Pending the publication of a comprehensive circular, this regulation is explained in an FAQ issued by the tax authorities, which already provides some initial clarification of the new rules. Below is a summary of the main points. The main conditions are:
- The builder who carries out or commissions the demolition and reconstruction must be the same person.
- The new building must be located on the same plot as the old building.
- The new dwelling must not exceed 200 m² and must be intended for use as the only and main residence of the client/buyer for a period of at least 5 years.
- The required declaration must be submitted to the administration in good time.
The 6% rate also applies to the demolition and reconstruction of dwellings intended for rental to or through a social housing agency, but no further details are provided on this in this publication.
1. Property developers
The 6% rate not only applies to those who arrange to have an existing building demolished and commission a contractor to erect a new building, which they intend to occupy themselves. The 6% VAT rate also applies to the sale of premises reconstructed by property developers to individuals who intend to occupy the new premises themselves. In such cases, the following applies:
- A property developer has been granted right of superficies by the landowner on a built-up site. They demolish the existing building and arrange for a new building to be constructed on the same plot. In such cases, they shall be entitled to sell the new building at 6%. The land is sold by the landowner under the registration duty system. However, if the landowner has made a reservation of title with regard to the existing construction, then the client is the landowner before the demolition and the developer can no longer be regarded as the client who carried out the demolition and reconstruction, or who arranged to have it carried out, and the property must be sold subject to a VAT rate of 21%.
- If a company bought a built-up plot of land before or in the course of 2020 and demolished the existing buildings in order to subsequently grant right of superficies to a sister company for the construction of the new dwelling(s), the administration has provided a temporary tolerance measure for projects that were started before 2021. In such cases, it is assumed that the condition that the demolition and reconstruction are executed by the same entity has been complied with, provided that the following conditions are met:
o It is an integral project: it must be possible to demonstrate that the demolition and reconstruction are part of an overall project (this is usually apparent from the planning permit).
o The landowner and property developer are affiliated companies.
Please note: if no cause for payment of the VAT in respect of the demolition has arisen by 31 December 2020, this tolerance measure shall not apply!
2. Sole and main residence
The condition that the dwelling must be the sole residence of the client/buyer individual must be complied with for a period of 5 years from the date of first occupation. If this condition is no longer met in the course of this 5-year period, the purchaser/client must voluntarily notify the tax authorities and repay the tax benefit (15% VAT) to the State for the year in which the change occurs and for subsequent years, to an amount of one fifth per annum. The tax authorities have consequently included additional clarification concerning the concept of sole and main residence in their FAQ.
Concept of ‘sole residence’
If you already owned another dwelling that you occupy as your main residence, where you are domiciled but this property is sold by 31 December of the year following the initial commissioning of the new dwelling, this shall not prevent the application of the 6% VAT rate.
A property acquired as part of an inheritance, which made you a joint owner, bare owner or usufructuary, shall not be taken into account either.
If, as a married or legally cohabiting couple, you intend to demolish and rebuild a dwelling, you shall be considered as one unit for the assessment as to whether you meet the conditions for the 6% rate. In practical terms, this means that the newly constructed dwelling must be the sole residence for both of you.
In the event of two brothers or two de facto cohabiting partners who each own 50% of the dwelling to be demolished and rebuilt, the sole residence condition associated with the lower rate shall be assessed for each individual party, with potentially a different VAT rate for each brother/ de facto cohabiting partner. Please note that, if a single building contract is concluded with both parties, the sole residence condition shall be deemed not to have been complied with.
Concept of ‘main residence’
The newly constructed dwelling must be used primarily as "a main residence", i.e. if it is also used for professional activities, at least 50% of the dwelling must be used as a main residence.
The client must move their domicile to the newly constructed dwelling without delay following its construction, i.e. as soon as the property is ready for occupation.
3. Regarding the dwelling to be demolished
If the demolition and reconstruction project involves a combination of several cadastral plots, with some being built on and others undeveloped, the newly built dwelling can benefit from the 6% rate, following the demolition of the old dwellings, provided that at least 50% of the new dwelling is located on the previously built-up cadastral plots. The new dwelling does not have to be positioned in the same physical location on the plot.
If this is not the case, if a plot of land with a dwelling to be demolished is divided into two and a new dwelling is constructed on each plot when the original dwelling has been demolished, both dwellings shall be eligible for the reduced rate, even if one plot was previously undeveloped, provided that all other conditions have been complied with.
4. Ongoing projects
Demolition and reconstruction projects that had already started before 1 January 2021 and that comply with all the relevant conditions, shall qualify for the reduced VAT rate that became due on 1 January 2021, provided that the declaration is submitted at the latest by 31 March 2021.
If the declaration is submitted too late, the reduced rate shall no longer apply! The date of 31 March 2021 is, therefore, a cut-off date for projects already underway that may qualify for the reduced rate associated with demolition and reconstruction.
If a dwelling is supplied by a developer, the declaration must be submitted no later than the date of delivery by the supplier (property developer). With a sale off-plan, this is usually the time of provisional completion/delivery. In the event of a sale off-plan with invoicing in instalments, the VAT becomes due with the instalments and the 6% rate can only be applied to instalments that are invoiced after submission of the declaration.
If you have any further questions concerning the new regulations or require assistance in this respect, please do not hesitate to contact us.