New developments regarding optional VAT on the lease of buildings for professional use

In an earlier article we announced that the current government, in the summer agreement of 26 July 2017, had decided to introduce an optional system for VAT on professional lease.

A few months later, in November 2017, we wrote that the optional VAT-system would not be introduced because the impact on the state’s budget would be too important.

During the budget control of 24-25 March 2018, the government came back on its decision and decided to introduce the VAT-system after all, and adopted a preliminary draft of law amending the VAT code, which still needs to be approved by the parliament. Once approved the new regulation should enter into force on 1 October 2018.

1. When can we opt to apply VAT?

Under the new rules one will be able to opt to subject the rent on buildings to VAT. This option is subject to two basic conditions:

• it concerns the lease of buildings or parts of buildings, if applicable including the lease of the land;
• the buildings are leased to a (taxable) lessee who uses the building for an economic activity giving it the quality of taxable person.

The option can therefore not be taken in case of lease to private individuals or other non-taxable persons, or in case of a lease to a taxable person leasing the building for private purpose. The option is available for the lease of residential real estate, such as nursing homes for the elderly or student homes, by the owner to the operator of the institution.

The VAT option regarding parts of buildings can only be taken if such parts can be operated independently, i.e. with a separate entrance.  A building with mixed activities can be separated in two parts, one of which is used exclusively for economic activities.

2. How can we use this optional system?

The taxation is only possible if the option thereof is explicitly taken. This option must be exercised by the lessor and lessee collectively.  The specific conditions to exercise this option will be determined by Royal Decree.

The option remains in place for the entire duration of the leases. Should the parties enter into a new lease agreement, they have once again the possibility to opt or not for VAT. The same applies when the lease is renewed.

3. VAT on the lease of warehouses

An existing exception of VAT exemption on the lease of warehouses, under certain conditions, will be replaced by this new optional regulation.  

For the contracts still in force the current rules on lease of warehouses remain in place. The existing rules regarding immoveable leasing remains in place and the conditions of the Royal Decree n° 30 of 29 December 1992 must be complied with.

4. The conditions no longer apply during the term of the lease. Revision?

It is possible that during the term of the lease agreement the conditions for submitting the rent to VAT no longer apply. In such case, the option shall automatically be suspended for as long as the conditions do not apply. This will then lead to a revision of the initially deducted VAT for the construction cost or purchase price, when the conditions no longer apply during the revision period, and this for the rest of the duration of the lease.  The lease agreement can of course provide that in such case the lessee must indemnify the lessor for the financial consequences of the changed use of the building by the lessee.

The initial lease agreement may also terminate (by resignation, dissolution, or end of term) during the revision period. This may lead to a revision of VAT, except if the lessor can demonstrate that it took all necessary steps to lease the building with VAT, or if the building remains empty due to circumstances that makes it impossible to carry out an economic activity, e.g. after a fire. Rent-free periods provided for in the lease agreement do not lead to a VAT revision. In regard of the optional VAT regime the revision period has been brought to 25 years starting on the date the building is being used.

5. Conclusion

The purpose of this reform is to promote the logistic sector. Due to the exemption of VAT this sector suffered a competitive disadvantage compared to the neighbouring countries. In addition, this reform wishes to promote the construction of new buildings, including fundamental renovation, in other sectors.

The new optional VAT regime will only apply to the lease of new buildings, i.e. only for buildings erected as from 1 October 2018, and for which no VAT was payable prior to this date that can be attributed to that building project. This includes preparatory works invoiced before 1 October 2018 (e.g. architects fees).

The above-described VAT rules are still in draft from. We shall of course keep you informed of further developments.