Bruno De Duve, who leads our Tax practice group, & Helene Mulier, summer intern, discuss in depth the recent legislative initiative of the Belgian Federal Government to allow the possibility to subject to VAT the mere letting of an immovable property to a business subject to VAT as of 1 January 2018. This draft bill may drastically improve the competitivity of professional tenants towards foreign competitors and may effect the real estate market on various fronts.
Article 137 of the VAT Directive 2006/112/EC provides that Member States may allow taxable persons a right of option for the taxation of the leasing or the letting of immovable properties.
In doing this, Member States are free to set the detailed rules governing the exercise of this option as well as they may restrict the scope of the option.
1. The present situation
As a rule, the current Belgian VAT Code exempts the leasing of immovable properties.
However, some exceptions exist. On the top of these provided by the VAT Directive itself (the provision of accommodation, the leasing of parking spaces, the letting of permanently installed equipment and machinery and the hire of safes), the Belgian VAT Code provides for the taxation of the letting of storage spaces and of the financial lease of newly constructed and/or acquired real properties between business.
Exemptions need to be interpreted strictly, since they constitute exceptions to the general principle that turnover tax is to be levied on all services supplied for consideration by a taxable person.
As VAT exemptions feature the exclusion to deduct VAT paid on upstream goods and services, the lessor has no right to recover the VAT charged on costs related to the immovable property.
In general, the lessor adapts its cost price to the costs he incurs including the non-deductible VAT. Seeking to compensate the irrecoverable VAT, he creates a VAT remanence.
To eliminate these inconveniences, the Belgian tax practice has developed complex structures to make the VAT-system applicable to a priori exempted transactions.
A first example is the management contract as a vehicle to put premises at the disposal of an operator. For example, instead of putting premises intended for a hotel at the disposal of an independent hotel operator, the owner hires this operator to run the premises as a hotel in its name and for its own account. In this sequence, the owner continues to keep the business as a hotelier. He receives income derived directly from the hotel operation and gives management remunerations to the operator. Both the owner and the manager are subject to VAT.
A second example is the creation of rights in rem when the property has the status of a new property. An immovable property qualifies as a new property until the 31st of December of the second year that follows the one during which the property is first used or occupied. Putting the new property at the temporary disposal of the manager, by creating a usufruct, a long- term lease right or superficies makes the property a capital good for VAT purposes when the following conditions are fulfilled:
The owner gives notice of subjecting the creation of the right in rem to VAT, following the procedure set out in Royal Decree n° 14.
The net present value of the payments under the contract equals minimum 97,50% of the actual value of the property at the time the contract enters into force.
The creation of a right in rem gives rise to deductibility for the VAT which the owner pays on the acquisition price or the construction costs of the property. The right in rem acquired by the tenant is subject to VAT as well. This VAT is adjustable over a period of 15 years.
Many more VAT schemes have been developed, some of them giving rise to VAT circular to fix the limits accepted by the tax administration. This is notably the case of the letting of spaces in business centers and of the letting of retail areas in shopping centers.
2. What is in project?
On 26 July 2017, the Belgian Federal Government announced a draft bill concerning the possibility to subject to VAT the mere letting of an immovable property to business subject to VAT. This would be applicable to contracts entered from 1 January 2018 on.
If this bill is enacted, the lessor of an immovable property will have the option to subject the leasing to VAT without being no longer obliged to use complex structures to achieve the VAT neutrality.
Both the lessor and the tenant will be able to enjoy the benefits offered by the VAT-system.
As any VAT-payer, the lessor will be able to recover any VAT levied on the leased immovable property, i.e., not only on the construction and/or the acquisition costs but also on the maintenance, repair, improvement and rehabilitation costs.
This, in the intention of the Government, would result in a diminution of the lessor’s cost of 21% which, passed on the tenant, would result in a rent decrease to the same extent, improving in turn the competitivity of the tenant towards foreign competitors.
The conditions and formalities of the announced VAT bill are not yet known. However, the minister of finance published a guidance note on 28 October 2016 providing that a system comparable to the Dutch tax system would be applicable in Belgium. This was reconfirmed on 26 July 2017.
In the Netherlands, leasing of immovable properties can be subject to VAT if (i) the tenant is entitled to deduct at least 90% (or 70% for travel agencies, real estate brokers and employers’ organizations) of the upstream VAT per calendar year and (ii) the election for the VAT system is signed by both the tenant and the lessor.
In the beginning of September, our office has drawn the attention of the Minister of Finances on the detrimental effects that limiting the option to tax to Vatable B2B relations and/or to new leases, may have on the real estate market.
We will keep you informed you of any latest information regarding this important tax reform.
Do not hesitate to contact our Tax practice for further clarifications.