In a previous communication, we already mentioned that the Belgian Government has decided to introduce an option to make real estate renting subject to VAT. It remained unclear which buildings would be eligible for this scheme. The draft act submitted to the Chamber of Representatives on 31 July 2018 provides clarification on this matter. The optional submission to the VAT regime will only apply to buildings in respect of which VAT on the construction works did not become due before 1 October 2018.
The key measure in the draft act is the introduction of the optional VAT regime, which will allow the application of VAT to the rent for immovable property in B2B situations. The advantage of opting for VAT is that the landlord will then be entitled to deduct the input VAT paid on the construction and renovation costs relating to the rented building. Under the current regime, the rent for immovable property is exempt from VAT, thus preventing landlords from deducting any input VAT.
In addition to an optional VAT regime for real estate renting, the draft act contains amendments to the VAT regime for short-term renting and for the renting of warehouse space.
The optional VAT regime
The main features of the optional VAT regime for the renting of immovable property can be summarised as follows:
Buildings constructed as from 1 October 2018
Only buildings constructed as from 1 October 2018 fall within the scope of the optional scheme. In addition to actual "newly constructed" buildings, thoroughly renovated buildings which – upon completion of the renovation works – qualify as "new buildings" for VAT purposes, are also eligible.
A building is considered to be constructed as from 1 October 2018 if the VAT on the construction works for the rented building did not become due prior to 1 October 2018.
The fact that VAT on intellectual work or intangible services (e.g. architectural services) has already become due prior to 1 October 2018 does not prevent the application of the optional scheme. The same goes for works related to the accompanying land. In this regard, the Explanatory Memorandum for the draft act refers, among other things, to drainage works, digging works and stabilisation works.
Buildings that can be operated independently
The optional submission to the VAT regime only applies to the renting of buildings and not to the renting of land. If a building and the "accompanying land" are rented out simultaneously, the renting of the accompanying land is subject to VAT alongside the building.
Additionally, the renting must relate to "buildings" or "parts of buildings". The optional submission to the VAT regime applies to parts of buildings provided that they can be operated independently from an economic perspective.
Under the optional scheme, one can only opt to make the rent subject to VAT if the tenant is a taxpayer that uses the building exclusively within the framework of its economic activity. This does not necessitate the tenant being able to deduct the VAT. Mixed taxpayers (e.g. banks) or exempt taxpayers (e.g. hospitals) are also eligible for the optional VAT regime.
Conversely, one cannot exercise the option if the tenant is not a taxpayer (e.g. a public institution that does not charge VAT or a passive holding company). Along the same lines, the optional scheme does not apply if the building is not exclusively used for the purposes of an economic activity (e.g. a private dwelling). When the building can be divided into several parts that can be operated independently from an economic perspective, the optional scheme applies to the part that will be used exclusively for the purposes of an economic activity.
This condition, however, does not mean that residential property is always excluded from the optional scheme. For instance, when retirement homes or student houses are rented out to an operator, the VAT regime can still be applied.
Option jointly exercised by tenant and landlord
The optional submission to the VAT regime must be exercised jointly by the tenant and the landlord. The details for the application have yet to be determined. However, it is accepted that a pro fisco declaration in the rental agreement will be sufficient to demonstrate vis-à-vis the tax authorities that the option has been jointly exercised.
The option will cover the entire term of the rent. If the parties conclude a new rental agreement, they have the right to exercise the option again. The same applies to a renewal of the rental agreement.
Minimum tax base
If the parties opt to make the rent subject to VAT, the landlord will charge VAT on the rent and deduct VAT on the construction works for the rented building.
This situation is neutral for the tenant if the tenant can fully deduct the VAT on the rent. However, if the tenant does not have a full right to deduct input VAT, the VAT on the rent constitutes a cost for the tenant. To avoid manipulation, a minimum taxable base will apply if the tenant does not have a full right to deduct input VAT and is linked to the landlord on the basis of personal, financial or organisational ties. This minimum taxable base is equal to the normal value, which is the open market value for a rent in similar conditions.
The standard VAT rate of 21% generally applies to real estate renting.
As is the case today for the so-called "VAT financial lease", the renting of buildings which are used for a number of specific purposes can benefit from a reduced VAT rate (6% or 12%). This applies in particular to the renting of private housing for disabled people, buildings used for educational purposes, and social housing (e.g. retirement homes).
Adjustment of initially deducted VAT
If the conditions for taxation are no longer complied with, the option will automatically cease to have effect. This will be the case, for instance, if, during the term of the rent, the tenant uses the building wholly or partly for private purposes (e.g. as a private dwelling).
In that event, and provided that the adjustment period has not yet expired, the landlord must adjust the VAT initially deducted on the construction works or the purchase price of the building.
The draft act prescribes a special adjustment period to prevent abuses and optimisation techniques. As regards buildings for which the option to apply VAT has been exercised, a special adjustment period of 25 years applies. As regards VAT deducted on mere renovation costs, the adjustment period of 5 years remains applicable.
