Optional VAT regime immovable rent: new VAT adjustment rules

On the 27th of May, a Royal Decree amending the provisions of Royal Decrees n° 3 and 14 has been published. Royal Decree n° 3 includes provisions regarding the VAT deduction and VAT adjustment rules. These provisions are now fundamentally changed following the introduction of the new optional VAT regime for the rent of immovable property.

It was already included in the VAT law that the application of the new optional VAT regime results in an extension of the VAT adjustment period from 15 to 25 years. This implies that the initial VAT deduction on the construction of buildings (or parts thereof) that are rented out with VAT under the optional regime, is subject to a possible adjustment during a period of 25 years. In case of changes in the use of the building during this 25-years period, the landlord may be obliged to reimburse part of the initial VAT amount deducted (negative VAT adjustment) or may be entitled to claim back part of said non-deducted VAT amount (positive VAT adjustment).

It is now stated explicitly that the adjustment period starts on the 1st of January of the year during which the building is for the first time taken into use. This avoids practical issues where the construction of the building is spread over more than one year, and is in line with the existing rules on the starting point of the VAT adjustment period of 15 years for immovable business assets.

However as from 1 January 2019, this starting point will also apply for the adjustment period (of 5 years) for movable business assets. Under the old rules, the starting point of the VAT adjustment period was in principle the 1st of January of the year during which the VAT became due, with the option to nevertheless have the adjustment period started on the 1st of January of the year during which the asset was taken into use.

For movable business assets, purchased or constructed as of 1 January 2019 onwards, the starting point of the VAT adjustment period will thus always be the 1st of January of the year of first taken into use. It is thus no longer required to distinguish multiple starting points of the adjustment period for movable business assets which are constructed over a period of more than one year.

The situation might occur that a taxable person decides to change the destination of its building; e.g. from using it for his own VAT taxable activity to renting it out with VAT under the optional regime. In such a case the initial VAT adjustment period of 15 years will be extended to 25 years. The new provisions of the Royal Decree determine the rules how the two different adjustment periods should be combined and how the VAT adjustments must be calculated.

If the initial adjustment period of 15 years has completely passed at the moment the building is started to be rented out with VAT, the 25-years period will not be applicable at all. The change in the use of the building should therefore occur during the initial VAT adjustment period of 15 years in order for the 25 years-period coming into play. Please note is that it is only possible to shift from the 15-years period to the 25-years period but not in the opposite direction. Once the 25-years period is opened, it will remain 25 years.

The new regulations result in situations where within one building, different VAT adjustment periods (15 year or 25 years) can be applicable and with different starting points. Think about the case of a building with several independently exploitable parts rented out to different tenants. Some of these rents can be VAT taxable under the optional regime (VAT adjustment period of 25 years) or can be VAT exempt (VAT adjustment period of 15 years). The applicable VAT adjustment period as well as the starting point needs to be assessed per individual part of the building. In practice, this may result in difficult VAT adjustment exercises.

As previously already communicated by the authorities, landlords may be eligible to reclaim so-called non-deducted ‘historical VAT’ incurred on costs. Indeed, although the optional regime only applies as from 1 January 2019 onwards, landlords are entitled to a deduction of VAT on costs incurred already before 1 January 2019. Obviously it should concern costs related to buildings that are or will be rented out with VAT under the new optional VAT regime. In respect of physical construction works, only the VAT that became due as from 1 October 2018 is eligible for reclaim (except for the VAT on costs related to warehouses that can be rented as from 1 January 2019 onwards with VAT due to the implementation of the broader definition of a warehouse).

In order to limit the budgetary effect for the Belgian Treasury, the new article 21ter of Royal Decree n° 3 however foresees in a postponed refund mechanism. This mechanism implies in essence that during 2019, the historical VAT can only be deducted in the periodical return to the extent there is VAT payable. The excess should be transferred to the next VAT return. If there is still an outstanding VAT credit after the November or third quarter 2019 return, the remaining VAT credit can be entirely deducted in the December or fourth quarter 2019 VAT return.

The new adjustment rules also introduce a kind of “transfer of going concern (TOGC)”-principle for situations where an old building, rented out with VAT under the optional regime, is transferred (under an exemption of VAT) during the 25-year revision period. The transfer of a building under VAT exemption results in principle in a (negative) VAT adjustment in the hands of the seller. The new provisions of the Royal Decree now provides that no VAT adjustment is required where the acquirer of the building continues to rent out the building with VAT. In case of later changes in the use of the building, the VAT adjustment obligation lies in the hands of the new landlord.

This “transfer of going concern”-principle not only applies to the VAT exempt sale of a building but also to the (VAT exempt) granting and transfer of rights in rem concerning (old) buildings. Important to note is that this transfer of going concern principle only applies on the transfer of buildings that are rented out under the optional VAT regime and not for example for buildings that are mandatory rented out with VAT (e.g. buildings located on port/airport territory or subject of an immovable lease agreement conform Royal Decree n° 30).