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Covid-19: Tax treatment of requisitions

Assessment arrangements and tax regime

09/04/2020

Article 2 of Covid-19 Emergency Response Act no. 2020-290, published on 24 March 2020 allows the State to "order the requisition of all goods and services necessary to combat the health disaster and of any person required for the functioning of these services or use of these goods" (new Article L.3131-15-7 of the French Public Health Code, PHC).

Such requisitions may only take place in areas where a public health state of emergency has been declared, by the Prime Minister acting by decree and for the sole purpose of protecting public health.

Up until this act was passed, Article L.3131-8 of the PHC provided for the possibility for the State to requisition goods and services but only for medical purposes and in the event where "the influx of patients or victims or health situation justifies it".

The Emergency Act has consequently considerably expanded the scope of such requisitions by allowing the State to requisition all property - in any form (movable or immovable property) and regardless of the identity of its owner (natural or legal person) - and any service (staff of a company and attached equipment, transport networks, etc.) required to combat the current Covid-19 epidemic.

In view of the general wording of this legislation, it seems that such requisitions may take place on a temporary basis (requisition for use) or definitive basis (requisition for ownership).

The prime example are hotels, we can imagine that they may be subject to temporary requisition for the purpose of meeting some urgent accommodation needs (for the homeless, careers, military personnel, family of hospitalized patients, etc.) or even for temporary conversion into treatment rooms.

Requisitioning goods and services: What are the arrangements for compensation?

The measures resulting from Act no. 2020-290 provide for the granting of a compensatory indemnity. The Act stipulates that the calculation methods are governed by the Defence Code (DC).

Thus, in order to determine the amount of compensation granted following the requisition of property or a service, reference should be made to Articles L.2234-1 et seq. of the Defence Code, which already stipulates the compensation for existing requisitions, namely for defence purposes (Article L.2211-1 DC) or for armed forces (Article L.2221-1).

According to these provisions, the amount of compensation - which must be assessed on the day of the final or temporary dispossession of the property or on the first day of the performance of the service - will be calculated, based on various criteria taking into account, in particular:

  • the material loss and expenses incurred as a result of the requisition (Article L.2234-1, para. 1);
  • the temporary or definitive nature of the dispossession (Article L.2234-1, para. 5);
  • the existence or non-existence of an on-going economic activity within the requisitioned property and, where applicable, the actual loss in particular with regard to the possibilities of transfer and subsequent resumption of operations and the profit/loss for the past three years (Article L.2234-2, para. 1 and 2);
  • legislative or regulatory bases for the purpose of setting prices or rent or, failing that, by means of on all elements, taking into account the previous habitual use of the requisitioned goods (Article L.2234-1, para. 5);
  • rates or compensation scales, established under the price legislation defined by the executive power as soon as the circumstances permit (Article L.2234-5);
  • normal and lawful prices for the services provided in the event of requisition of services or failing that, on the basis of the cost price obtained by adding to the temporary dispossession allowance, the amount of the normal operating expenses and expenses borne by the service provider (Article L.2234-1, para. 8).

However, no compensation is awarded for the loss of profit that would have been generated as a result of free disposal of the property or the continuation of business activities, subject to no restrictions (Article L.2234, para. 3).

Additional compensation may nevertheless be awarded in some circumstances, upon justification, to compensate certain damages or refund expenses directly justified by the requisition, as well as inevitable costs normally due by the user but paid by the service provider (Article L.2234-3).

Requisition of property and persons: tax classification and treatment of compensation

Compensation received by natural persons:

  • In the event of temporary requisition of immovable property, the administrative doctrine, confirming an earlier ministerial response [1], states that this allowance must be included in the income for the year in which it was paid.

The amount will consequently be included in the gross taxable income for the assessment of property income. [2]

  • In the event of requisition of movable or immovable property on a definitive basis, neither the law nor doctrine seems to provide for specific tax treatment. We therefore consider that the rules relating to capital gains or losses should be applied by comparing the definitive requisition operation with an expropriation on a definitive basis for public utility purposes, the consequences of which are strictly identical.

With regard to compensation collected by legal entities subject to corporate income tax in the event of the temporary or definitive requisition of movable or immovable property, the administrative doctrine stipulates that it constitutes a taxable income subject to the deduction of the costs referred to in Article 39 of the General Tax Code (GTC) (miscellaneous overhead expenses, etc.) and the depreciation of immovable property owned by the operator [3].For this reason, it uses in particular a previous decision of the Council of State which held that the requisition of commercial buildings, furniture and equipment recorded as assets of a hotel is equivalent to the continuation of its operations and that the compensation received in return should therefore be regarded as commercial profits, without the need to distinguish between the portion of the requisition compensation corresponding to the forfeiture of enjoyment and the portion intended to compensate for losses resulting from the discontinuance of operations. [4]

In addition, when the requisition results in the loss of ownership of a fixed asset, the asset capital gains regime is applicable but, in light of the scope of the long-term capital gains regime [5], the compensation received is still included in the results subject to the normal rate, regardless of the nature of the loss compensated by the compensation (temporary or definitive).

