New criteria for the VAT adjustment period for immovable business assets

Following a judgment from the European Court of Justice, a draft law has introduced new principles to determine the applicable VAT adjustment period for works related to immovable business assets in Belgium. 

Whenever there is a change in the use of a business asset, a VAT adjustment of the initial VAT deduction may have to be performed insofar as the VAT adjustment period for that asset has not yet elapsed. For example, if a business asset is initially used for activities which grant the taxable person an input VAT deduction right, the taxable person will have to perform a negative VAT adjustment if the use changes to a VAT-exempt activity which does not grant an input VAT deduction right. This also works the other way around: if the asset was initially used for a VAT-exempt activity but is changed within the VAT adjustment period to an activity that does allow an input VAT deduction, the taxable person can perform a positive VAT adjustment.

The general VAT adjustment period for business assets is five years. However, for immovable business assets, this period is extended to fifteen years for:

• activities that lead or contribute to the construction of (parts of) buildings; and
• the acquisition of ownership of/rights in rem to (parts of) buildings.

For (parts of) buildings rented under the optional VAT regime (article 44, §3, 2°, d) of the VAT Code, the VAT adjustment period for these costs is extended to twenty-five years.

According to the current administrative VAT comments, the performance of conversion or improvement works which cause (the part of) the building to become “new” again for VAT purposes are subject to the fifteen-year VAT adjustment period. If (the part of) the building does not qualify as “new” following the performance of the works, those costs fall within the scope of the general five-year period. Works solely related to the repair, maintenance, or cleaning of (a part of) a building are not subject to any VAT adjustment.

The draft law currently before parliament (legislative document no. 56-1205) introduces a noteworthy change with respect to the applicable VAT adjustment periods for immovable business assets. To determine whether immovable property works are subject to the five-year or fifteen-year VAT adjustment period, the abovementioned criterion related to (the part of) the building becoming “new” after completion of the works will no longer be relevant. Instead, the fifteen-year period will be applicable to “services that have characteristics comparable to those typically attributed to immovable business assets”. The same principle will also be applicable for the twenty-five-year period in cases where the building is subject to an optional VAT lease.

This new criterion has been inspired by the Drebers case law of the European Court of Justice (C-243/23 of 12 September 2024). In that judgment, the Court ruled that the distinction made in Belgian administrative practice (i.e. whether or not (the part of) the building qualifies as “new” again after completion of the works) is not relevant. Instead, the applicable VAT adjustment period should be determined taking into account whether or not the effects of those works have an “economic lifespan” of which the duration corresponds to that of a new building.

According to the explanatory memorandum to the draft law, the European Commission had already inquired how this case law would be implemented in Belgian practice. The draft law aims to address this, while also noting that an administrative circular letter will be published with additional clarifications.

The explanatory memorandum refers to the factual circumstances which were deemed relevant in the Drebers judgment, namely that the immovable works:

• took several years to complete;
• had led, taken as a whole, to a major renovation of the building as well as its expansion;
• were significant in scope with a total cost of approximately 1.9 million euros; and
• had given rise to effects which, particularly given their scale, had the same economic lifespan as a new building.

Despite the existence of case law and administrative practice on the qualification of a building as “new” following immovable property works, the principles currently in place often leave some room for discussion on the applicable VAT adjustment period. It seems therefore likely that the introduction of this new criterion, with very little further guidance available at this time, might initially place the determination of the applicable VAT adjustment period for immovable business assets in an even grayer area than before. The administrative circular letter which has been announced will be an important tool to resolve these uncertainties.

Note that not only VAT becoming due after the entry into force of this new regulation will be impacted. VAT that became due before the entry into force may also be impacted where the “old” applicable VAT adjustment period has not yet elapsed at that time.

Whereas these new principles were originally meant to (retroactively) enter into force as of 1 January, the most recent amendment to the draft law specifies that the date of entry into force will be the day of publication of the law in the Belgian Official Gazette.