In a decision dated September 9, 2020,  the French Administrative Supreme Court confirmed  the possibility of exercising the option to subject rents to VAT on a lot-by-lot basis and no longer on a global basis per building or property complex.
Principle: a global VAT option per building or property complex.
As a reminder, the letting of professional premises is in principle exempt from VAT . However, the taxpayer has the possibility to subject the rents to the tax through the exercise of the option provided for in 2° of article 260 of the French Tax Code (“FTC”).
Moreover, article 193 of Annex II to the FTC specifies that “in buildings or property complex comprising both rented premises which give right to elect to the [VAT] option and other premises, the option does not extend to the latter but applies globally to all premises of the first category.”
The French administrative guidelines  confirm the globality of the option by specifying that it must cover “necessarily all the premises not excluded from its scope that a lessor owns in a given building“. As a result, as soon as the premises fall within the scope of the option, the VAT election automatically applies globally to such premises (based solely on the reference of the buildings), regardless of the will of the lessor or the lessee to recover or not the VAT. This point was therefore subject of discussions during the negotiations with non-recovering lessees since (i) the lessor did not wish to impact his right to deduct, and (ii) the tenant did not wish to have a non-deductible VAT cost (20%).
Major new case-law: one option per premise / lot
It is therefore against the French tax authorities’ position, as it is stated in the French administrative guidelines until today, that the French Administrative Supreme Court handed down its decision, offering the lessor the possibility to choose between the premises he wants to subject to VAT and those he would rather rent without tax. In its decision, the High Court applies European standards and case-law .
From now on, it would be possible not to opt and consequently not to subject to VAT the rent paid by a non-taxable lessee. The landlord would then be able to opt only for premises leased by tenants who can recover the VAT paid on the rent.
Obviously, in this case, the lessor will only be able to partially deduct (up to the proportion of lots for which the option has been exercised) the VAT paid on the acquisition, works or operating costs relating to the relevant building. Also, in such a situation, the lessors could have impacts in terms of wages tax too.
This important decision offers real estate players a greater flexibility in the management of their investments. It deserves to be clarified and commented during an update of the French administrative guidelines.
In the future, care should be taken to ensure that the election letter specifically and precisely targets the relevant premises/lot and the related leases.
With respect to past VAT options, a reflection on the opportunity to denounce them in order to formulate new options by lot will have to be carried out, it being specified that, under the current lax stands, the option exercised for a building can only be denounced as from January 1st of the ninth year following the one during which it was exercised. It will then be necessary to know the tax authorities’ position on the possibility of amending the already exercised options or of drafting new options by denouncing the initial ones without having to take into account the aforementioned time limit.
Arsene Real Estate and VAT Teams
 French Administrative Supreme Court, 9 September 2020, #439143, SCI EMO
 French Administrative Court of Appeal of Nancy, 27 December 2019, #18NC02185, SCI Emo
 Article 261 D of the FTC
 BOI-TVA-CHAMP-50-10-20140404 § 110 and 120
 Articles 135 and 137 of the EU Council Directive 2006/112/EC on the common system of value added tax of 28 November 2006 & European Court of Justice (Third Chamber), 12 January 2006, Turn- und Sportunion Waldburg contre Finanzlandesdirektion für Oberösterreich (C-246/04)