Compensation for requisition benefits must consequently be linked to the profit/loss for the year in which they became accrued receivables in principle and in the amount.

VAT

From a VAT perspective, the taxation of the compensation paid to compensate for a temporary or definite requisition is deducted if the compensation is calculated as the price of a supply of goods or provision of services carried out for consideration (1) by a taxpayer (2) acting as such, provided that this operation is not VAT-exempt (3).

  1. A supply of goods or provision of services for consideration: the temporary requisition of the property, resulting in a transfer of its enjoyment during the period in which the requisition occurs, is considered a service comparable to making available or rental of the property concerned. Requisition on a definitive basis entails a change of ownership of the property and therefore constitutes a delivery for VAT purposes. Article 256 I 3 a) of the General Tax Code expressly provides that the transfer of ownership of tangible personal property carried out pursuant to a request by a public authority constitutes a delivery. There is no reason to consider that it is different for immovable property furthermore as confirmed by the case law of the Court of Justice of the European Union [6];
  2. carried out by a taxpayer acting as such: a taxpayer is a natural or legal person who carries out economic activities on an independent basis. If the requisition relates to property owned purely in a real estate framework, the operator does not act as a taxpayer and the compensation paid to it is never subject to VAT. On the other hand, when the property concerned is used for economic operations, taxpayer status is presumed;
  3. non-exempt: in this respect, it should be noted that many transactions involving buildings are exempt from VAT such as bare rental (unless other option chosen by the lessor) or the delivery of a building completed for more than five years (unless other option chosen by the seller).

When the requisition relates to property owned by a person who has used it for economic operations up until this time on an independent basis, ascertaining whether the compensation constitutes the price of a transaction is consequently decisive.

The question is whether the compensation is the direct and individualized consideration for the delivery of the property (definitive requisition) or the provision of services (temporary requisition).

The analysis may be sensitive since it is partly subjective as it depends on the parties’ interpretation of the payment.

Commenting on the expropriation of buildings, the authorities wrote that it should be assumed that it does not in principle constitute economic operations for the expropriated person if the consideration received is compensation. However, the same does not apply if the expropriated person proves that this delivery also meets the needs of the company (see BOI-TVA-IMM-10-10-10-10-20120912, no. 100).

There is consequently a form of basic presumption of no tax liability, which the taxpayer can reverse by showing the interest of the expropriation on its operations.

The approach is very practical because it consequently offers an expropriated person the choice, but it is conceptually difficult to understand, unless we accept that compensation for expropriation does not in principle constitute fair remuneration for the dispossession of the property.

Furthermore, the solution is not general since the tax authorities state, with regard to the requisition of hotels, restaurants, garages, etc., that the requisition is treated as a rental of commercial or industrial premises fitted with furniture or equipment required for the operations.As a result, compensation received for this requisition is subject to VAT even though it would be less than the actual rental value of the requisitioned premises or establishments (see BOI-TVA-CHAMP-10-10-50-20 no. 70).

Finally, it consequently seems that for the tax authorities:

  • compensation paid in the event of requisition on a definitive basis could be presumed not to be liable for VAT, except if the operator demonstrates that this expropriation also meets the needs of the company.
  • the compensation paid in the event of a temporary requisition would, however, be presumed to constitute the price of a service, although forced, and would therefore in principle be subject to VAT, except obviously in the event of application of an exemption.

In particular, unfitted buildings that are subject to a temporary requisition may be considered to be a rental exempt from VAT by Article 260 D, 4 of the General Tax Code, unless the lessor has opted for voluntary taxation in accordance with Article 260, para. 2 of the same code.

Concluding that the compensation should be subject to VAT may appear to be unfavourable to the operator’s interests, as it is very likely that the amount of the compensation will not be increased by the amount of the related VAT.

However, we must not lose sight that this tax eliminates any risk of impact on the requisitioned person’s right to deduct.

If the requisition is not analysed as forming part of the requisitioned person’s economic operations, it may lead to adverse consequences on the requisitioned person’s situation with regard to the right to deduct resulting, as the case may be, in an obligation to carry out an adjustment or tax a supply of goods or services to itself.

It will depend on the circumstances and a case-by-case approach will be required, unless the tax authorities publish comments in the meantime. The exceptional circumstances lead us to hope nevertheless that they may guide the reflection towards no taxation of the compensation for requisition and no loss of deduction rights.


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