The para-hotel business, so little known in the past, is now widespread in French tourist resorts. This activity, which is subject to VAT, is very popular when new developments are marketed, since the new owner of the property can then claim a refund of the VAT credit resulting from its acquisition.
While the operating phase is generally straightforward, we have chosen to focus here on the turning point of resale, and its tax and social consequences for the seller.
The VAT mechanism
If the property is resold less than 5 years after completion
The property is considered “new” within the meaning of tax regulations, and sold by a professional subject to VAT. In this case, the sale is fully subject to VAT at the rate of 20%.
Example n°1: In 2020, Mr Xavier purchased an apartment worth €1,200,000 including VAT. Mr. Xavier operates this property under para-hotel business, which is fully subject to VAT. He was able to obtain a refund of the VAT paid on this acquisition, €200,000.
In 2023, Mr Xavier sells the property for €1,500,000. The property has been completed less than 5 years ago, and is therefore “new”. The sale is automatically subject to VAT on the full price, so Mr. Xavier will have to pay the tax authorities: 1,500,000 / 1.2 x 0.2 = €250,000.
Mr Xavier will therefore only receive €1,250,000 on resale.
If the property is resold more than 5 years after completion
The property is no longer considered as new, and the sale will therefore not be subject to VAT.
On the other hand, real estate VAT is subject to a twenty-year adjustment period, during which the seller must adjust and repay part of the VAT refunded on acquisition/construction of the property. Adjustments are made in twentieths, depending on the number of years that have elapsed.
Example n°2: In 2020, Mr Xavier purchased an apartment worth €1,200,000 including VAT. Mr. Xavier operates this property under para-hotel business, which is fully subject to VAT. He was able to obtain a refund of the VAT paid on this acquisition, €200,000.
In 2027, Mr Xavier sells the apartment for €1,500,000. The property has been completed for more than 5 years, and is no longer considered new.
Mr Xavier, on the other hand, will have to pay back 13/20th of the VAT initially obtained as a VAT credit refund in 2020 at the time of acquisition: €130,000.
However, there is an exemption from regularization when the purchaser intends to continue the transferor’s business (transfer of universality, art 257 bis of the French Tax Code).
Professional capital gain
The capital gain realized on the resale of a property operated under a para-hotel scheme falls into the category of business capital gains. It is in fact the sale of a business asset.
Calculation of gross capital gain
The gross capital gain is determined by the difference between the sale value of the asset and its net book value, which appears on the assets side of the balance sheet.
Example n°3: In 2020, Mr. Xavier acquired an apartment worth €1,200,000 including tax. It is recorded as an asset on his balance sheet at its value excluding tax : €1,000,000
When he sells his apartment in 2027, Mr. Xavier’s apartment is depreciated by €105,000. The net book value of the apartment is therefore €1,000,000 – €105,000 = €895,000.
The resale price of this apartment is €1,500,000.
The gross professional capital gain is calculated as follows: 1.500.000 – 895.000 = 605.000 €
Distinction between short term / and long term capital gain
When a company sells an asset, a distinction is made between “short-term” and “long-term” capital gains.
- If the assets sold were acquired less than 2 years ago: the capital gain is said to be short-term.
- If the assets sold were acquired more than 2 years ago :
- The capital gain is short-term to the extent of the depreciation deducted up to the date of sale.
- Long-term capital gains beyond that (for the excess)
Let’s continue with our last example to understand:
Example n°3 (continued): Mr. Xavier’s apartment is depreciated by €105,000.
We determined that the gross capital gain amounted to : 1.500.000 – 895.000 € = 605.000 €. It breaks down into :
– Short-term capital gain up to the amount of depreciation deducted : €105,000
– Long-term capital gains in excess of 605,000 -105,000 = €500,000
Why make this distinction?
Short-term and long-term capital gains are treated differently for tax purposes:
- Short-term capital gains are added to the company’s current income. It is therefore taxed at the progressive income tax rate.
- Long-term capital gains are subject to a single flat-rate withholding tax of 30% (12.8% + 17.2% plus CSG CRDS social taxes).
Exemption schemes are available
When the operator acts as a “real” professional, participating “personally, directly and continuously in the performance of the acts required for this activity” (BOI-BIC-DEF-10), he can claim the exemption provided for in article 151 septies of the French Tax Code, if the following conditions are met:
- The business must have been in operation for at least 5 years
- Average gross rentals for the two calendar years preceding the sale are less than €250,000.
The entire business capital gain (both short-term and long-term) is then tax-exempt.
If the conditions are not met to benefit from the total exemption offered by art. 151 septies of the French Tax Code (for example, the business is run on a non-professional basis, or sales exceed the threshold), an alternative is available under art. 151 septies B. Under this system, long-term capital gain benefits from an allowance of 10% per year from the 5th year onwards, leading to a long-term capital gain exemption after 15 years of ownership.
Beware of social security charges on resale!
Last but not least, when reselling, part of the capital gain, even if tax-exempt, is subject to social security charges (Sécurité sociale des indépendants, ex-RSI).
Short-term capital gain, the accumulated depreciation, is included in the basis for calculating the seller’s social security contributions. It is therefore advisable to be particularly vigilant at the time of resale, and to anticipate this charge, which will arise several months after the date of sale. The operator’s social security contributions represent between 35 and 45% of the short-term capital gain.
As a reminder, these social security charges apply even when the capital gain is fully tax-exempt.
NB: for non-resident owners, it is advisable to check whether a bilateral agreement on the coordination of social security schemes has been signed with the country of residence.
How can we help you ?
The missions we can offer you:
Drafting of a tax study: with simulation of your tax obligations in France ; a key solution to secure your installation in France in order to avoid unfortunate situations, such as delays or errors in your tax returns.
Follow-up of your tax returns in France: income tax, real estate wealth tax, rental income
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