You have opted for property leasing to finance your business premises? This financing tool has its own specific accounting and tax features that you need to be familiar with. Between special provisions, financial depreciation and the treatment of purchase options, the property leasing system is complex.
Understanding the hybrid nature of property leasing
Property leasing is a two-faced operation: legally a lease, economically a loan. This dual nature raises many questions about its accounting and tax treatment.
Under article L. 313-7 of the French Monetary and Financial CodeIn France, property leasing is "a transaction whereby a company leases property for business use, purchased by it or built on its behalf, where this transaction enables the lessee to become the owner of the leased property, at the latest at the end of the lease".
This hybridity raises questions: should the legal approach (a lease) or the economic approach (financing) be favoured in the accounting and tax treatment?
Accounting by the lessor
Fixed assets and depreciation
For the lessor, the leased asset is a fixed asset recorded as an asset on the balance sheet at its price excluding tax. It is depreciated in accordance with the rules of ordinary law.
However, since article 29 of the amended finance law for 1999, leasing companies have been able to opt for financial amortisation. In this case, the depreciation charge is equivalent to the portion of the lease payment corresponding to the capital invested.
"The depreciation of leased assets is spread over the term of the contracts. The depreciation charge for each financial year is thus equal to the fraction of the rental income for that period corresponding to the reconstitution of the capital invested in the purchase of the leased assets" (CGI, art. 39 C, para. 4).
Rent processing
The lease payments received by the lessor constitute operating income, which is taken into account when determining its taxable income. It comprises amortisation of the capital invested and a financial margin.
One notable feature is that the lessor's real margin is often masked by conventional accounting.
The special provision
The lessor may set aside a special provision when the depreciation charged exceeds the financial depreciation. This provision, provided for in article 39 quinquies I of the CGI, is used to spread the loss incurred at the end of the contract when the net book value of the asset exceeds its residual value.
It is equal to "the excess of the cumulative amount of the share of rents, already acquired, taken into account for the determination of the sale price agreed for the possible sale of the property at the end of the contract, over the total depreciation applied".
A real tax advantage that allows you to defer taxation.
Accounting by the lessee
Processing rents and charges
As the lessee does not own the asset, it does not recognise it as an asset on its balance sheet. Lease payments are operating expenses, recorded in the income statement under accounts 6122 (equipment leases) or 6125 (property leases).
Please note, however, that for contracts entered into after 1 January 1996, part of the lease payments may not be deductible if the purchase option price is less than the purchase price of the land by the lessor.
The Conseil d'Etat has consistently ruled that lease payments are deductible provided that they correspond to an actual expense, in line with the actual rental value of the asset, and that they are incurred in the interests of the business.
Pre-rentals and additional investments
Pre-rentals, paid during the construction phase, are treated as deferred charges. They can be spread over the term of the contract.
Additional investments made by the lessee are recorded as assets in a specific account (2181) and depreciated in accordance with the usual rules.
If these investments remain at the end of the contract without the option being exercised, the lessee must recognise an expense equal to their residual value.
Applicable direct taxation
Deductibility of rental income
For the lessee, the rental payments are deductible from taxable income, provided that they constitute fair remuneration for the service provided.
Since 1996, there has been an important limitation: when the purchase price provided for in the purchase option is lower than the purchase price of the land by the lessor, the portion of the lease payments corresponding to the land is not deductible (CGI, art. 39-10).
Capital gains regime
At the exercise of the purchase optionIf the lessee does not pay the purchase price, the lessee must include the difference between the market value of the property and its reduced purchase price in its taxable income (CGI, art. 239 sexies).
The purpose of this reintegration is to neutralise the tax benefit arising from the deduction of rental income during the rental period.
If the lessee resells the property at a later date, the capital gain is treated as short-term up to the amount of depreciation that the company would have taken if it had owned the property for the duration of the lease (CGI, art. 39 duodecies A).
Indirect taxation
VAT
Property leasing payments are subject to VAT, which may be reclaimed by the taxable lessee.
The tax authorities consider that "leases of converted buildings fitted out with professional fittings or furniture are, in accordance with the established case law of the Conseil d'Etat, subject to compulsory value added tax".
Registration fees
Publication of the leasing contract in the real estate register is subject to land registration tax at the rate of 0.60% (CGI, art. 740).
The exercise of the purchase option is subject to registration duty at the rate of 3.60%, plus additional taxes.
Changes to the tax regime for SICOMIs and SOFERGIEs
Historically, Sociétés Immobilières pour le Commerce et l'Industrie (SICOMI) benefited from an advantageous tax regime: exemption from corporation tax in return for a distribution of 85% of profits.
This scheme was gradually phased out from 1991, disappearing completely in 1996, except for contracts concluded before 1 January 1996 (transitional measure).
A similar fate befell the Sociétés pour le Financement des Économies d'Énergie (SOFERGIE), whose preferential tax regime was definitively abolished by the amended Finance Act for 1999.
Points to bear in mind when optimising your tax position
Several aspects deserve particular attention:
- The timing of the exercise of the purchase option: it may be a good idea to bring this forward if the market value of the property has risen sharply.
- Setting the price of the call option it must take account of the different tax treatment of land and buildings
- Additional investments: their treatment varies depending on whether or not the purchase option is exercised
In a recent case (CE, 12 January 2004), the Conseil d'Etat confirmed that pre-payments made during the construction phase do not constitute prepaid rents but remunerate a specific service. They are therefore deductible in the year in which they are incurred.
Understanding the tax treatment of property leasing requires in-depth analysis. An error of assessment can result in a tax reassessment, as demonstrated by a decision of the Lyon Administrative Court of Appeal on 28 May 2020.
Our tax lawyers can help you optimise your property leasing operations, from drafting the contract to exercising the purchase option.
Sources
- Monetary and Financial Code, article L. 313-7
- General Tax Code, Articles 39 C, 39 quinquies I, 39-10, 239 sexies, 39 duodecies A and 740
- Amending Finance Act for 1999, article 29
- Conseil d'État, 12 January 2004, no. 243273
- Tax instruction 4-H-13-91 of 20 June 1991 (BOI 2 July 1991)
- El-Mokhtar Bey, "CRÉDIT-BAIL IMMOBILIER - Régime comptable et fiscal", JurisClasseur Droit bancaire et financier, 27 June 2015
- El-Mokhtar Bey, "CRÉDIT-BAIL IMMOBILIER - Régime légal - Définition. Conditions de fond", JurisClasseur Droit bancaire et financier, 30 June 2015.
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