Leaseback scheme explained

What is the leaseback scheme?

First, I need to explain you the reason why the “French leaseback scheme” was created:

France is the most visited country in the World, with 80 million foreign tourists on average each year...and the WTO says that it will increase big time since a lot of people from China, South East Asia and South America will have the means to travel to our country in the coming years…and we have a problem with that. Not that we don’t like having tourists visiting our country. What’s the problem then? Well, quite a big one actually when it comes to accommodation. Because a lot of French people invest in a holiday home and use it for just a few weeks. Then they put the shutters down and leave it empty for the rest of the year. We are also very good at arguing about ownership and inheritance, so properties remain empty during lengthy legal procedures (the longest one actually ended…after 41 years). This leads to more empty properties littering the countryside and making no contribution to the tourism economy.

Fortunately, back in the 80’s, the French government thought about a scheme to increase the capacity of accommodation in order to welcome an increasing number of tourists: “the leaseback scheme”.

For the following explanation, let’s pretend you are a potential client interested in buying an apartment at a ski resort.

The arrangement works by you buying an off-plan apartment to a developer/builder and then allowing a tourism management company the right to let it to holidaymakers. In order to have some sort of harmony in the decoration of the apartments, all the owners have to buy the same furniture/decoration package which includes everything holidaymakers will need (from tea spoon to flat screens).

 On a practical level, at the same time you will sign a preliminary contract with the developer/builder to buy an apartment, you will also sign another contract with a management company called “commercial lease”. A commercial lease has a duration of 9-11years and is automatically renewable for 3, 6 or 9 years (80% are renewed for 9 years). In this contract, the management company commits to pay you a rental income each year (it is a % of the total price you will buy the apartment which will be index-linked to protect you from inflation), and it also defines all the things they will be in charge of. Basically, the management company will pay all the utility bills (heat, electricity, water,…), take care of the maintenance of the private premises and common areas (swimming pool, fitness room, garden…).

On top of that, some management companies offer the possibility to have some private usage of the property during the year. Usually 2 to 3 weeks a year. The only thing you will have to pay is the land tax and managing agent fees (the legal entity which manages the common areas of the residence).
NOTE: the leaseback scheme should not be confused with timeshare, as you are the freehold owner of the property from day one. What you are doing is allowing the company to run the property on your behalf, then after a set number of years it is yours to do as you please.

In France, the leaseback scheme also applies to student residences, apart-hotels and residences for “seniors”.

The advantage of this scheme is that you are able to purchase a property for a substantially reduced figure as the VAT on the cost is refunded by the French tax administration. VAT in France is 20%. So that’s a big saving on the purchase price. The only condition to this tax gift is that the commercial lease needs to last 20 years. It doesn’t mean that you have to keep the apartment for 20 years. You can sell it whenever you want. It is only in the case you will want to stop the lease with the management company that you will need to pay back some of the VAT you got refunded when you purchased your property. It works pro rata temporis, meaning that if you decide to quit the leaseback scheme after 15 years, you will need to pay back the French tax administration 5/20 on the amount of VAT you got refunded at the start.

Another advantage is the tax system linked to leaseback. First, this system applies the same way for residents and non-residents. What happens in this scheme is that a chartered accountant will declare every year your rental incomes to the French tax administration, in order for you not to pay taxes on the incomes you will get from the management company. In fact, due to the tax regime of leaseback, you will be allowed to offset from your incomes a certain number of things such as: interests from your mortgage, land tax, fees for the chartered accountant, service charges,… All in all, you will create a tax deficit in France and you won’t pay taxes on the long term (between 15 and 30 years). Since there is a tax treaty in order to avoid double taxation between France and most of the countries in the World, you won’t pay taxes twice but I strongly advise you to seek for legal assistance in your home country because rules are different in each country . You will need to check  how your tax administration considers the incomes you get from a foreign country.

Regarding the purchasing process itself, since we are dealing with new built/off-plan properties, you will be paying what we call “stage payments”. There will be several stage payments corresponding to the several stages of construction of the properties. First, a purchaser will pay a deposit (usually between 2% and 5% of the price) in order to book the property. Then, upon signature of the final deeds, there will be an installment of 20%. After this, another installment of 15% when ground floor will be completed, and so on until the handover of the keys.

To finish with this explanation, according to the finality of your investment, and time, several scenarios can happen:
-if you decide to sell your property before 20 years have passed by, since you will be selling it with the commercial lease, you won’t have to repay any VAT.
-if you decide to stop the lease before 20 years have passed, you will pay back the VAT pro rata temporis as I mentioned above, plus the management company might apply a “penalty fee for eviction” since you will be withdrawing one of property they were used to rent out to holidaymakers.

Now I am done with the basics, here is a sum up of the key points:

• You purchase the freehold of a property
• You sign a commercial lease with a management company which guarantees you index-linked rental incomes for 9-11 years, renewable (so a big part of the mortgage will be repaid thanks to the money you will get from the management company)
• There are personal use packages available, so you will be able to enjoy some skiing in the French Alps
• You get 20% of the cost refunded by French tax administration (with no VAT liability after 20 years)
• It’s a hands-off investment since the management company takes care of everything: advertising, rental, maintenance,...which is really convenient for our foreign clients
• It’s a perfect addition to a personal pension plan