How does the deductible VAT work in France?

VAT deductions for French companies

Normally, the VAT is a tax that makes the price of most transactions go up by a certain amount. It means that the buyer will have to pay more to the seller, and the seller will then give this surplus back to the state. Of course, this also applies to transactions between companies.

However, the point of the VAT is that it is a tax that only the consumer pays. As such, to prevent companies from being subject to it, there exists the concept of “deductible VAT”.

So how does it work?

Indeed, technically, the VAT is supposed to apply if your company buys something from another company. However, this VAT is deductible, so your company will be able to deduct it from the amount of VAT it gives back to the state. Let’s illustrate that with an example:

Let’s say a company buys materials from its supplier. Here, it will have to pay the VAT on this transaction. When it later sells its product, the customer will then also have to pay the VAT to the company.

Now, normally, the company would have to pay this VAT back to the state. However, it already paid the VAT on the raw materials. As such, it can deduct the VAT it paid for the materials from the VAT it owes to the state, hence the term “deductible VAT”.

Essentially, this process means that in the end, the customer is the only one who has paid the VAT. It’s quite the useful process!