20 OCTOBER 2017
Exemption from Tax on Offices (Taxe Sur les Bureaux, TSB) in the Ile-de-France region for premises specially equipped for educational activities: the way is now open for claims for rebates!
Under the terms of article 231 ter V-2° of the French Tax Code ("FTC"), premises that are specially equipped for educational activities are exempt from TSB.
In the absence of a precise definition in the law as it stands, the tax administration has simply sketched the outlines of “premises specifically equipped for educational activities”, holding that the rules only apply to educational premises with “substantial” facilities that would prevent any other activity. As such facilities are rarely needed in practice, this approach would exclude the vast majority of classrooms, study areas, etc. from the exemption.
In a recent case the French Conseil d’Etat has questioned the administration’s restrictive approach1. This welcome decision seems to mark a reversal of the legal view that previously upheld the tax administration’s questionable interpretation.
A priority preliminary ruling (“QPC”) on the compatibility of article 231 ter V-2° FTC with the French Constitution was then submitted by the French Conseil d’Etat to the Conseil Constitutionnel2, which established an exemption from TSB for administrative premises of private establishments under contract to the State, but not for private establishments without such contracts.
This exciting legal news opens up opportunities to challenge assessments for all persons subject to TSB who own premises covered by article 231 ter V-2° FTC (TSB paid in 2015, 2016 and 2017).
What are the educational premises exempted from TSB?
The wording of the law
The following are exempted by article 231 ter V-2° FTC: “Premises and parking areas owned by foundations and associations that are of recognised public utility and upon which they perform their activity, as well as premises specifically equipped for administrative archiving and for the performance of activities of a research or health, social, educational or cultural nature.”
Restrictive approach of the tax authorities and the courts
According to the comments of the French Tax Authorities (FTA) published in the Official Tax Bulletin (§ 400, BOI-IF-AUT-50-10), only the following premises may be regarded as “specifically equipped”: “…where the design itself is only suitable for one of these activities or, failing this, premises that have been substantially modified to this effect or that are furnished with fixed apparatus such that they are unfit or unsuitable for any other use.”
These conditions do not appear in the wording of article 231 ter V-2° FTC.
This approach has de facto meant that the vast majority of classrooms that could be used for administrative office activities without the need for major conversion works are not exempt from TSB.
The reasoning of the FTA was until very recently upheld in its entirety by the administrative courts dealing with the merits of such cases, as well as by the French Conseil d’Etat3.
Questioning of the restrictive approach
Classrooms should be able to benefit from the exemption from TSB without having to establish the “substantial” nature of the equipment provided or the existence of any “fixed apparatus”. More generally, the tax authorities should not be able to use their doctrine to deny the TSB exemption to premises that would, on account of their design, be unsuitable for educational activities.
It is in this sense that the French Conseil d’Etat held as follows on 11 October 2017: “The court had ruled that the premises for which the applicant was seeking exemption under article 231 ter V-2° of the French Tax Code for premises specifically designed for educational activities were of a modular nature and were therefore by design not solely suitable for this purpose; it then concluded that the premises could not benefit from exemption. It follows from the remarks in paragraph 2 that, in its judgment, the court had made the benefit of the exemption at issue subject to a condition that was not present in article 231 of the French Tax Code, and had thus committed an error of law. As a result, and without it being necessary to rule on the other aspects of the appeal, the applicant is entitled to seek the overturning of the decision it is challenging.”
Note that, in this case, the premises had been exclusively dedicated to teaching activity for over 10 years.
Although the comments of the tax authorities have not been overturned by this decision, they seem to have been undermined. It remains to be seen what will be the new scale of assessment for equipment used by the courts ruling on the merits.
A consistent application of the ruling by the French Conseil d’Etat and the legal wording, which simply refers to “specifically equipped premises”, requires in our view that the TSB exemption should apply to premises equipped with “simple” facilities (e.g. wall charts, podiums, laboratory benches, overhead projectors, etc.), and therefore to the vast majority of classrooms. We hope that the courts ruling on the merits will also move to a broad interpretation of this condition. For evidentiary purposes, it is suggested that those taxpayers wishing to take action should instruct a court process server to draw up a room-by-room inventory of the facilities present on their premises.
Other grounds for exemption
In some cases, the owners of premises allocated to educational activities may invoke exemption from TSB under article 231 ter V-3° of the FTC applicable to commercial premises whose total surface area is less than 2500 m2.
For the purposes of TSB, the term “commercial premises” refers in particular to premises in which commercial services are provided and to which the public usually has access. While the Paris Administrative Court ruled on 15 January 2015 that a teaching activity cannot be regarded as a commercial activity within the meaning of section 231 ter V-3° of the FTC, on 22 September 2015 it also held that where premises are occupied by a company, with access to the public to whom training is provided, these should be considered as commercial premises and, where appropriate, exempted from TSB if their total surface area is less than 2500 m2. While seemingly contradictory, we understand that these two decisions actually distinguish between educational establishments (a non-commercial activity pursuant to article 231 ter V-3° FTC) and continuous vocational training establishments (a commercial activity pursuant to article 231 ter V-3° FTC).
As a result, the premises of establishments that offer short seminars, bespoke training and courses for the certification of professionals and businesses should benefit from the exemption under article 231 ter V-3° FTC if their total surface area is less than 2500 m2.
What can be expected of the question submitted to the French Conseil Constitutionnel?
Under the terms of article 231 ter V-2° bis FTC, the administrative offices of primary and secondary public educational establishments and private establishments under contract to the State pursuant to articles L. 442-5 and L. 442-12 of the Education Code are also exempt from TSB. Premises occupied by private establishments without such contracts remain taxable.
This provision thus exempts all surface areas of premises occupied by establishments under contract: it was the object of a QPC submitted on 4 October 2017 by the Conseil d’Etat to the French Conseil Constitionnel4.
In this case, the applicant, an SCI, argued that article 231 ter V-2° bis FTC disregards the principle of equality before the law and the principle of equality before public burdens arising from articles 6 and 13 of the 1789 Declaration of the Rights of Man and of the Citizen. The distinction between private establishments according to whether or not they have entered into a contract with the State could not be justified by any reason of general interest in relation to the object of the law, nor was it based upon any objective or rational criterion in relation to the intended aim of the legislation.
While the French Conseil Constitutionnel has criticised the wording of the law, it is difficult to know whether its scope will now be extended to private establishments without contracts, or if private establishments under contract will be excluded from the exemption. It should also be borne in mind that the French Conseil Constitionnel often limits the effect of its decisions to those taxation disputes occurring before the publication of such decisions.
These decisions open the way for all owners concerned to apply for a rebate of TSB. As leases often provide for the rebilling of TSB, it is in the interest of tenants to invite owners to apply.
In order to uphold their rights to a rebate, owners should make their claims now, and at the latest by 31 December 2017 for TSB paid in 2015.
The Conseil d’Etat’s decision of 11 October 2017 may also be invoked in adjustment proceedings and pending actions.
From Pierre Appremont & Yacine Bousraf
1. French Conseil d'Etat (CE), 9th and 10th chambers sitting jointly, 11/10/2017, 392999.
2. CE, 8th chambre, 04/10/2017, 412381.
3. CE, 10th chamber, 19/07/2017, 405377; Paris CoA, 25/06/2016, no. 14PA02491; Paris AC, 16/12/2016, no. 1607754/2-1; Paris AC, 21/01/2015, no. 1406237; Paris AC, 8/10/2009, no. 701959.
4. CE, 8th chamber, 04/10/2017, 412381.