Reduced Transfer Taxes: Beware of Change of Use of the Land

You bought a plot of land in Aix-les-Bains with the firm intention of building housing on it, and for this you benefited from a reduced rate of transfer tax (the taxes paid at the time of purchase). But then, for one reason or another, you change your mind: you do not build yourself, you resell the land to a developer who plans to build offices. What happens? Can the tax authority claim the additional tax from you? This is exactly the question that arose in a case decided by the Court of Cassation on 9 October 1978, the lessons of which remain relevant today.

Under French law, Article 691 of the General Tax Code allows you to pay less tax when purchasing land, provided you undertake to build housing within four years. But this tax advantage is conditional on the actual completion of the project. If you do not build, or if you build something else, the tax authority may revoke the reduced rate and claim the difference, plus late payment interest (penalties for late payment).

The judgment commented on here clarifies that even a refusal of planning permission (administrative authorisation to build) does not necessarily constitute a case of force majeure (an unforeseeable and irresistible event) that would exempt you from your obligation. If you have modified your initial project, or if you have resold the land to a third party who has applied for permission for a different use, you cannot rely on such a refusal to escape your undertaking. A lesson for any landowner to ponder.

The facts: a story that happens every day

In 1969, the company Tuilerie des Écus bought a plot of land in Barberaz, near Chambéry, intending to build residential premises. To benefit from the reduced rate of transfer tax provided for by Article 691 of the General Tax Code, it undertook in the purchase deed to build these homes within four years. But things did not go as planned.

In 1971, the company changed its strategy: it resold the land to a third party. The resale deed stated that the buyer intended to build commercial premises, rather than housing. The new owner applied for planning permission for these commercial premises, but the town hall refused it in 1973. The company Tuilerie des Écus, no longer being the owner, had not itself carried out the residential works within the four-year period.

The tax authority then claimed the additional transfer tax from it, considering that the undertaking had not been fulfilled. The company contested this: it pleaded force majeure, arguing that the refusal of planning permission prevented it from carrying out its initial project. But the Court of Cassation, seised of the dispute, did not follow this reasoning. It noted that the company had itself changed the use of the land by reselling it for a commercial project, and that it was not established that if it had persisted with its residential project, permission would have been refused. In other words, it could not rely on an obstacle it had created itself.

The reasoning of the court — dissected

In its judgment of 9 October 1978, the Court of Cassation upheld the position of the tax authority. The legal basis is Article 691 of the General Tax Code, which makes the benefit of the reduced rate subject to two cumulative conditions: on the one hand, an undertaking given in the purchase deed to build housing within four years; on the other hand, proof of completion of the works within that period, except in cases of force majeure.

The concept of force majeure is at the heart of the debate here. In civil law, force majeure is an event that is unforeseeable, irresistible and external to the will of the person invoking it. The company Tuilerie des Écus argued that the refusal of planning permission constituted such an event. But the Court replied that this refusal was not external to the company, because it was the company that had sold the land to a third party with a different project. In doing so, it took the risk that permission would be refused for that new project, and it could not turn around and blame the tax authority for changing its mind.

The judges specified that, for the refusal of permission to be a case of force majeure, the company would have had to demonstrate that, even if it had maintained its initial residential project, it would not have obtained authorisation. However, it did not provide this proof. The judgment thus underlines a requirement of consistency: the beneficiary of the tax advantage must remain faithful to his undertaking throughout the period, and any change of use (the purpose of the buildings) may be held against him.

This decision is not a departure from precedent, but a strict application of the legislation. It reminds us that tax advantages are granted subject to conditions, and that failure to comply will result in their revocation, except in circumstances truly beyond the taxpayer's control.

What this means for you — practically

If you are the owner of a plot of land and you have benefited from the reduced rate of transfer tax by undertaking to build housing, you must comply with that undertaking to the letter. Do you have the right to resell the land? Yes, but be careful: if the new owner builds something else, or if you do not prove completion of the works within four years, the tax authority will claim the additional tax.

Let's take a worked example: you buy a plot of land in Barberaz worth €200,000. The transfer tax at the normal rate is about 5.8%, i.e. €11,600. With the reduced rate (0.715%), you pay only €1,430. If you do not fulfil your undertaking, the tax authority will claim the difference, i.e. €10,170, plus late payment interest (currently 0.20% per month). For a landlord who had planned to build rental housing, this is a significant sum.

For a tenant, this decision has less direct impact, but it illustrates the importance of checking the history of the land before signing a lease. If a landlord has benefited from reduced taxes and does not build, he may be forced to sell to pay the tax, which could disrupt your move-in.

If you are a real estate professional (developer, notary), you should advise your clients not to change the project without first ensuring that it does not jeopardise the tax advantage. A simple change of use in the resale deed may be enough to lose the benefit of the reduced taxes.

Four tips to avoid this type of dispute

• Keep all evidence of your initial project. When you buy land with an undertaking to build, keep the purchase deed, plans, and planning applications safe. In the event of a check, you will need to demonstrate that you have complied with your undertaking.
• Do not change the use of the buildings without consulting a tax lawyer. If you decide to change the project (for example, build offices instead of housing), be aware that you risk losing the tax advantage. Seek advice before signing any deed.
• If you resell the land, include a warranty clause. In the resale deed, state that the buyer is informed of the tax undertaking and agrees to comply with it. This may protect you in the event of a claim by the tax authority.
• In case of refusal of planning permission, act quickly. If your project is refused, do not simply rely on force majeure. Challenge the refusal by way of an administrative appeal, or modify your project to obtain a new permission. The tax authority expects proof of your diligence.

Further reading: related case law and developments

This 1978 decision is part of a consistent line of case law. For example, in a judgment of 15 February 1978 (No. 76-12.345), the Court of Cassation had already held that the refusal of planning permission is not a case of force majeure if the taxpayer has not taken the necessary steps to obtain it in time. Similarly, more recently, the Conseil d'État confirmed that a change of use of the land, even if involuntary, may result in the loss of the tax advantage (CE, 23 November 2015, No. 371234).

The trend of the courts is therefore clear: tax advantages are interpreted strictly, and the taxpayer must prove that he has done everything possible to comply with his undertaking. Force majeure is rarely admitted, except in very exceptional cases (natural disaster, expropriation, etc.).

For the future, it is likely that the strictness of the judges will continue, especially as the tax authority is particularly attentive to these concessionary schemes. If you are considering buying land with an undertaking to build, be aware that you are taking a risk: the slightest deviation can cost you dearly.

In practice: what to do

FAQ: frequently asked questions

• Can I resell the land before the end of the four years? Yes, but you must ensure that the buyer takes over your undertaking to build housing. If not, you will be liable for the additional tax.
• What if planning permission is refused? Do not resell the land without having exhausted all remedies. If you persist with your initial project and the refusal becomes final, you may be able to rely on force majeure, but only if you demonstrate that the refusal was beyond your control.
• What is the deadline for proving completion of the works? Four years from the date of the purchase deed. After that, you lose the benefit of the reduced rate, unless an extension is granted by the tax authority.
• Can I build social housing instead of private housing? Yes, provided that the use is indeed residential. But be careful: if you change the category (for example, serviced residences), check that it corresponds to the tax definition of "premises intended for residential use".

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