VAT on Property Transfer: Who Really Pays? The Court of Cassation Rules

Imagine: you are selling a plot of land in Orange, for €500,000. The notary tells you that 20% VAT must be added. Who pays? You thought it was the buyer, but the contract does not say so clearly. Then begins a trench war that can last months, even years. This is exactly what happened to a real estate company (SCI) in Sorgues, a few decades ago, and which gave rise to a judgment of the Court of Cassation of 15 March 1988 (No. 86-16.697).

Every owner or developer asks themselves this question at some point: who bears the VAT on a property transfer? Is it automatically the seller, because he is the taxable person under the General Tax Code? Or the buyer, if the contract so stipulates? The answer is not as simple as it seems, and this judgment demonstrates this.

The high court laid down a clear principle: in relations between the parties, the final burden of VAT falls on the legal debtor only if there is no contrary agreement. In other words, if you have signed a contract which provides that the buyer bears the VAT, it is the buyer who will pay, even if the tax law designates the seller. Analysis of a decision which, although dating from 1988, remains highly relevant today.

The facts: a story like many that happen every day

A SCI, owner of a plot of land in Sorgues, sells it to a buyer for a price of 7,157,510 francs inclusive of VAT (i.e. approximately €1.09 million). In the deed of sale, a clause states that the SCI "undertakes to bear the VAT relating to the sale". So far, everything seems clear. But a disagreement arises: the buyer considers that the VAT must remain the responsibility of the seller (the SCI) because that is what the tax law provides. The SCI, for its part, considers that the clause is clear and that it agreed to pay the VAT, but can it recover it from the buyer? No, it agreed to bear it.

The dispute arises when the buyer refuses to reimburse the VAT to the SCI, arguing that the final burden falls on the legal debtor, i.e. the seller. The SCI sues the buyer for payment. The Court of Appeal rules in favour of the SCI: it holds that the agreement is clear, and that the SCI agreed to bear the VAT. The buyer appeals to the Court of Cassation.

Before the Court of Cassation, the buyer argues that the Court of Appeal should have considered whether the SCI was indeed the taxable person for VAT under tax law. But the Court of Cassation dismisses his appeal: since the parties have agreed between themselves that the SCI would bear the VAT, there is no need to check who is the legal debtor. The agreement of the parties prevails.

The reasoning of the court — analysed

The Court of Cassation relies on the principle of freedom of contract (Article 1103 of the Civil Code, formerly 1134). According to it, the parties may freely decide who bears the final burden of VAT, independently of the tax rules. It states: "In relations between the parties to an act, the burden of VAT due on the transaction in question should be borne by the party who is the taxable person under tax law only in the absence of proof of an agreement between these parties as to the final burden of the tax."

In other words, the legal debtor (the one who must declare and pay VAT to the tax authorities) is not necessarily the one who ultimately bears the cost. If the contract provides that the buyer reimburses the VAT to the seller, or that the seller bears it, it is this allocation that applies between them.

The Court of Appeal had therefore rightly confined itself to the contractual clause. The Court of Cassation validates this reasoning and confirms that the search for the taxable person is not necessary in the presence of a clear agreement. This judgment is a classic application of the principle that agreements constitute the law of the parties (Article 1103 of the Civil Code). It is neither a reversal nor an evolution, but a confirmation of settled case law.

The lower courts must therefore, first and foremost, interpret the intention of the parties. If the contract is silent, then one turns to the tax law. But if it expresses an allocation, that prevails.

What this changes for you — concretely

For a landlord owner in Orange who sells a building, this decision means that you absolutely must check what your preliminary sale agreement says. If you are a seller and you want the buyer to pay the VAT, you must stipulate it in black and white. Otherwise, you risk having to pay it yourself, even if fiscally you are the taxable person.

Take an example: you sell a building plot in Sorgues for €300,000 excluding VAT. If the contract provides "VAT in addition at the buyer's expense", the buyer will have to pay €360,000 inclusive of VAT. If nothing is said, the VAT (€60,000) remains your responsibility, because you are the legal debtor. A significant difference.

For a buyer, it is the opposite: if you buy a property and the contract mentions that you bear the VAT, do not count on tax law to exempt you. You will have to pay, even if the seller is the taxable person.

If you are a tenant, this decision does not directly concern you, but it illustrates the importance of contractual clauses. In co-ownership, similar questions may arise when transferring common parts.

In practice, if you are in this situation, you must examine your deed of sale. If a clause exists, it applies. If it is ambiguous, it must be interpreted, and in the event of a dispute, a judge will decide.

Four tips to avoid this type of dispute

• Draft an explicit clause on VAT: in any property transfer deed, clearly indicate who bears the VAT, with the mention "VAT in addition" or "VAT included". Avoid vague wording.
• Distinguish legal debtor and economic burden: remember that the taxable person (the one who declares) may be different from the one who actually pays. Specify the allocation in the contract.
• Have your contract reviewed by a lawyer: before signing, a property law professional will check that the VAT clause is in line with your intention and with case law.
• Keep all correspondence: if negotiations have taken place on the VAT, keep emails, letters or minutes. They may serve as proof of the agreement of the parties.

Further reading: related case law and developments

This 1988 judgment is part of a consistent line. Already, the Court of Cassation had ruled, in a judgment of 5 May 1982 (No. 80-16.123), that the burden of VAT could be contractually transferred to the buyer. More recently, in a judgment of 13 December 2017 (No. 16-25.289), it specified that the clause must be express and unambiguous.

The trend is therefore clear: judges respect the intention of the parties, but they require that this intention be clearly expressed. Failing that, they apply the tax rule. For the future, it is likely that this case law will be maintained, as it protects the legal certainty of transactions.

Note however: since 1988, VAT law has evolved (in particular with European directives). But the principle of freedom of contract remains unchanged. Real estate professionals must therefore be particularly vigilant.

In practice: what to do

FAQ:

• Q: Can I claim from the buyer the VAT I paid if the contract says nothing? A: No, unless you prove a verbal or written agreement. In the absence of a clause, the burden follows tax law.
• Q: What if the VAT clause is ambiguous? A: Apply to the tribunal judiciaire for interpretation. The lawyer will analyse the terms and circumstances.
• Q: Is there a time limit to act? A: Yes, the limitation period is 5 years from the signature of the deed for a claim for payment.
• Q: Must the notary inform me about VAT? A: He has a duty to advise. If he does not, his liability may be engaged.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →