Reduced fees and VAT

What does reduced lawyer's fees mean?

If the transaction concerns a building finished in less than 5 years the fiscal system is very different. The taxes and other taxation due by the purchaser are not any more of about 5% but only of about 1%. The other fees remain the same. This is what we mean by 'reduced notaire's fees'.

Why does the buyer get reduced fees?

Because in exchange of this reduction agreed to the purchaser the income tax people (The Inland Revenue) will make the vendor pay a tax : the Value Added Tax(VAT) on real estate. In this distinct case of the sale of a building finished in less than 5 years, the estate will be considered as much the same as any goods and its price will be liable to VAT. The vendor will be regarded, exceptionnally and perhaps for the only time in his life, as a trader. He must assess the price of his sale " VAT included" in another way called All Taxes Included ("TTC").

One example

If for example the vendor has put his house for sale at 200 000 Euros, he must be aware of the fact he will sell it at 200 000 Euros VAT included. It is very important for the future because he may not have 200 000 Euros in his pocket left. Why? Simply because if the price shown is 200 000 Euros (all added taxes included understood), this means the price is in fact without VAT (167 224 Euros) and the VAT calculated at the rate of 19,60% ( that is to say in the example 32 776 Euros). Now the VAT does not belong to the vendor but to the Inland Revenue to which the vendor must give the day of the signature of the act in front of the lawyer ('notaire'). Yet before he pays this sum to the income tax people, the vendor will be able to bring down the amount of the VAT that he payed to the enterprises which participated to the construction. In this example if we reckon the vendor payed to the enterprises involved in the building of his house a total amount of the works of 150 000 Euros VAT included, this VAT in this sum was of 24 582 Euros; he will have to pay to the Treasurer the difference between 32 776 and 24 582, that is indeed 8 194 Euros. After the sale realised it will be left for him the price of 200 000 Euros reduced of the VAT to give (8 194Euros), that is to say 191 806 Euros.

Is the vendor entitled to give relevant documents to the Inland Revenue?

Of course to be able to deduct ( that is also to say to recover) the VAT paid to the enterprises you have to bring written proofs with proper receipts or invoices. Receipts not made in due form will not be accepted. Keep carefully all your invoices and think of making out an invoice when you buy materials meant for a house built less than 5 years ago. If you resell you will be glad to be able to use it. Do not forget, because of this system of VAT, all works made without a receipt will not be taken into account.

What is the difference with the tax on the capital gains?

This ( value added tax) or VAT is very much like a tax on the capital gains as it is taxing on the profit you have made on your property, but it is different with the taxation on the capital gains. Indeed, if the house you sell is not your principal accomodation or residence you must declare the capital gains in addition and eventually pay the tax linked to this. In all events it is the lawyer ('notaire') in charge of the sale who will levy the correspondant taxation on the sale's price. It is a sort of tax deducted at source(= pay as you earn). Also you must know that only the first sale in the length of 5 years since the completion is concerned by the system of the VAT on property. If for example you had your house built last year and you sell it in 2005, it will be liable to the VAT because the completion will be less than 5 years. In return if your purchaser sells it next year, it will not be liable to VAT, because it will concerns the second sale since the completion. To be a question of VAT you need the two conditions all together : the end of the construction has to be dated less than 5 years and it matters the first sale after the completion. How to get the date of the end of the works? The fiscal definition of the completion is the addition of the conditions of the fitness for habitation. In other words you can declare the works finished as soon as it is liveable. To justify it, nearly all the ways of proof are good. Things are simple if you live in it and can justify you are gas, electricity, telephone consumers .

What would you advice to the owner of a new construction?

Keep invoices and written invoices. Within a limit of a few days it can happen that the house will or will not be liable to the VAT. In any case this situation is not by itself penalizing. In effect it is a transfer of tax. It is the vendor who pays the taxes instead of the purchaser. It is why the phrase " reduced 'notaire' fees" does not mean saving for the buyer. The total expenses for the purchaser will be nearly equal to the price of the sale raised by the 'notaire's fees ( and eventually of the real estate agency). It is the repartition in these expenses fields that can vary and not really the cost price for the buyer. The main interest of the purchaser is the fact he becomes the owner of a very new building and still under guarantee ( 10 years for the main works). In all events and before assessing the price of the sale the fiscal regulation of the sale has to be checked. The vendor will have to calculate his price thinking of this particularity. If the question is well examined at the beginning it will all be right.