Understanding the scope of French VAT

Understanding the application of VAT in France

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VAT is a complex tax, and its application depends on several criteria. This article explains the key points to consider when determining if a transaction is subject to VAT in France.

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1. Taxable transactions and territoriality

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First of all, it is necessary to determine whether a transaction falls within the scope of VAT. If it is not the case, it is not subject to tax. Then, the territoriality rules come into play.

These rules specify whether a transaction, which was initially taxable, must be taxable in France or not according to the connecting rule provided for by the regulations (Administrative doctrine - BOI-TVA-CHAMP-10 and BOI-TVA-CHAMP-20).

This is not necessarily the place where the operation is actually carried out.

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2. Exemptions and Options

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Even if a transaction is taxable and located in France, it can benefit from an exemption provided by law. (Administrative doctrine - BOI-TVA-CHAMP-30): It is therefore necessary to check whether the transaction falls within an exemption.

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It is also possible, under certain conditions, to opt for the voluntary application of VAT on transactions that are normally exempt or outside the scope of application (Administrative Doctrine - BOI-TVA-CHAMP-50).

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This is for example the case of certain real estate rental transactions or even certain financial or banking transactions.

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3. Suspensive regime

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Some transactions, although taxable and located in France, can be carried out under a suspensive regime. This regime makes it possible to postpone the payment of VAT, without changing the effects of the transaction in terms of general VAT rules. (Administrative doctrine - BOI-TVA-CHAMP-40).

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What transactions are subject to VAT?

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VAT: Taxable transactions in 3 categories

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VAT applies to three main categories of transactions.

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1. Transactions that are taxable by their nature

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These are taxable transactions because of their intrinsic nature (Administrative Doctrine - BOI-TVA-CHAMP-10-10).

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VAT applies to taxable transactions, i.e. those subject to VAT or exempt.

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Transactions outside this scope are not subject to VAT. This field is defined by Article 2 (1) of Directive 2006/112/EC.

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The concept of transactions outside the scope of VAT should therefore not be confused with transactions exempt from VAT. For example, a doctor who only performs therapeutic operations is exempt from VAT but is not outside the scope of VAT. The doctor is therefore a non-taxable person: he carries out transactions within the scope of VAT but all exempt from VAT.

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Transactions subject to VAT for example:

• Deliveries of goods for consideration: by a taxable person acting as such;
• Provision of services for a fee: by a taxable person acting as such.
• Intra-community acquisitions of goods for consideration by a taxable person, a non-taxable legal person, or any other non-taxable person for new means of transport.
• Imports of goods.

The case law of the Court of Justice of the European Union (CJEU) and the Council of State specifies that a direct link must exist between the service provided and the consideration received.

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First condition to be in the field of application: concept of direct link

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The VAT liability for the supply of services is based on the existence of a direct link between the service provided and the consideration received. The Court of Justice of the European Union (CJEU) specified this link in its judgment of 8 March 1988 (CJEU, case 102/86, Apple and Pear Development Council). This decision highlights the absence of taxation where the benefits arising from the service benefit producers indirectly, with no direct link between the amount of taxes and the individual benefits. (Administrative doctrine - BOI-TVA-CHAMP-10-10-40-50).

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Criteria for assessing liability

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Two cumulative conditions determine coverage:

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1. Direct benefit for the customer: The service must provide a direct advantage, even if it is not precisely measurable, to the customer (e.g. obligation of means). An express commitment by the service provider or the implementation of resources are sufficient to establish this advantage. The benefit may be collective, provided that each contributor receives a direct benefit (Administrative Doctrine - BOI-TVA-BASE-10-10-50).

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Concrete examples are detailed in the case-law of the Council of State, in particular concerning collective promotion activities (EC, decision of 6 July 1990, no. 88224; EC, decision of 17 March 1993, no. 73272; EC, decision of 28 July 1993, no. 73272; EC, decision of 28 July 1993, no. 73272; EC, decision of 28 July 1993, no. 73272; EC, decision of 28 July 1993, no. 73272). These decisions tend to be considered outside the scope of VAT since the benefit is associated with third parties or an entire profession and not with the person paying for the service. On the other hand, an operation within the scope of VAT is an operation shared by various operators: the latter cannot consider that the gain is indirect as long as the benefit received is direct.

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The service may also satisfy a legal obligation, provided that the price is linked to the service provided: As such, the Council of State determined that the transactions carried out by inter-company occupational health service organizations were subject to VAT due to the direct link between the services provided by the associations and the compensation received from member employers (EC, decision of 20 July 1990, no. 84846).

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Note: On the other hand, cryptocurrency mining is generally excluded from the scope of VAT in the absence of an individualized service (BOI-RES-TVA-000140).

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2. Payment in connection with the service: The consideration (price, contribution, etc.) must be related to the benefit received, even if the price does not reflect the economic value of the service (CJEU, judgment of 21 September 1988, case 50/87).

