We reported before [1] on the consensus of the Belgian Federal Government to introduce an option to make the leasing of immovable property between professionals subject to VAT. This initiative was aborted due to budgetary constraints, but the Government has now agreed to reactivate it: this option to tax will be introduced as of 1 October 2018.
Traditionally, leasing immovable property is exempt from VAT in Belgium. However, there are exceptions to this rule, which are all subject to specific conditions. These exceptions include letting parking spaces, letting warehouses, and financial leasing agreements, among others.
The current Government initiative entails the introduction of another exception: in a B2B context (i.e.: if the landlord and tenant are professionals who are subject to VAT) parties can opt to charge VAT on the leasing of the immovable property in question. The application of VAT will be advantageous to the landlord because it will be allowed to recover the VAT charged on the construction costs or on the acquisition price of a new building, whereas in most scenarios, the VAT payable on the rent will not lead to an increased cost for the tenant, who will be able to deduct the VAT on the rent. For those professional tenants who are not entitled to deduct VAT or could only deduct part of it, the rent increase can be avoided if parties do not opt for VAT. This is not without consequence for the landlord, however, who will then lose the right to deduct the VAT on the cost of construction or on the acquisition price of the property. Parties will then need to agree on a rent that would compensate the non-deductible VAT.
Since the VAT recovery by landlords is expected to have a serious impact on the Government’s budget, certain mitigating measures will be implemented:
- In principle, the option to tax will only be available for new buildings (including substantially renovated buildings) for which no construction or design costs were made before 1 October 2018. This allows the new measure to be implemented gradually.
- Leases that are subject to VAT under this new option scheme will also be able to benefit from reduced VAT rates if applicable (e.g.: the 6% VAT rate for school buildings), but this is somewhat compensated by an extension of the ordinary adjustment period. The current VAT deduction adjustment period of 15 years for buildings would indeed be extended to 25 years for buildings that are let under this new option scheme. This reduces the risk that the amount of VAT deducted by the landlord would not be fully recovered by the Treasury via the VAT on the rent received during the adjustment period.
Along with the introduction of the option to tax, short-term leasing would also become subject to VAT in any event, except for leasing of residential property or immovable property whose use is destined for socio-cultural activities.
At this time, no further information is available on the conditions and formalities of this reactivated tax option, but our tax team is monitoring the developments closely on this matter and is available to discuss any further questions you may have.
Footnotes:
1 Please consult the newsletter of the 4 August 2017 for more information
