon sale, the lessor is deemed to be disposing of a used asset that was used for business purposes. In the case of real estate, the transfer is subject to VAT by default, except when it involves a building completed more than five years ago or land other than building land, in which case it benefits from the exemption under Article 261(5) of the FTC (subject to the option provided for in Article 260(5 bis) of the same code).

Note: the same update removes the paragraph stating that "indemnities received in consideration for the requisition of movable property by public authorities are subject to VAT, even if the amount of these indemnities does not correspond exactly to the commercial value of the goods in question".

This removal, made without explanation, deprives the doctrine of a long-standing assertion whose alignment with Article 14(2)(a) of Directive 2006/112/EC (transfer of ownership by virtue of a requisition made by public authorities in return for compensation) remained rudimentary. We can cautiously conclude that the authorities no longer wish to commit to this position in this commentary.

2. A rejection of the EU framework: the Mercedes-Benz ruling and the criterion of the only economically rational choice

Article 14(2)(b) of Directive 2006/112/EC treats as a supply of goods "the actual handing over of goods pursuant to a contract for the hire of goods for a certain period or for the sale of goods on deferred terms which provides that ownership shall pass at the latest upon payment of the final instalment".

In other words, a lease can be treated as a supply of goods as soon as the asset is handed over: this classification triggers VAT liability at the time of delivery.

When asked about the scope of these terms, the Court of Justice ruled that they apply "to a standard hire-purchase agreement where it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice the lessee will be able to make at the appropriate time if the contract is performed to its term, which it is for the national court to verify" (CJEU, 1st Chamber, Oct. 4, 2017, Case C-164/16, Mercedes-Benz Financial Services UK Ltd).

Two cumulative conditions emerge from the ruling:

• first, the contract must include a clause regarding the transfer of ownership to the lessee, a condition met by the simple stipulation of a purchase option.
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• second, it must be evident from the financial terms of the contract, assessed at the date of signing, that exercising the option constitutes the lessee's only economically rational choice: this is the case when the sum of the installments corresponds to the market value of the asset, including financing costs, and exercising the option does not require the payment of a significant residual amount.

Conversely, the Court preserved the classification of a supply of services for contracts that leave the lessee with a genuine alternative: in the main proceedings, the "Agility" contract, for which the lease payments represented only about 60% of the vehicle's price and for which the option, amounting to about 40%, was exercised by only half of the lessees, thus avoided being classified as a supply of goods.

3. A French judicial reception, without doctrinal echo

National case law has adopted this interpretation without it being taken up by the tax authorities.

In a judgment dated June 16, 2020, the Bordeaux Administrative Court of Appeal ruled, regarding a lease for a ship, that since the sum of the installments exceeded the market value of the asset, exercising the option constituted the lessee's only economically rational choice, such that the provision of the ship in France had to be regarded as a supply of goods, making VAT payable upon physical delivery with the associated territoriality consequences (CAA Bordeaux, June 16, 2020, No. 18BX02182, Sté Bonita).

The tax authorities, for their part, have never commented on the Mercedes-Benz ruling: not in 2017, not during the successive updates of the BOFiP, and not in the version dated July 8, 2026.

This results in a well-known asymmetrical situation: taxpayers can rely, on the basis of Article L. 80 A of the LPF, on guidance that is more favorable than hard law, while EU case law " enters the discussion " when the classification of a supply of goods serves their interests instead.

4. Article L. 211-36 of the CIBS: the codification of the criterion

Ordinance No. 2025-1247 of December 17, 2025, which recodifies VAT within Book II of the CIBS, includes a substantial innovation on this point.

Under the terms of Article L. 211-36 of the CIBS:

‍When a transfer of ownership is deferred until full payment of the consideration, the supply of goods is deemed to take place upon the physical delivery of those goods.

Such a deferral also includes the acquisition of ownership upon payment of the final installment of a contract for the provision of goods, where such acquisition results automatically from the terms of the contract or from the absence of any economically rational alternative.

The first paragraph refers to installment sales subject to a retention of title clause.

The second paragraph faithfully transposes the Mercedes-Benz ruling. Goods made available under a contract where the transfer of ownership results either automatically from its terms or from the absence of an economically rational alternative for the lessee would be deemed supplied upon their physical delivery.

For certain leasing and hire-purchase contracts (particularly where the option price is nominal or the cumulative rent payments cover most of the asset's value), physical delivery would thus trigger a taxable supply on the total price.

The consequences would be significant:

• immediate VAT liability on all sums due under the contract, including rent and the option price;
• pre-financing of the tax by the lessor;
• immediate and full right of deduction for the taxable lessee;
• determination of the place of supply based on the location of physical delivery;
• and finally, a complete overhaul of invoicing rules and the treatment of early terminations.