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A voluntary payment generally implies the existence of a direct link. However, financing through compulsory taxes presumes the absence of this link, unless there is evidence to the contrary (CJEU, case 102/86 of 8 March 1988, Apple and Pear Development Council).

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Activities financed by taxes or parafiscal are generally excluded (EC, decision of 5 January 1994, no. 73875), unless fees for specific services provided exist (EC, decision of 28 July 1993, decision no. 46886).

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The qualification of the payment (aid, grant, etc.) is irrelevant; the main thing is the relationship with the service. Thus, operators should not only take into account the qualification indicated in the contracts to determine VAT treatment.

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Payment may thus also be considered to have been obtained in the form of a rebate (CJEC, judgment of 23 November 1988, case 230/87).

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Note: The degree of actual use of the service is irrelevant in the case of a subscription (BOI-TVA-CHAMP-10-10-10-20240214).

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Additional details on the following topics are available in rulings published by the tax authorities:

• the subject matter and the tax base of token offerings (ICOs) to the public, please refer to the BOI-RES-TVA-000054.
• the qualification of transactions carried out using non-fungible tokens (“NFTs”) under VAT rules, please refer to BOI-RES-TVA-000140.

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Second condition to be within the scope of application: the supplier or service acts as a taxable person

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Who is subject to VAT in France?

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Determining whether a person is subject to VAT in France is based on the precise definition of a taxable person according to article 9, paragraph 1, of directive 2006/112/EC and article 256 A of the French Tax Code (FTC).

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The taxable person is the person carrying out an economic activity as the administration recalls in accordance with the BOI-TVA-CHAMP-10-10-30 doctrine.

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It is an activity carried out independently, regardless of the legal form, the situation with respect to other taxes, or the nature of the intervention (Administrative Doctrine - BOI-TVA-CHAMP-10-10-30).

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Independence: the first key criterion for VAT liability

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Independence is a crucial element. A person acts independently when carrying out an activity under his own responsibility, with complete freedom of organization and execution.

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This is particularly the case for corporate and mandate contracts.

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On the other hand, employees and homeworkers bound by an employment contract or a relationship of subordination (concerning working conditions, remuneration and responsibility) are not considered to be subject to taxation.

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The state of subordination is assessed on a case-by-case basis, considering contractual elements (employment contract, location, hours, equipment, employer control) and the freedom to organize work (Administrative Doctrine - BOI-TVA-CHAMP-10-10-30). Case law provides details (e.g. EC, decision of 4 July 1973, no. 87349 and EC, decision of 28 March 1984, no. 35274).

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Homeworkers are also not subject to the conditions of Article L. 7411-1, L. 7412-1, L. 7412-2, L. 7412-3 and L. 7413-2 of the Labor Code (Trav.) and that their earnings are treated as wages.

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Important points: Taxation is independent of legal status, financial results (profit or loss), and the actual payment of VAT.

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Special cases:

• Pharmacist managing a clinical pharmacy: Judged in a situation of subordination, therefore not subject to VAT (EC, decision of 4 July 1973, no. 87349).
• Installer and seller on commission registered in the commercial register: Considered independent and subject to VAT (EC, decision of 28 March 1984, no. 35274).
• Apprentices, performing artists, journalists, press correspondents, press correspondents, models, statutory sales representatives: Generally considered as employees and not subject to VAT.
• Presidents of public establishments and representatives of the State: Assimilated to employees and not subject to taxation.
• Commercial agents: Independent and subject to VAT, unlike statutory or employee sales representatives. A combination of the two statuses is possible in certain cases (EC, decision of 15 January 1965, no. 63409, and EC, decision of 6 March 1970, no. 72022).
• Air navigation and flight teachers (temporary contracts): Not subject if they are in a situation of subordination.
• Transactions between entities of the same legal person: Generally outside the scope of VAT, except in the case of a single taxable person (article 256 C of the FTC, BOI-TVA-AU - see the judgments CJEU judgment of 23 March 2006, aff. C-210/04, FCE Bank plc; CJEU judgment of 17 September 2014, case C-7/13, Skandia America Corp.; CJEU judgment of 11 March 2021, case C-812/19, Danske Bank A/S; EC, decision of 4 November 2020, no. 435295, Société BNP Paribas Securities Services).
• Ship co-ownership management: Generally considered to be an employee, therefore not subject to..
• Doctors and paramedical professions attached to a community/company: Not subject if they are in a situation of subordination.
• Condominium syndicates: Subject to VAT for their services, with exceptions for the reimbursement of expenses in traditional condominiums. Additional services in serviced residences are subject to (BOI-TVA-BASE-10-10-30, BOI-TVA-LIQ-30-20-10-10)
• Occasional public service employees: Mainly subject to taxation, with specific exceptions.

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Factors that have no influence on subjugation

Taxation is independent of the purpose of profit, legal status, the situation with respect to other taxes, and the form of intervention. However, the usual or occasional nature of economic activity can play a role.

