Optional VAT regime for rental of immovable property
Recently, the Finance Commission approved the draft law introducing an optional VAT regime for the rent of professional real estate. The new rules will enter into force on the 1st of January 2019.
To date, the rental of buildings is, besides some exceptions, exempt from VAT. As a result, owners-landlords are not entitled to deduct VAT paid on the construction or acquisition of the buildings they rent out. Especially in a business-to-business environment, this non-deductible VAT is a major disadvantage.
The introduction of an option to subject immovable rent agreements to VAT, will allow owners-landlords to deduct input VAT paid on the construction or acquisition costs. In his turn, the tenant will also be able to deduct the VAT charged the periodic rental payments if he is a VAT taxable person with a (full or partial) right to deduct VAT. VAT will thus no longer have a cost-increasing effect.
The introduction of the optional regime means a far-reaching simplification of the current VAT practices applied in the real estate sector. Today, investors often invoke VAT taxable but more complex alternatives such as rights in rem, immovable leasing and special regimes such as the ones foreseen for business centres and commercial centres.
In the future, such complex alternatives, at least what concerns buildings newly constructed or thoroughly renovated as from 1 October 2018 onwards, will no longer be necessary.
The option to rent out with VAT is subject to two cumulative ground conditions:
- The first ground condition is that the rent should relate to a ' building ' or ' part ' of a building. The application of the option on the rent of a ' part ' of a building is important because the option can be applied per individual rental agreement. It will therefore be possible that a part of a building is rented to a tenant without VAT, while another part of the building is rented to another tenant with VAT, provided that in the latter case parties have opted for the VAT regime.
- The second ground condition is that the building is rented out to a VAT taxable tenant who fully uses the building for the purposes of his economic activity for which he has the status of VAT taxable person.
Except for warehouses, the optional regime will only apply to buildings for which the VAT on the construction or thorough renovation works has only become due for the first time as of the 1st of October 2018 onwards. Only the actual material works in the strict sense (construction/renovation works) should be taken into account.
In addition to the two aforementioned ground conditions there is also a formal condition to respect. Both the landlord and the tenant have to explicitly opt for the application of the VAT regime. A specific pro fisco clause in the rental agreement, which confirms the will of the parties to exercise the option, will suffice to demonstrate to the VAT administration that the option was jointly exercised by the landlord and the tenant.
As part of the introduction of the optional regime, the scope of the existing mandatory VAT taxation of warehouse rents will be limited. The rental of a warehouse for the storage of goods will only be mandatory subject to VAT if the tenant is a non-taxable person. In case the tenant is a taxable person, the optional regime will apply and the parties will have the choice to subject the rent to VAT or not. At the same time, a less stringent definition of a ' warehouse ' is introduced. A warehouse is defined as a building that is primarily, i.e. for more than 50% in terms of surface or volume, used for the storage of goods. However, no more than 10% of the warehouse, again in terms of surface of volume, may be used for sales activities.
A further attention point of the new optional regime is the extension of the VAT revision period from 15 years, which is the revision period that currently applies to buildings, to 25 years for buildings that are rented out with VAT under the optional regime.
Additionally, a minimum taxable base equalling the 'normal value' is introduced for rent payments where the landlord and the tenant are related parties and the tenant does not have a full right to deduct input VAT.
Finally, the new rules will also introduce a mandatory VAT taxation for short term rentals (= maximum 6 months) both in a B2B and a B2C context. By derogation, the rental of dwellings, of buildings intended for activities of socio-cultural nature, short-term rents to non-profit-making organisations and to private individuals using the property for purposes other than those of their economic activity will fall outside the scope of the mandatory VAT taxation.