France has been experiencing political instability since the Prime Minister tendered his resignation to the President on 5 December 2024, following the adoption of a no confidence motion in the Budget Bill. As a result, it was not possible to adopt the Finance Act for 2025 before the end of 2024.
The government has relied on an exceptional procedure that allows it to temporarily raise the funds needed to finance essential public spending until the Finance Act is passed, by presenting a special law. Pending the adoption of a new budget for 2025, the commitment appropriations opened by the first Budget Bill for 2024 were renewed on 1 January. The new Prime Minister, François Bayrou, said he hopes to adopt a Finance Act in February, but it is not certain that this will happen. Affected taxpayers should monitor developments closely over the coming weeks, in particular, any new measures that may be adopted as part of the Finance Act for 2025.
The political crisis is not the only noteworthy development in France. Two recent French court decisions address the conditions for obtaining a VAT suspension for a transfer of assets and the burden of proof in VAT deduction cases.
In a decision issued on 12 November 2024, the Administrative Appeal Court of Nantes confirmed the strict conditions for taxpayers to benefit from the VAT suspension on an asset transfer. The case before the court involved a limited liability company specializing in the sale of IT solutions that transferred a functional IT solution to another company it considered to be a full branch of its business, thereby benefiting from the VAT suspension in article 257bis of the French Tax Code. Following an audit of its accounts, the French tax authorities challenged the VAT suspension.
The Administrative Appeal Court agreed with the tax authorities, concluding that the company had not transferred an autonomous economic activity that was likely to continue on a lasting basis, since no material or human resources had been transferred at the time of the contribution and no invoices for services relating to the marketing of the services offered by the platform had been produced. Thus, the sole functional existence of the IT solution was insufficient to demonstrate the transfer of a going concern asset. The court held that to benefit from the VAT suspension for transfers of a going concern between taxable persons, it is necessary to demonstrate the transfer of an autonomous economic activity with material and human resources, as well as the ability to continue an activity on a lasting basis.
The Paris Administrative Court of Appeal ruled on 23 October 2024 that the burden of proof is on the tax authorities when they challenge the validity of transactions invoiced in the context of a VAT deduction.
This case involved a A SARL (limited liability company) that carries out a business subject to VAT. The SARL is 60% owned by Company Q, and the two companies have the same director. The SARL received invoices from Company Q for management fees that were subject to VAT. Company Q declared and paid the VAT.
The SARL requested a refund of the VAT credit relating to the invoices, which was rejected by the tax authorities on the grounds that the services invoiced were fictitious because:
The Paris Administrative Court of Appeal ruled in favor of the SARL, holding that these factors were sufficient to establish the reality of the services and held that where the issuer of the invoice is duly registered and liable for VAT, the burden is on the French tax authorities to demonstrate the fictitious nature of the invoices to deny the right to deduct input VAT.
The government has relied on an exceptional procedure that allows it to temporarily raise the funds needed to finance essential public spending until the Finance Act is passed, by presenting a special law. Pending the adoption of a new budget for 2025, the commitment appropriations opened by the first Budget Bill for 2024 were renewed on 1 January. The new Prime Minister, François Bayrou, said he hopes to adopt a Finance Act in February, but it is not certain that this will happen. Affected taxpayers should monitor developments closely over the coming weeks, in particular, any new measures that may be adopted as part of the Finance Act for 2025.
The political crisis is not the only noteworthy development in France. Two recent French court decisions address the conditions for obtaining a VAT suspension for a transfer of assets and the burden of proof in VAT deduction cases.
VAT Suspension on the Transfer of Assets
In a decision issued on 12 November 2024, the Administrative Appeal Court of Nantes confirmed the strict conditions for taxpayers to benefit from the VAT suspension on an asset transfer. The case before the court involved a limited liability company specializing in the sale of IT solutions that transferred a functional IT solution to another company it considered to be a full branch of its business, thereby benefiting from the VAT suspension in article 257bis of the French Tax Code. Following an audit of its accounts, the French tax authorities challenged the VAT suspension.The Administrative Appeal Court agreed with the tax authorities, concluding that the company had not transferred an autonomous economic activity that was likely to continue on a lasting basis, since no material or human resources had been transferred at the time of the contribution and no invoices for services relating to the marketing of the services offered by the platform had been produced. Thus, the sole functional existence of the IT solution was insufficient to demonstrate the transfer of a going concern asset. The court held that to benefit from the VAT suspension for transfers of a going concern between taxable persons, it is necessary to demonstrate the transfer of an autonomous economic activity with material and human resources, as well as the ability to continue an activity on a lasting basis.
Burden of Proof for VAT Deductions
The Paris Administrative Court of Appeal ruled on 23 October 2024 that the burden of proof is on the tax authorities when they challenge the validity of transactions invoiced in the context of a VAT deduction.This case involved a A SARL (limited liability company) that carries out a business subject to VAT. The SARL is 60% owned by Company Q, and the two companies have the same director. The SARL received invoices from Company Q for management fees that were subject to VAT. Company Q declared and paid the VAT.
The SARL requested a refund of the VAT credit relating to the invoices, which was rejected by the tax authorities on the grounds that the services invoiced were fictitious because:
- The two companies had close capital links and shared the same director; and
- The services were provided without human resources.
The Paris Administrative Court of Appeal ruled in favor of the SARL, holding that these factors were sufficient to establish the reality of the services and held that where the issuer of the invoice is duly registered and liable for VAT, the burden is on the French tax authorities to demonstrate the fictitious nature of the invoices to deny the right to deduct input VAT.
David Hirsch
Marie Lambert
BDO in France