Option to tax banking and financial services: update of the French tax authorities’ guidelines

The French tax authorities (FTA) published on June 22, 2022 an updated version of their guidelines relating to the financial and banking transactions that may be subject to VAT upon option as well as the scope and conditions of the option.

As a reminder, the 2022 Finance Act amended Article 260 B of the French tax code (FTC) so that the taxable person who exercises the option to tax (OTT) may choose to apply it on a transaction-by-transaction basis. Prior to January 1, 2022, once the option was exercised, it was global and applied to all transactions falling within its scope.

The scope of the option is unchanged

In accordance with the updated Article 260 B of the FTC, the guidelines do not make any substantial changes to the scope of the transactions that may be subject to the OTT and the transactions expressly excluded from the scope of the OTT (Article 260 C of the FTC), as well as to the persons who may exercise it (i.e., professionals in the trade of securities and money and other persons carrying out on a principal or usual basis transactions related to banking and financial activities).

Less stringent conditions for exercising the OTT via a selective option mechanism

The OTT applies on a transaction-by-transaction basis (as defined for VAT purposes by Article 257 ter of the FTC).

Each time a taxable person who has exercised the OTT carries out a banking or financial transaction falling within its scope, he may choose to tax or exempt it. For example, the taxpayer may decide to apply the OTT not only on a transaction-by-transaction basis, but also by category or type of transaction, or, in a global approach, to apply the OTT to all banking or financial transactions within its scope.

Clarification of the terms and conditions for exercising the OTT

The taxpayer shall exercise the OTT in writing and send it to its competent tax office. The OTT is effective on the first day of the month following its exercise.

The FTA specify that, unless the taxable person indicates otherwise, the OTT is valid for all of his distinct business sectors, thus confirming that it can be exercised sector by sector. In the context of the future VAT group scheme, it is specified that the OTT is exercised for each distinct sector (i.e., member of the VAT group) and is therefore valid, unless otherwise specified, also for the sub-sectors of the member concerned (i.e., the current sectors).

Applying the OTT is not subject to additional specific formalities. On the other hand, as soon as the taxable person chooses to tax a transaction, the invoice he issues must contain all the compulsory information, in particular the indication of the amount excluding tax and the related tax.

A favorable impact on VAT recovery rights

Concerning the VAT recovery rights, it is recalled that transactions subject to VAT upon option grant input VAT recovery rights.

Where the transaction is located outside of France, the FTA indicate that:

  • Where the taxpayer has not exercised the option, the transactions at stake do not grant input VAT recovery rights;
  • Where the taxpayer has exercised the OTT, he is deemed to have applied it to these transactions, which then grant input VAT recovery rights.

A change in the comments on principal and ancillary transactions

The FTA have removed their previous comments which stated that where a financial service, taxable by OTT, is ancillary to an exempt financial service without the possibility of an option, the OTT took precedence over the ancillary principle: the ancillary service was subject to VAT while the main service remained exempt.

From now on, where a banking or financial transaction is subject to VAT upon option, the taxation also applies to the elements that are ancillary to it. Conversely, where a transaction is excluded from the scope of the OTT or the OTT has not been applied to the transaction, the VAT exemption also applies to the elements that are ancillary to it.

This change is in line with the codification of the CJEU case law relating to single complex transactions (Article 257 ter of the FTC in its version in force since December 31, 2021). As a reminder, by way of derogation from the principle that each transaction is considered separate and independent for VAT purposes, a single supply is recognized:

  • where two or more elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split; or
  • where one or more elements are to be regarded as constituting the principal supply, while other elements are to be regarded, by contrast, as one or more ancillary supplies which share the tax treatment of the principal supply.

Entry into force

The new regime applies to any transaction within the scope of the OTT whose chargeable event occurs on or after January 1, 2022. The FTA specify that it applies to taxable persons who had already exercised the OTT before this date (options already applicable on January 1, 2022), the OTT comes into force the first day of the month following its exercise.

Anne Gerometta

Anne Gerometta is Indirect Tax Partner of Deloitte Société d’Avocats. She advises international groups on their indirect tax issues. Anne notably assists operators from the Financial Sector – bank, insurance […]

Robin Maubert

Robin is an Indirect Tax Director based in Paris. He has more than 13 years of professional experience in VAT and joined Deloitte Société d’Avocats in 2018. Robin advises French […]

Victor Guistinati – Montegu

Assistant in the Indirect Tax team of Deloitte Société d’Avocats in Paris – La Défense