Until recently, immovable property leases have – in principle – been exempt from VAT (section 44, paragraph 3(2) of the Belgian Value Added Tax Act). There are but a few specifically outlined exceptions to this VAT exemption rule. The flip side of the VAT exemption is the absence of the right to deduct VAT upon acquisition, establishment or renovation of the related immovable property.
In practice this often resulted in creative solutions such as the establishment of VAT units, service centres, so-called active provision, and immovable leasing structures so as to have a right to deduct VAT with respect to the costs pertaining to the acquisition, establishment or renovation of the building involved.
The Summer Agreement of the Belgian Federal Government already mentioned the introduction of the option of leasing including VAT, but this was subsequently cancelled on 22 October 2017 for budgetary reasons.
On 30 March 2018 the Council of Ministers adopted a preliminary draft bill which contained the option of leasing including VAT. This preliminary draft bill is now before the Council of State. The bill should come into effect on 1 October 2018. We will discuss below what is currently included in the draft bill. Please note that it is subject to change depending on any comments from the Council of State.
Option of leasing including VAT
To be able to exercise the option of leasing a building including VAT, the property must consist of (part of) a building and the accompanying grounds, if any, and the lessee must be subject to VAT and use the property solely for the purpose of their economic activity. The lessee may also be VAT exempt (a doctor, for instance).
For the purpose of this new legislation, part of a building is understood to be a part that can be operated (leased and used) independently. The leased areas must have separate entrances from the outside, so that they can be accessed without having to pass through areas used for non-professional purposes. Accompanying grounds means the cadastral parcel on which the building is erected and which is leased together with the building. The option of subjecting the lease to VAT must be implemented as a joint agreement between the lessor and the lessee.
The option of leasing including VAT applies only to new buildings or thoroughly renovated buildings that after renovation, again qualify as new buildings for VAT purposes (in Dutch ‘vernieuwbouw’) and for which VAT becomes due and payable after 1 October 2018. According to the Explanatory Memorandum to the draft bill, VAT may not have become due and payable on the material construction costs or on the preparatory activities (such as architect fees) prior to 1 October 2018. In other words: prior to that date no invoices may have been issued and no advance payments may have been received in relation to the new building. In case of the contrary, the option of leasing including VAT does not apply.
(Parts of) buildings designated for storage of goods constitute the only exception to this rule. In that case the requirement that they involve new buildings for which the works start after 1 October 2018 does not apply. In other words: the option of leasing including VAT may also be used for 'existing’ buildings. After the new rules enter into force, the current exception as regards exempt immovable property lease for storage areas will apply only if it is impossible to exercise the option of leasing including VAT (e.g. in case of leases to private persons). Hence, if exercising the option is possible in theory, for renewal of existing lease contracts and newly agreed lease contracts involving storage areas the option that will always have to be chosen after 1 October 2018 is to subject them to VAT. Another new provision is that the previous 10% rule (according to which no more than 10% of the building may be used as an office for management of the goods) which had to be satisfied for the building qualify as an area for goods storage, will be abandoned under the new Act. From now on the requirement is that the building has to be used ‘mainly’ for storage.
When opting for subjecting the lease to VAT, the option will apply to the entire term of the lease agreement. For each new lease agreement or renewal of an existing agreement parties will have to specifically opt for subjecting them to VAT. Further to the option of subjecting property leases to VAT a ‘normal value’ will be introduced for lease fees, i.e. a minimum lease fee (as a taxable basis for calculating VAT) which should help avoid that a ridiculously low lease sum is charged just to have the right to deduct VAT when establishing or thoroughly renovating (‘vernieuwbouw’) a building. Normal value means the market price for leasing under similar circumstances. This ‘normal value’ will only apply if the following conditions are met:
- The lessee’s valuable consideration is less than the normal value;
- The lessee does not have a full right to deduct VAT; and
- The lessee and the lessor have personal, financial or organisational relations.
Another new aspect is the specific adjustment term of 25 years for buildings leased with the option of subjecting the lease to VAT. This is an additional adjustment term; current legislation provides a 5-year adjustment term for movable operating assets and renovation works and a 15-year term for the construction of new buildings. If the initially applied VAT deduction currently must be adjusted annually, this will also apply to the 25-year adjustment term, but it will be assessed on a monthly basis. Further provisions are yet to be detailed in a Royal Decree (e.g. exceptions for buildings that are vacant between two lease periods; cases of force majeure, etc.).
Obligation to subject short-term leases to VAT
A short-term lease is a lease for a period under 6 months. The term of use as provided in the lease agreement is taken in consideration in this respect. If consecutive agreements are made between the same parties and in relation to the same building (or part thereof), the entire term will be considered.
In the case of short-term leases, opting for subjecting the lease to VAT is not a requirement as this will automatically be the case. The lessee’s capacity does not matter either (ergo it also applies to leases to private persons, public agencies, etc.).
There are two exceptions to subjecting short-term property leases to VAT:
- when the (parts of the) buildings are used as residence
- when the (parts of the) buildings are used for activities that are exempt by virtue of section 44 paragraphs 1-2 of the Belgian VAT Act, i.e. the VAT exemptions that apply to activities of a medical, social and cultural nature.
A few examples of the new requirement that subjects short-term property leases to VAT include the lease of rooms for seminars, events, fairs etc., but also the lease of storage space for a term under 6 months. The mandatory requirement of subjecting short-term leases to VAT overrides the option of subjecting a lease to VAT, in other words: in the case of short-term leases VAT will always be applicable.
The new option of subjecting immovable property leasing to VAT constitutes one of the most significant VAT revolutions in recent years. Even though the opinion of the Council of State is still pending, one may already start thinking about planning new construction projects.