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Carrying out an economic activity: second criterion for being considered a taxable person

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Definition of economic activity

By economic activity, we mean any activity as a producer, trader or service provider, including the extractive and agricultural sectors, liberal professions and similar.

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The exploitation of tangible or intangible personal property for the purpose of permanent income is also considered to be an economic activity. This is the case, for example, with the provision of funds (interests) or real estate rentals.

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A. Commercial activities

All commercial transactions, even if they are loss-making, are subject to VAT.

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The Commercial Code defines traders as those carrying out commercial acts in a usual manner (Article L. 121-1 of the Commercial Code).

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Commercial activities include:

• The resale of raw materials and manufactured products;
• The rental of objects;
• The operation of hotel establishments, restaurants, theaters, etc.;
• Commission and brokerage transactions;
• Business agencies and offices (real estate, travel, etc.);
• Banking and insurance transactions;
• furnished rentals;
• The granting of advertising rights;
• The organization of commercial events.

B. Industrial Activities

‍Industrial activities, characterized by significant means of production, consist in the production of goods, whether they are processed on behalf of the producer or for third parties. These activities are subject to VAT.

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C. Craft Activities

Craft activities combine commercial and industrial aspects. The craftsman, a skilled manual worker, mainly realizes the value of his work. They are subject to VAT (Article 256 A of the FTC).

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Artisans differ from self-employed homeworkers who are not subject to VAT (Administrative Doctrine - BOI-TVA-CHAMP-10-10-20 to I-B-2-a).

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D. Liberal Activities

Liberal activities are generally subject to VAT, except for exemptions provided for by law (e.g. doctors, medical assistants) (Administrative doctrine - BOI-TVA-CHAMP-10-10-60; BOI-TVA-CHAMP-30-10-20-10).

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E. Agricultural Activities

Agricultural activities are subject to VAT, but operators can benefit from a lump-sum reimbursement regime or a simplified regime (FTC, art. 298 bis; Administrative doctrine - BOI-TVA-SECT-80).

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F. Civil activities

Certain civil activities, such as the rental of bare land or undeveloped buildings, and the transfer of patents, are subject to VAT, unless expressly exempted (Administrative Doctrine - BOI-TVA-CHAMP-30-10-50).

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The rental of bare premises is generally exempt (article 261 D of the FTC), with the exceptions detailed below:

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i. Rentals of empty premises or undeveloped land

The rental of bare premises is generally exempt from VAT (article 261 D of the FTC), except option for VAT or in three specific cases:

1. Participation of the lessor in the results of the tenant company.

2. Leasing is a way of continuing to operate a commercial asset for the lessor.

3. Renting is a way of increasing the lessor's opportunities.

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Taxation depends on the continuity of operations and the links between the parties: such structuring of the rental or the price clause leads to a reclassification of the activity as a commercial activity. This can therefore also have an impact on IS.

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ii. Parking space rentals

Parking space rentals are subject to VAT, with exceptions for locations closely linked to exempt rentals of residential or business premises, or for parking permits on public roads granted by local authorities.

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iii. Exploitation of invention patents

‍Patent assignments and license grants are subject to VAT (FTC, art. 256, IV).

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This applies to French and foreign patents, with exceptions for patents of Soviet origin (Franco-Soviet agreement of 14 March 1967) and according to the rules of territoriality (Administrative Doctrine - BOI-TVA-CHAMP-10-10-30).

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iv. Assignments of trademarks

The transfer of trademarks is subject to VAT unless it involves the transfer of customers and is subject to registration fees (article 719 of the FTC). The Council of State specified that the transfer of an unused brand is subject to VAT if no customers are transferred.

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V. Extractive Activities

Extractive activities are subject to VAT when they consist of taxable supplies of goods or services. Receipts from the extraction of materials resulting from a right of ownership or usufruct are exempt. (FTC, art. 261D, 3°).

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VI. Banking and Financial Operations

Banking and financial transactions are either exempt or taxable depending on their nature (FTC, art. 261 C, 1°; BOI-TVA-SECT-50-10). An option for the payment of VAT is possible for certain exempt transactions (FTC, art. 260B).

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Financial products received by businesses fall within the scope of VAT if they are the consideration for the provision of a service (provision of capital), carried out by persons acting as taxable persons and in the context of an economic activity.

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VII. Exploitation of tangible personal property

‍The exploitation of tangible personal property for permanent income is considered an economic activity (article 256 A of the FTC).

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Conclusions

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The qualification of taxable person is based on independence and the exercise of an economic activity, criteria defined by regulations and specified by case law. VAT thus applies to numerous commercial, industrial, craft and liberal activities, with special regimes for certain professions and specific sectors.

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Finally, beyond the general principles, subtleties exist, in particular in terms of territoriality, taxation options and specific regimes applicable to certain transactions. Good control of these aspects is essential to ensure tax compliance and optimize VAT management.

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