This version was updated on 27 April 2020
This incentive applies to rent waivers granted between 15 April 2020 and 31 December 2020 (and not 31 July 2021, as indicated in the amendment). The intention is to encourage landlords to assist lessees and, therefore, to, help lessees reduce their indebtedness with a view to enabling lessees to resume activity in a better financial state after the pandemic.
Normally, a landlord is subject to a double sanction when it waives the right to collect rent: while rent is waived (i) as a commercial matter, the landlord does not receive rent, and (ii) the landlord is nonetheless taxed on the rent that it did not receive unless the landlord can demonstrate that either the rent waiver constituted a "normal" act of management or the lessee was subject to an insolvency procedure (Article 39, 1-8° of the Code général des impôts and Article 39, 13 of the same code).
This incentive therefore introduces a new circumstance in which rent can be waived by a landlord without the landlord being subject to tax in respect of the rent that has been waived: as a landlord who grants a waiver during the period when the amendment is in force does not have to have a commercial motive for granting the waiver in order to escape taxation on the waived rent. The scope of this relief is broad, since it covers waivers that relate both to rent taxed in the hands of an individual as property income (bare rental) or non-commercial profits (subletting) and also to rent subject to corporate income tax in the hands of a company.
Several conditions (that were not initially included in the amendment) must be met to benefit from such measure:
- the lessee must be a business;
- the landlord and the lessee cannot be related entities within the meaning of Article 39, 12° of the Code général des impôts;
- where the lessee's business is operated by a landlord's relative in the ascending or descending line or a member of his/her household, the landlord must be able to substantiate by any means the lessee's cash-flow difficulties.
Where relief is granted a landlord's right to deduct expenses incurred in earning the waived rental income is unaffected by the rental waiver.
For a landlord benefiting from a regime that exempts rental income from the charge to tax (e.g. a French ‘SIIC’ REITs and the French ‘OPCI’ regime), the amendment should not directly reduce tax exposure (as rental income will be tax-exempt in any event). However, rents waived will be ignored in calculating the profit that such a landlord is required, as a condition of enjoying tax exempt status, to distribute to investors.
From a VAT perspective, if the rents are subject to VAT, waived rents do not, in principle, give rise to VAT collection. We nonetheless draw your attention to the two following situations:
- VAT chargeable on the issuance of the rent invoice: where a landlord has elected to charge VAT on the issuance of the rent invoice (and not on receipt of the rent payment), a rent may be waived whereas the invoice has already been issued by the landlord to the lessee. In this case, the landlord will need to follow the unpaid debt procedure to reclaim the already collected VAT.
- Landlord's right to deduct VAT for general operating expenses in case of property generating both VAT and VAT-exempt rents: in this case the waiver of rents subject to VAT may negatively impact the landlord's capacity to deduct VAT for the concerned year due to the deterioration of his/her taxation ratio (determined, in principle, by the proportion between the turnover subject to VAT and the overall turnover).
For a lessee, a rent waiver gives rise to a taxable profit. However, the amendment also provides for a temporary increase (under the conditions provided by Article 209, I paragraph 4 of the Code général des impôts) in the capacity to carry forward tax losses. The standard €1,000,000 threshold is increased, for a lessee who has been granted a waiver, by an amount equal to the amount of rent waived.
In practice, we strongly recommend to formalise the rent waiver with the lessee via an amendment of the lease agreement.
 French REITs.
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The partners of Gide's Tax practice group are available to answer any questions you may have in this respect. You may also get in touch with your usual contact at the firm.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.
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