Further measures are to be announced regarding adjustments to be made in specific situations (e.g. in the case of transfer of the rented building by the landlord).
Applicable as from 1 January 2019
The optional VAT regime will apply as from 1 January 2019. The fact that the rental agreement has already been concluded prior to that date does not prevent the parties from exercising the option, provided that the other conditions of the optional scheme are met (including the condition that the buildings must be constructed as from 1 October 2018).
As regards the application of VAT, one could argue that the draft act introduces a certain hierarchy between different types of rental. The existing exceptions to the general VAT exemption for real estate renting and the new exception regarding short-term rental have priority over the optional VAT scheme. If, for instance, an agreement meets the conditions of a "VAT financial lease", it will automatically be subject to VAT as a "VAT financial lease" without the parties having to exercise an option in this respect.
The opposite is true when it comes to the renting of warehouse space (see below). In a B2B context, the optional VAT system prevails. As a result, such agreements will only be subject to VAT if the parties explicitly opt for this.
Renting of warehouse space
To promote logistics business (e-commerce), the draft act substantially amends the existing exception to the general VAT exemption for real estate renting with respect to the renting of warehouse space.
Under the current regime, rent for warehouse space is only subject to VAT if (i) it relates to a building that is specifically designed for storage purposes, and (ii) the surface area of the offices used by the personnel charged with the storage of goods does not exceed 10% of the warehouse's total surface area.
Following the proposed amendment, only the actual use of a building, rather than its design, will be taken into account. Hence, "warehouse space" is deemed to exist if more than 50% of the building (by surface area or by volume) is used for storage purposes, while no more than 10% of the entire premises is used for retail purposes.
One can determine a clear distinction between B2B and B2C renting. A B2C rental that constitutes rental of warehouse space is automatically subject to VAT. In a B2B context, such a rent falls within the scope of the optional VAT regime. Unless the parties opt to make the rent subject to VAT, no VAT will be due. It is important to note that, for the renting of warehouse space, there is no condition relating to the "age" of the building. As regards buildings constructed prior to 1 October 2018, VAT will apply to B2B relationships if the option has been exercised.
Existing agreements which are currently subject to VAT remain subject to VAT until their expiration date. For B2B rental agreements that were not subject to VAT before 1 January 2019, but which qualify as rental of warehouse space under the new definition, the parties have the option to make the existing rent subject to VAT as from 1 January 2019.
Mandatory VAT regime for short-term renting
In addition to an optional VAT regime for immovable renting, the draft act also introduces a mandatory VAT regime for short-term renting.
"Short-term" means a period not exceeding 6 months. Whether a rental agreement qualifies as a short-term rental must be determined taking into account the agreed term of the agreement. However, if successive agreements are concluded between the same parties concerning the same building, the total duration of all successive agreements will be considered.
Like rentals of warehouse spaces, short-term rentals will be taxed differently depending on the capacity of the tenant. Indeed, the mandatory VAT regime generally only applies to B2B relationships. Hence, the following short-term rentals remain exempt from VAT:
- rental of immovable property for housing purposes;
- rental to physical persons who use the premises for private purposes or for purposes falling outside the scope of their economic activity;
- rental to non-profit organisations;
- rental to entities using the rented building for operations benefiting from a socio-cultural VAT exemption (article 44, §2 of the VAT Code).
The mandatory VAT regime for short-term renting is also intended to enter into force on 1 January 2019. Existing agreements that are not subject to VAT will continue to benefit from the VAT exemption for real estate renting until their expiration date.
Transfer of the rental agreement
The existing VAT exemption for the renting of immovable property also applies to the transfer of the rental agreement. Under the new regime, the transfer of the rental agreement will be excluded from the scope of application of the VAT exemption. The Explanatory Memorandum indicates that the transfer of the rental agreement by a taxpayer acting as such will always be subject to VAT, whether or not the underlying rent is subject to VAT.
The introduction of an optional VAT regime for immovable renting is a welcome simplification for the Belgian real estate sector. Whereas today real estate developers have to opt for other legal techniques (e.g. the granting of rights in rem) in order to be entitled to deduct input VAT on the construction cost of a building, the reform will offer them greater legal flexibility.
It is however remarkable that, with this reform, the legislator continues to make a distinction between B2B and B2C relationships. This should be taken into account when drafting rental agreements. In order to comply with their VAT obligations, it is recommended that the parties clearly stipulate in their rental agreement the purposes for which the rented building should be used and which party will bear the financial risk of possible VAT adjustments to be made. Furthermore, since the scope of the optional VAT regime is limited to buildings constructed as from 1 October 2018, one must accurately document the "age" of the rented buildings (e.g. in the context of due diligence). Considering that there is a clear trend towards renovation of existing buildings, the question whether thoroughly renovated buildings qualify as a "new building" for VAT purposes (and are thus eligible for optional VAT regime) is likely to become increasingly important.