Rescission of Sale and Real Estate VAT: When Bare Land Becomes a Tax Trap

Imagine: you are the owner of a plot of land in Six-Fours-les-Plages, in the Var, which you sold to a developer. The developer built a residence on it, but the sale is cancelled for non-payment. You get the land back... with the building. And then, surprise: the tax authorities demand nearly €200,000 in real estate VAT. How is this possible? The question every owner asks: when a sale is rescinded, what is payable on the restitution of the property? The answer of the Court of Cassation in this judgment of 20 January 2015 (no. 13-27.454) is clear: it all depends on whether the land remained bare or whether it was built on. But beware, the nuances are formidable.

The facts: a story that happens every day

Mr X, owner in Six-Fours-les-Plages, sells a plot of land to the company Le Clipper, a property developer. The price is paid, but the company does not fulfil its obligations: it does not build within the agreed deadlines. The sale is judicially rescinded (cancelled). Mr X gets his land back... but in the meantime, the company has erected a building on part of the land. The remainder has remained bare. The tax authorities send Mr X a proposed adjustment of €188,126 for real estate VAT on the gain realised upon the resale of the surplus bare land. Mr X contests: for him, the rescission of the sale cancels everything, and the restitution should not be taxed. The Court of Appeal rules in his favour, but the tax authorities appeal to the Court of Cassation.

The reasoning of the court — analysed

The Court of Cassation recalls the principle: the deed evidencing the rescission of a sale can only be subject to a fixed duty (a flat-rate tax) if it results in the mere restitution of the land sold, without any other taxable transaction. Here, the land did not remain in its original state: a building had been erected. However, the restitution of the land entails that of the building, which constitutes a transfer (a transfer of ownership) of that building. And this transfer is subject to real estate VAT (Article 257 of the French General Tax Code, which subjects supplies of new buildings to VAT). In contrast, the surplus land that remained bare is not subject to this VAT upon its subsequent resale. In short, the judges distinguish two parts: the built part (subject to VAT) and the bare part (not subject). In other words, the rescission does not erase the tax consequences of the acts that occurred in the meantime.

What this means for you — practically

For owner-landlords: if you recover land on which a developer has built, you must expect to pay VAT on the value of the building at the time of restitution. For developers: beware of the resale of the surplus bare land, which is not subject to VAT, but may be subject to registration duties (transfer tax). For modest buyers in Draguignan: if you buy a unit in a condominium after the rescission of the overall sale, you could be indirectly affected by the seller's tax adjustment. Example: if the building is worth €200,000 and the bare land €100,000, the VAT at 20% on the building will be €40,000, while the resale of the bare land will escape this VAT. If you are in this situation, you must check the rescission deed and request a precise breakdown of values. undefined, I have encountered cases where the tax authorities attempted to tax the whole, including the bare land. You must contest by demonstrating the distinction.

Four tips to avoid this type of dispute

• Engage a notary or lawyer from the time of rescission: the deed evidencing the rescission must be drafted clearly distinguishing the built part and the bare part, to avoid any tax misunderstanding.
• Obtain a separate valuation: have the value of the bare land and that of the building estimated by a property expert before signing the deed. This will serve as a basis for the tax return.
• Anticipate the VAT: if you recover land with a building, plan cash flow to pay the VAT. You can request a payment schedule from the tax authorities.
• Challenge proposed adjustments: if the tax authorities tax you on the whole, including the bare land, do not hesitate to file a contentious claim within 30 days of notification. The 2015 case law is in your favour.

Further reading: related case law and developments

This decision is part of a consistent line of the Court of Cassation: since the judgment of 12 July 2012 (no. 11-18.824), the distinction between bare land and built land has been affirmed. More recently, the Court clarified that rescission has no retroactive fiscal effect (judgment of 9 November 2022, no. 21-14.356). The trend is therefore to maintain VAT on existing buildings at the date of rescission. This means that developers must incorporate this tax risk into their contracts, and owners must negotiate guarantees.

What you absolutely must remember

• FAQ:
• What should I do if I recover land with a building? Declare the value of the building and pay the VAT. For the bare land, no VAT.
• Can I challenge the amount of VAT? Yes, if the tax authorities include the bare land in the tax base, you can claim the distinction.
• What is the deadline to act? 30 days to challenge a proposed adjustment, otherwise 2 years for a contentious appeal.
• Must the notary mention the VAT in the deed? Yes, it is mandatory for buildings. Insist on it.

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