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Value added tax and real estate rental

Belgium was one of the last EU Member States which did not allow the optional system of value added tax liability for real estate rental in a professional context. The VAT Code Amendment Act of 4 October 2018 was adopted in order to counter that competitive disadvantage of the Belgian economy. The tax authorities recently published a circular on the matter. The main aim of the reform was to strengthen the competitiveness of the Belgian logistics and construction sector. Against this background, the Act provides for the following measures as of 1 January 2019:

 

1. Optional taxation of real estate rental

An economically active lessor can in future charge his economically active lessees rent with VAT. This enables the lessor to claim the VAT which he has paid for the construction or renovation of the rented property as input tax. For his part, the lessee can deduct the VAT paid on the rent in proportion to his right of deduction. 

Furthermore, the costs for the construction or renovation of a property are reduced considerably, if the lessor is in a position to claim the input tax in future. This cost reduction can also be reflected in the terms of lease and therefore benefit the tenant. This optional VAT liability system has no effects on private individuals however, and can be applied only if the following conditions are met simultaneously:

  • The letting must take place in a professional context.
  • It must concern a newly erected building or a building which has undergone extensive renovation works.
  • The lessor and the lessee must exercise the option jointly and explicitly.

 

2. Storage contracts

The provision of floor space may be optionally subject to VAT, if more than 50% of said floor space is used for the storage of merchandise and no more than 10% as retail space.

 

3. Short-term leases

The economically active lessor is required to subject leases for less than six months to VAT.

Are you concerned by this issue or are you interested in this subject? Do not hesitate to read our subsequent detailed analysis of these measures.


1. Optional taxation of real estate rental

 

As of 1 January 2019, an economically active lessor can charge his economically active lessee rent with VAT. This enables the lessor to claim the VAT which he has paid for the construction or renovation of the rented property as input tax. For his part, the lessee can deduct the VAT paid on the rent in proportion to his right of deduction.

 

Furthermore, the costs for the construction or renovation of a property are reduced considerably, if the lessor is in a position to claim the input tax in future. This cost reduction can also be reflected in the terms of lease and therefore benefit the tenant.

 

This optional VAT liability system has no effects on private individuals however, and can be applied only if the following conditions are met simultaneously:

 
    • The letting must take place in a professional context. The lessee must consequently be a person liable for VAT who uses the property exclusively for his professional activity. The Lessee’s liability can be documented on the basis of a set of interrelated facts and evidence. The simple communication of a valid VAT number by the lessee is not sufficient. It should be noted however that lessors or lessees who are eligible for a certain tax exemption or are among the tax-exempt small companies, qualify as persons liable for VAT and this condition is consequently met.
    • With the exception of storage contracts (cf. point 3 infra), a newly erected building or a building which has undergone extensive renovation works must be involved. The VAT charged on material construction or renovation works on the building may not have been due before 1 October 2018, whereas the VAT charged on immaterial works (architects or land surveyors, applications for permits, rental of machinery as well as demolition works or preparatory works on the land) may have been due already before 1 October 2018.
    • The lessor and the lessee must exercise the option jointly and explicitly for the letting to be subject to VAT. In this context, it suffices if the parties insert a clause for tax purposes which stipulates that the lease is subject to VAT. The exercise of the option counts for the entire term of the agreement.


On the other hand, the option is not applicable for the letting of buildings that already exist, as well as for the letting of new buildings to private individuals, to persons who do not fall under the scope of application of VAT or to persons who do fall under said scope, but do not use the building for their professional activity.

As regards properties with several intended uses, it is possible to exercise the option for only one part of the building, if it is accessible from the outside and independently operable. Such parts of the building must be accessible from the outside without entering premises which are used exclusively for purposes other than the economic activity of the lessee or other lessees.

If the option is exercised, the revision time of VAT for this property shall amount to 25 years. Consequently, the lessee must rent the property for at least 25 years with VAT, in order to be able to claim the entire VAT charged on the construction or renovation of the property as input tax. This revision is conducted year after year if necessary.

If the parties are affiliated and the lessee is not entitled to deduct the VAT in its entirety, the tax base of the lease must correspond to the market value at least.

The lessee can claim his right to deduct the VAT charged on the property at the earliest in the first tax return of 2019. The amount of VAT charged before 1 January 2019 will be counted little by little via line 62 on the VAT amounts declared in line 71 on the tax returns of 2019. If this amount could not be claimed fully when drawing up the last tax return of 2019, the remaining amount can be claimed in full in line 62 of this tax return.



2. Storage contracts

 

Since 1 January 2019, the provision of (existing or new) floor spacemay be optionally subjected to VAT, if more than 50% of said floor space is used for the storage of merchandise and no more than 10% as retail space. A storage facility which is used as retail space only occasionally, does not count as retail space.

The new contracts (concluded after 1 January) may be optionally subject to VAT, if the aforementioned conditions are met and the lessee is a perso who falls within the scope of application of VAT and uses the storage space for the exercise of his economic activities. Nevertheless, short-term leases are necessarily subject to VAT (cf. point 3).

If the aforementioned conditions are not met, the lease of storage facilities may nonetheless be optionally subject to VAT, if a new building is concerned and the corresponding conditions are met (cf. point 1 supra).

New contracts are nonetheless necessarily subject to VAT, if the aforementioned conditions are met and the lessee is a person who does not fall under the scope of application of VAT or a person who does fall under the scope of application of VAT, but does not use the storage space for his professional activity.

 

Old storage contracts (concluded before 1 January 2019), which were subject to VAT on the basis of old legislation, continue to be subject to VAT.

 

Nevertheless, old storage contracts, which were not yet subject to VAT on the basis of old legislation, may be optionally subject to VAT in future, if the aforementioned conditions are met and the lessee is a person who falls under the scope of application of VAT and uses the storage premises for his professional activity.



3. Short-term leases

 

The economically active lessor is henceforth required to subject short-term leases for properties to VAT irrespective of their nature and age.

In principle, the useful life of the building provided in the lease is taken into account for the calculation of the six-month term. In the event of several successive leases between the same parties, the overall continuous duration of the leases must be taken into account. In this respect, leases, which entered into force already before 1 January 2019, are not taken into account. If the overall duration of the lease when a further lease agreement is concluded exceeds six months, the VAT treatment of the previously short-term leases concluded previously is not retracted retroactively, if there are no improper practices.

 

This does not however concern the letting:

 
    • For residential purposes;
    • To natural persons, who use the assets for natural purposes or for purposes which do not fall under their economic activity;
    • To non-profit associations;
    • For the benefit of any person who uses the assets to exercise sociocultural activities.
 


A statement signed by the lessee which confirms that he falls under the scope of one of these exceptions suffices for the short-term lease to be exempted from VAT.

Contracts which had entered into force already before 1 January 2019 and were exempted from VAT on the basis of old legislation, remain exempted from VAT until the expiry of their original term.

Questions? Are you considering embarking on a real estate project or are you letting or renting a storage facility? Do not hesitate to contact our specialists on this subject.