The key principle in the new rules remains the same: there will be an optional system in which the landlord and the tenant can jointly decide to submit the rental of a building to VAT.
The basic conditions for applying the optional system have not been restated and so remain that:
• The tenant uses the building exclusively for an activity within the scope of VAT (this can be either a VAT taxable or a VAT exempt activity).
• The option extends to the accompanying land if the building and the land are rented jointly.
• Parts of buildings can be rented out separately with VAT if there is a possibility to rent and use these parts independently (separate entrance).
• The option must be exercised jointly by the landlord and tenant. The specific modalities will have to be determined by the Belgian Head of State. In the explanatory memorandum, it is already clarified that a pro fisco statement in the rental agreement should in principle be sufficient.
• The option applies for the full duration of the rental agreement.
• If the tenant is not eligible for a full deduction of the input VAT and if he/she is "connected" with the landlord, then the rental price should be in line with the market rental price.
The following existing legal exceptions to the VAT exemption for immovable rental remain: the letting of parking space; the provision of furnished accommodation in hotels, motels and so on; the letting of campsites; the provision for immovable property in the context of the exploitation of ports, airports or navigable waterways; the provision of permanently-installed equipment and machinery; the leasing of immovable property in accordance with the terms of Royal Decree No. 30; the rental of safes. For these transactions, VAT must be applied in accordance with the current provisions.
It is also clear that the introduction of the optional system should have no impact on agreements that are currently subject to VAT as active rental agreements (the letting of immovable property combined with a number of services supplied by the landlord). In this respect, we refer to the administrative guidance on the VAT treatment of business and shopping centres. In practice, it remains important to assess, on a case-by-case basis, whether VAT should be applied and, if it is not obligatory, whether the optional system can be applied.
Regarding the letting of storage space, the legal exception to the exemption will be limited to agreements in a B2C context from 1 January 2019. From then on it will be necessary to opt for VAT under the new rules in a B2B situation. Moreover, the VAT authorities will broaden the scope of the concept "storage space” as from 1 January 2019: all buildings that will be mainly used (more than 50%) as storage space with the exception of buildings that are partly used as a shop or commercial space (more than 10%).
The new definition of storage space is especially important in the context of the transitional arrangements. In this respect, the final texts differ significantly from the previous texts. Below, we have summarized the main principles:
• The option to submit immovable rental property to VAT is only open for buildings, or parts of buildings, for which the VAT on the construction works, which specifically contribute to the construction of the building, become chargeable for the first time from 1 October 2018. For these buildings, the option can thus be exercised from 1 January 2019. In other words, if VAT already becomes chargeable on the construction of the building before 1 October 2018, then the building will be excluded from the optional regime. Contrary to previous texts, no account needs to be taken of VAT on intangible services, such as the intellectual services of architects, surveyors, study offices, etc. In addition, demolition works and works that are related to the land will not be taken into account.
• These restrictions in time do not apply to storage space. Existing buildings that are mainly used as storage space can thus be rented with VAT under the new rules from 1 January 2019. In principle, this also counts for current contracts that are not subject to VAT. Existing agreements for the provision of storage space that, under the current rules, are already subject to VAT, will continue to remain subject to VAT after 1 January 2019. For new agreements that are concluded after this date, it will be possible to opt for VAT under the new rules. This certainly offers opportunities. Please note that the Council of State’s opinion has commented on this distinction between storage space and other buildings; the justification is sought, in particular, for attracting logistics business (e-commerce).
In the final texts the new regime for short-term rental (of no more than 6 months) has also been retained. The rental of immovable property for a period of no longer than 6 months will be subject to 21% VAT from 1 January 2019. Contrary to the previous texts, there are more exceptions to this new rule. The new regime for short-term rental will, in particular, not apply in the following cases:
• The rental of immovable property destined for habitation;
• The rental of immovable property to natural persons who use the property for their private purposes or, more generally, for purposes other than those of their economic activity;
• The rental of immovable property to non-profit organizations;
• The rental of immovable property to any person who uses the property for their VAT exempt activities as set out by Article 44, paragraph 2 of the Belgian VAT Code.
An important countervailing measure is maintained, namely the introduction of a special revision period of 25 years for buildings intended for rental under the optional system. On this point, the Council of State’s opinion, which has stated that the European VAT Directive foresees a maximum revision period of 20 years, has not been followed. A comprehensive justification for this measure was included in the explanatory memorandum.
The revision rules will also be adjusted. A revision of the original VAT deduction on an annual basis will be the rule. Specifically, for buildings that are rented with VAT under the optional regime, the revision will be calculated on a monthly basis. These rules will be further elaborated through an adjustment of Royal Decree No. 3.
The remaining doubts regarding the applicable revision period in case of the change of the building’s designated use will also be further clarified by an adjustment of Royal Decree No. 3. The explanatory memorandum has already clarified that the special revision period of 25 years will only apply when the building is destined for a VAT taxable rental upon its first use or during the first 15 years. The explanatory memorandum has also clarified that a solution will be provided for the adverse effects, which may arise from the sale of a building outside the new VAT term (a negative VAT revision) if the VAT taxable rental is continued by the building’s purchaser.
Finally, we draw attention to a number of other changes that will be introduced:
• The transfer of rental rights will become subject to 21% VAT, regardless of whether or not the underlying rental agreement is subject to VAT.
• The application of the reduced VAT rates is extended to the rental of buildings under the option of VAT (6% or 12%, as the case may be). This is particularly the case for: private homes and institutions for disabled persons; housing within the framework of social policy; and buildings intended for education and students.
As stated in previous newsletters, this important tax reform is very much welcomed. The Belgian VAT rules for immovable rent have been modernized and been more aligned with neighbouring countries’ rules. However, the introduction of the extended revision period of 25 years as a compensatory measure constitutes a major obstacle. Various elements will also require further elaboration in Royal Decrees and administrative guidance.
The vote in the Parliament on the draft law is scheduled for September/October 2018, and it is expected that the Parliament will approve this draft law. Now that the final rules have been established, it is appropriate to assess, on a case-by-case basis, what impact this might have on the tax position of your company.
Tiberghien has extensive experience in the real estate sector and is very much aware of the new rules regarding the optional system; contact us if you would like us to assist you in this respect.
Stijn Vastmans - Head of VAT (stijn.vastmans@tiberghien.com)
Stein De Maeijer - Senior Associate (stein.demaeijer@tiberghien.com)
Loulou Geboers - Associate (loulou.geboers@tiberghien.com)
Marouschka Gunzburg - Associate (marouschka.gunzburg@tiberghien.com)
Nils Vanhassel - Associate (nils.vanhassel@tiberghien.com)
Gert Vranckx - Associate (gert.vranckx@tiberghien.com)