5. What the July 8 update suggested at the time

This is where the timeline became critical.

The entry into force of Book II of the CIBS, initially set for September 1, 2026, by Article 49 of the ordinance, was then publicly announced as postponed to January 1, 2027, and a corrective ordinance was expected within days.

The recodification was presented as being carried out "at constant law": substantive rules were not intended to be changed.

It is clear that the second paragraph of Article L. 211-36, by reclassifying as a supply of goods contracts that established administrative guidance and market practice treat as leases, alters a practice accepted by the Tax Legislation Directorate (DLF).

In this context, the reaffirmation on July 8, 2026, of the traditional analysis of leasing and hire-purchase, without any reservation or reference to the CIBS, could be read as a signal:

• the Tax Legislation Directorate might be anticipating an adjustment to the ordinance that would exclude the codification of the Mercedes-Benz criterion — that is, the removal or rewriting of the second paragraph of Article L. 211-36 — in order to bring the text back within the scope of constant law and preserve the current regime for lessors;
• alternatively, if required to keep these elements in the CIBS, it might use its guidance to give taxpayers protection allowing existing practice to continue and securing ongoing contracts.

This second reading was the one we favored: the tax authorities intend to secure ongoing operations whenever there are implications for the duration of existing contracts, such as in real estate or aircraft leasing (planes, helicopters).

The first reading saw it as a simple renewal by inertia, eight and a half years after the Mercedes-Benz ruling, of guidance that codification would have rendered obsolete (and one might then regret the BOFiP's persistent silence on the EU criterion).

The corrective ordinance, published on July 28, 2026, now allows the question to be settled.

6. The corrective ordinance of July 27, 2026: the Mercedes criterion is maintained in the CIBS

Ordinance No. 2026-671 of July 27, 2026, making various adjustments to the CIBS, published in the Official Journal of July 28, 2026, has removed the uncertainty.

It first postpones the entry into force of Book II to January 1, 2027, substituting that date for September 1, 2026, in Article 49 of the Ordinance of December 17, 2025, and extends until June 30, 2028, the tolerance allowing continued references to FTC articles.

It does not, however, touch Article L. 211-36. Neither the first nor the second paragraph appears among the many corrections made to Book II, and the table of contents annexed to the ordinance reproduces the article as it stood after the recodification. The only-economically-rational-choice criterion will therefore indeed enter French written law on January 1, 2027: the hypothesis of the second paragraph being removed is ruled out.

The Government has taken the other branch of the alternative. Article 17 of the ordinance adds a paragraph III to Article 46 of the Ordinance of December 17, 2025, under which, for the purposes of Articles L. 64 B, L. 80 A and L. 80 B of the LPF, the interpretation given by the authorities to the VAT provisions of the FTC transferred into the CIBS constitutes an interpretation of the corresponding provisions of that code.

In other words, the guidance reaffirmed on July 8, 2026, does not lapse on January 1, 2027: a lessor that continues to treat the handover of the asset as a rental will be able to rely on BOI-TVA-CHAMP-10-10-40-10 against the second paragraph of Article L. 211-36. The reading we favored is therefore confirmed — the current regime survives through the guidance guarantee, not through an amendment to the legislation.

The fragility of this construction

The guarantee under Article L. 80 A presupposes formal guidance bearing on the provision invoked, and the Conseil d'État reads it strictly where the provision commented on has been amended in substance.

The second paragraph of Article L. 211-36 spells out a criterion — the absence of an economically rational alternative — that Article 256(II)(3)(b) of the FTC did not state in so many words. A taxable person invoking the BOFiP on this precise point is therefore not immune to the objection that the guidance interprets a text which is not exactly that of the CIBS. The new paragraph III of Article 46 reduces this risk without eliminating it: it secures the transfer of the guidance, not its fit with a text more precise than the one it commented on.

Explicit comment from the authorities on how paragraph 100 of BOI-TVA-CHAMP-10-10-40-10 interacts with Article L. 211-36 therefore remains necessary, and should feature in the transitional guidance expected before January 1, 2027.

What to check now

Leasing and hire-purchase contracts running on January 1, 2027 — first and foremost in real estate and aircraft financing, where contract terms extend well beyond that date — should be reviewed now.

Three checks are called for: identify the contracts whose financial terms, assessed at signing, leave the lessee with no economically rational alternative; document, for the others, the existence of a genuine choice at the time the option falls to be exercised; and decide, for the former, between the position in the guidance (rental) and the application of the legislation (supply upon physical delivery), whose cash-flow effects run in opposite directions for the lessor and for the taxable lessee.