Currently, immovable letting is, as a general rule, exempt from VAT. This implies that the landlord does not charge any VAT to the tenant and is, on the other hand, not allowed to deduct input VAT paid upon construction or acquisition of the real estate and during the investment lifetime (e.g. VAT on asset management fees). The Belgian VAT legislation provides for certain exceptions to this general rule (e.g. for the lease of warehouses, hotel rooms, lease of a building in connection with the operation of an airport, the so-called “VAT-lease” or “financial lease”).
According to the VAT Directive, Member States are free to provide for an optional VAT system for immovable letting, this possibility having been exercised – with different modalities – by all Member States except Belgium to date.
With a view of boosting the real estate and construction sector and reducing the competitive disadvantage of Belgium compared to its neighbouring countries, the Belgian government has finally decided to provide for an optional VAT system for immovable letting. While this system would have initially been limited to the logistics sector, it has been extended, with different modalities, to all commercial letting.
The introduction of such an optional VAT system could be beneficial for all actors in the real estate industry in Belgium. VAT paid on construction and operating costs which previously had to be considered as a ‘non-deductible cost of the building’ will now in several situations become recoverable.
Below an overview of the announced changes.
In a nutshell, it should be always possible to submit the letting of warehouses to VAT, based on one of the following VAT regimes, it being understood that the condition of “new building” applicable to this optional regime, is not applicable to warehouses:
- contracts existing and subject to VAT before 1 October 2018: the current regime continues to apply to those contracts;
- new contracts as from 1 October 2018, for which the VAT option cannot be exercised (i.e. when the lessee does not use the leased premises for its economic activity): a new exception for warehouses (exception to the non-submission to VAT) shall apply;
- new contracts as from 1 October 2018, for which the VAT option can be exercised: those contracts can be subject to VAT if both parties agree so and comply with the option formalities.
For all other commercial letting, an optional VAT regime shall be introduced as from 1 October 2018.
Under “commercial letting”, it must be understood the letting of premises that are exclusively used by the tenant for its economic activity granting such tenant the quality of VAT taxable-person (even if without right to deduct input VAT). In other words, the letting of residential properties to individuals shall not be subject to VAT, neither the letting of office spaces to pure holding companies. On the contrary the letting of residential properties to professional operators shall fall under the new VAT regime.
This commercial letting might be subject to VAT under the following conditions:
the letting concerns a ‘new building’ (or parts thereof) (and accompanying land), possibly also including heavily refurbished building qualifying as ‘new building’ after the refurbishments;
- the option to apply VAT will need to be agreed upon by both the landlord and the tenant; and
- the option to apply VAT will be valid during the entire lease.
New buildings and VAT claw-back
The option may only be exercised for buildings for which VAT on construction costs has become chargeable for the first time on 1 October 2018 at the earliest. On the basis of the explanatory notes, this “construction cost” is to be interpreted broadly and should include preliminary feasibility cost (e.g. architect) if related to the specified project.
Under this concept of “new building” should probably also be understood the heavy refurbishments being defined as either:
- a drastic modification of essential elements, being the nature, structure or destination, whatever the costs of the works might be; or
- modifications for which the cost of the works (excluding VAT) equals to at least 60% of the market value of the building (excluding ground) at the end of the works.
Moreover, an extended VAT claw-back period of 25 years (instead of the standard 15 years) should apply to buildings which have been subject to this optional VAT letting regime. This extended claw-back period should start upon first utilisation of (part of) the building.
With respect to this VAT claw-back, and knowing that the option to submit letting to VAT depends on the will of both the landlord and the tenant, the explanatory gives interesting information:
- the VAT is deductible, by the landlord who intends to lease with VAT, during the construction phase, and no claw-back shall (initially) apply in case it appears that the option has been validly exercised;
- no claw-back shall have to apply in relation to any rent-free period;
- no claw-back shall apply in case of vacancy provided that the landlord demonstrates its intention to lease with VAT and that the vacancy is independent from the landlord’s will (e.g. force majeure, damage to the property, refurbishment works).It goes without saying that, on these aspects, further clarity from the VAT administration should be welcome.
As from 1 October 2018, the letting of non-residential real estate (e.g. pop-up store) for a period of maximum 6 months shall be subject to VAT. Letting in the framework of certain specified social and cultural purposes shall however continue benefiting from a VAT exemption.
Note that this contribution is based on the preliminary draft law approved by the Council of Ministers dated 30 March 2018. There is still a long way to go and conditions will likely be fine-tuned along that process. We will keep you updated and remain at your disposal in case of any questions.