BDO Indirect Tax News

In a decision released on 16 January 2025, the Administrative Court of Appeal of Marseille reaffirmed the strict evidentiary requirements that must be met to claim a VAT deduction on real estate investments. The court upheld the denial of a VAT credit refund due to the taxpayer’s failure to provide contemporaneous and objective evidence demonstrating the future intended use of the property for a taxable economic activity. The decision underscores a fundamental principle of VAT law, i.e., that the right to deduct VAT is conditional on demonstrating clear and unequivocal intent to allocate the property to a VAT-taxable business activity from the outset of the investment.

Facts of the Case and Decision of the Court

The case before the administrative court involved a taxpayer who requested a VAT credit refund of EUR 954,130 for renovation work undertaken between 2010 and 2012 on a villa in Cannes, which the taxpayer claimed was intended for para-hotel operations (subject to VAT). The French tax authorities rejected the request on the grounds that the evidence presented by the taxpayer did not establish a genuine and effective economic purpose for the property.

Following an initial rejection of an appeal by the Administrative Court of Nice, the taxpayer appealed to the Administrative Court of Appeal of Marseille, which ruled in favour of tax administration.

In reaching its decision that the taxpayer was not entitled to a VAT credit, the Administrative Court of Appeal of Marseille emphasised that the taxpayer’s submissions were inadequate to establish an effective allocation of the property to a VAT-taxable business. In particular,

• The scale and nature of the renovation did not, in and of itself, constitute proof of an intended economic use;
• A 2014 email referring to summer rentals was deemed insufficiently precise and too remote in time to demonstrate a contemporaneous intention; and
• A late business registration, unsupported by substantive commercial activities, failed to meet the evidentiary threshold required for a VAT deduction.

Given the absence of compelling and timely proof of taxable use, the tax authorities were justified in denying the VAT credit refund.

BDO Insight

The administrative court’s decision serves as a critical reminder to real estate investors and VAT-registered businesses that the right to deduct VAT is not presumed but must be substantiated. To mitigate the risk of a denial of a VAT refund, taxpayers should consider adopting a structured and well-documented approach by:

• Providing compelling and timely evidence, such as:
  • Rental agreements or mandates with licensed real estate agencies
  • Correspondence with booking platforms or commercial partners
  • Detailed business plan demonstrating economic viability
  • Invoices for property modifications tailored to the intended taxable activity
• Ensuring a consistent and well-timed sequence of events, including:
  • Initiating marketing and rental efforts during the renovation phase
  • Promptly registering the business and obtaining relevant tax identification numbers
• Formally documenting the intended business use, for example, by:
  • Including a clear declaration of intent in financial and corporate records
  • Establishing lease agreements or service contracts before project completion.

The administrative court decision highlights the key factors required to justify a VAT deduction on real estate investments. In the absence of clear, objective and contemporaneous documentation of a property’s intended taxable use, the tax authorities may legally deny VAT credit claims, posing a significant financial risk to investors.

David Hirsch
BDO in France