Optional VAT regime: no VAT adjustment when rented real estate is sold

14 June 2019

The optional VAT regime for real estate rental entered into force on 1 January 2019 (see Eubelius Spotlights September 2018). This means that, in a B2B situation, it is possible – under certain conditions – to make the renting out of buildings subject to the VAT regime, which then allows the landlord to deduct the input VAT paid on the construction costs. The introduction of the optional VAT regime comes together with a special regime for the adjustment of deducted input VAT. A royal decree dated 12 May 2019 now provides more details about these adjustment rules.

General background

The right to deduct input VAT is exercised immediately, taking into account the envisaged use of the acquired goods and services.

For "capital goods" which are used durably for the purposes of the economic activity, input VAT deducted in relation to the acquisition of the capital goods is subject to adjustment during a determined adjustment period. This means that part of the initially deducted input VAT must be adjusted if a change occurs in the factors used to determine the deductible portion of the input VAT paid. The same applies when a capital good for which the taxpayer has deducted input VAT paid is transferred in  a VAT exempted transaction during the VAT adjustment period (see also Eubelius Spotlights June 2019). In that event, initially deducted input VAT must be repaid in proportion to the remaining part of the applicable adjustment period.

With regard to input VAT paid in relation to "movable capital goods", the adjustment period is five years. However, the adjustment period is 15 years for input VAT paid on the construction or acquisition of a new building or on the acquisition of rights in rem relating to such buildings ("immovable capital goods").

Adjustment period of 25 years

In order to prevent abuse and specific optimisation techniques, an extended adjustment period of 25 years applies under the optional VAT regime. As a result, there are now two adjustment periods (15 years and 25 years) which may apply to "immovable capital goods".

The Royal Decree of 12 May 2019 regulates the interaction between the two adjustment periods.

In essence, the adjustment period of 25 years applies from the moment a building is rented out with VAT under the optional VAT regime, either as from the first time it is occupied or subsequently but during the "normal" adjustment period of 15 years.

Consequently, it is possible that a building is initially subject to the normal adjustment period of 15 years, but, following the conclusion of a rental agreement which the parties opt to make subject to VAT, it shifts to the adjustment period of 25 years. In such a case, the input VAT that has already been subject to adjustment under the 15-year period can no longer be adjusted under the 25-year period.

This is not possible the other way round.  As from the moment that the adjustment period of 25 years applies, this adjustment period remains applicable. The fact that, after being rented out with VAT, a building is later used for other taxable purposes (e.g. for use as a business centre) does not prevent the 25-year period from remaining applicable.

Sale of a building that is rented out with VAT

Buildings may only be transferred with VAT as long as they qualify as "new buildings" for VAT purposes, i.e. until 31 December of the second year following the year they are first occupied. If a building is transferred after that date, the transfer is not subject to VAT, but it is then subject to registration duties. As already mentioned, if the seller initially deducted input VAT in relation to the construction or acquisition of the building, he will be obliged to adjust the initially deducted input VAT.

In a situation where a building which is being rented out with VAT is sold subject to registration duties while a rental agreement which is subject to VAT continues to apply, such an adjustment would be regarded as an unfair measure.

With this in mind, the Royal Decree of 12 May 2019 now stipulates – importantly – that, in such a situation, the seller should not make any adjustment in respect of initially deducted VAT.

It should be noted that this regime, which is based on the regime applicable to the transfer of a going concern (article 11 Belgian VAT Code), means that, from now on, possible adjustments of the input VAT deducted by the seller are the responsibility of the buyer. In other words, if, after the acquisition of the real estate and during the 25-year adjustment period, the buyer decides to use the building for VAT exempted purposes, he will be obliged to repay part of the input VAT initially deducted by the seller.