VAT rate for demolition and reconstruction

One of the most eye-catching measures, also the most commented upon, is the "extension" of the reduced VAT rate for demolition and reconstruction. To understand this measure properly, we need to go back to 2007.

In 2007, a reduced rate was introduced for demolition as part of the redevelopment of certain cities. The measure allowed the builder (individual or company) to demolish an existing building and rebuild it. Until then, this work would fall under the normal rate of 21%, but thanks to this exceptional regime, only 6% was due.

This permanent measure was limited to a total of 32 cities. And it also had to involve housing. But other than that, there were few restrictions. It did not have to be the builder's only home. Self-occupancy was not mandatory, nor were there any restrictions on the surface of the building.

In 2020, in the midst of the corona crisis, a temporary regime (i.e. in force until 31 December 2023) was introduced but for the whole of Belgium. The new regime (which came alongside the 2007 regime) also provided for a 6% VAT rate in three situations:

  1. The demolition and reconstruction of a sole and own home, not larger than 200 m2, by the builder himself. This measure was only open to individuals and the 6% VAT rate applied to the work carried out.
  2. The demolition and reconstruction of a dwelling with a view to selling (or establishing a right in rem) to individuals. This second possibility was actually an extension of the point above (again, the building had to become the sole and own home of the private buyer), where the home was not built by the private individual himself, but by a third party developer. Again, the dwelling could not exceed 200 m2. In this case, the 6% VAT rate applied to the sale or constitution of rights in rem relating to such buildings.
  3. The demolition and reconstruction of buildings that would be leased to a social housing agency or offered on the social housing market through a social housing agency. The builder could be either an individual or a legal entity and there was no restriction in terms of surface area. The 6% VAT rate applied to the work carried out.

From 2024, both the permanent and temporary regimes will be replaced by the regime described above under point 1. In other words, for the whole of Belgium, demolition/reconstruction work can only benefit from a 6% VAT rate if the invoicing is done to an individual (i.e. no longer to legal persons), for the reconstruction of a only and own home of less than 200 m2 (also in the 32 cities).

Practically, this means that from 2024, the 6% VAT rate for demolition / reconstruction will remain solely applicable to private owners having their main residence (of maximum 200m²) demolished and rebuild.

The 6% VAT rate will remain applicable in case of a leasing by the principal  (private individual or legal person) within the framework of social housing.

The government als provided for a transitional regime: if the building permit was applied for before 1 July 2023, the old regime can continue to be applied for invoices issued before 1 January 2025.

Solar panels and heat pumps

The installation of solar panels and heat pumps is in principle subject to 21%. Today, there are 2 exceptions to this.

  1. Installation on a building older than 10 years (this is considered a renovation and consequently only 6% VAT is due);
  2. The installation on buildings younger than 10 years between 1 April 2022 and 31 December 2023.

The exception mentioned in point 2 is thus a temporary measure taken to support the transition to a more sustainable society.

In the budget agreement, it was agreed to extend these temporary measures but only with regard to heat pumps. Practically, this means that the installation of solar panels on houses younger than 10 years will again be subject to a 21% rate.

Other measures

There are some other measures that have been somewhat underexposed in the many publications on the budget agreement. Many details are also not yet known. But for the real estate sector, it is important to take into account the following decisions in the coming years:

  1. The increase of real estate transfer taxes (RETT) (droits d’enregsitrement / registratierechten) on the granting and transfer of building rights (droit de superficie / opstal recht) and long-term lease rights (emphytéose / erfpacht) from 1st January 2024: the current rate of 2% will be increased to 5%. Considering that until July 2013 the applicable RETT rate was 0.2%, this represents an increase of the RETT rate of 2500% over a period of 10 years …
    In this respect, we will recall that the increase in the RETT rate from 0.2% to 2% in July 2013 created some stormy issues in terms of entry into force. Although the new rate was applicable to authentic deeds signed on or after the entry into force of the Program-Act of 28 June 2013, it took an administrative circular to confirm that the date of submission for registration would prevail if the deed was preceded by a private agreement signed before the date on which the new rate came into force. In conclusion, if you have transactions of this type on the go, it will probably not be enough to only conclude the private agreement in 2023 to retain the benefit of the 2% rate.
  1. The tightening of the conditions for holding a real estate investment fund (FIIS/GVBF). According to the government, this measure aims at closing a tax loophole where these funds were only held for a very short time in order to benefit from an advantageous tax regime. To be followed up closely …

Stressful times ahead?

A budget agreement is a document that mainly looks at the cost or revenue of a measure. To date, these measures have not yet been translated into draft bill form. Although some of the above-mentioned decisions already seem to be defined in very concrete terms (such as VAT on demolition and reconstruction), only the bill will allow us to define the exact impact of the decision.

There is no doubt, however, that the next few months are likely to be stressful for a real estate sector that is already suffering from the current economic conditions.