11/2018: VAT ON PROFESSIONAL PROPERTY LEASES AN OPTION AS OF 2019

As announced in our April 2018 newsletter (04/2018: VAT taxable real estate finally in sight!), the decision was taken earlier this year to bring in an optional VAT regime for real estate leases, whereby lessors can recuperate the VAT paid on building or renovation work.

Now the text has finally been approved and published in the Belgian Official Gazette of 25 October, it is time for a summary of the definitive provisions of the law:

1. Optional regime for immovable property leases as of 1 January 2019 – subject to the following conditions:

  • Only buildings constructed as of 1 October 2018, or those which have been so thoroughly renovated since that date that they are regarded as “renovations”, will be eligible. Buildings considered to be renovations are those that have undergone radical and substantial alterations – e.g. in their nature, structure or purpose – or those where the cost of the work (excl. VAT) comes to more than 60% of the value of the building after completion of the work.
  • It is also important to mention here that such buildings may have become VAT taxable before 1 October 2018 with regard to intellectual activities (e.g. for the services of study bureaus, architects and surveyors), as well as for demolition work and work related to the ground.
  • The lessee must use the (part of the) building exclusively for an activity that is VAT-registered and is thereby either subject to VAT or VAT exempt, e.g. a member of the liberal professions, an entrepreneur, school, etc.
  • VAT is thereby charged not only on the (part of the) building that is let, but also on the accompanying land that is leased with it. If a part of a building is leased and one wants to apply the new VAT regime to it, this part of the building must be able to be leased and used independently and must therefore have a separate entrance.
  • The lessor and the lessee must both agree to opt for payment of VAT on the rent.
  • Once the parties have concluded a lease agreement that includes the payment of VAT, VAT will continue to be payable on the rent for the duration of the lease agreement.
  • If the lessee is not entitled to deduct the full VAT amount and, furthermore, the lessee is “bound” to the lessor, the rent charged must be market conform.

Another important point regarding this new regime:

Instead of the usual term of 15 years for immovable business assets, a review period of 25 years will be applied, during which the purpose of the business asset may not be changed. Therefore, under this VAT regime, to fully recuperate the VAT paid when the building was constructed or substantially renovated, the building must be leased for a period of 25 years.


2. Easing of the rules on leasing storage space

As of 1 January 2019, there will also be an optional regime for the lease of storage space, whereby the lessee – who must thereafter use the storage space for an economic activity – and the lessor may make an agreement on whether they wish to make VAT payable on the rent in question. Whether or not the building involved is old or new is of no consequence.

As a transitional arrangement for ongoing agreements that are not currently subject to VAT there will be an option to apply VAT as of 1 January 2019. If a storage space lease is already subject to VAT, it will continue to be subject to VAT after 1 January 2019 and it will not be necessary to make a specific choice.

In addition, an easing of the current regime is also foreseen. Where, until now, a maximum of 10% of the surface area of the building in question could be used as related office space, it will suffice in future for the building to be used mainly for the storage of goods. If, therefore, at least 50% of the building is used for this type of storage, it will be legitimate to apply the VAT regime. One condition here is also that no more than 10% of the part which is not used as storage space may be used for sales.

Consequently, in so far as the option to apply VAT to an existing lease agreement has been chosen, and the original review period on the construction costs or other work on the building is ongoing, it should be possible to recuperate part of the VAT that was originally paid. Noteworthy here is that the initial review period of 15 years on the construction costs will in that case be extended to 25 years.


3. Compulsory application of VAT to short-term lets

Leases of immovable property for a period of less than 6 months will, under certain conditions, be compulsorily subject to VAT as of 1 January 2019. Whether or not the lessee rents the property for professional or private purposes is of no consequence.

This new regime will not be applicable in the following cases:

  • The lease of immovable property as residential accommodation;
  • The lease of property to natural persons for their private use or for purposes other than their economic activity;
  • The lease of property to a non-profit organisation;
  • The lease of immovable property for activities exempted in art. 44, §2.

Given the new regime it is advisable to look at the impact this option could have on your company’s fiscal position, either in your capacity as a lessee or as a lessor.

Please do not hesitate to contact your dossier manager for help in analysing future building projects and/or current or future lease agreements.

 

Thomas Follens

About Thomas Follens

Thomas is an accountant & tax expert certified by the Institute of Accounting professionals and Tax Experts. He is your point of contact at BOFIDI for all matters relating to VAT. Thomas is also specialised in the cross-border provision of services to Germany and the Netherlands. Do you have questions? Contact Thomas by email: thomas.follens@bofidi.com