Belgium has finally introduced an optional VAT regime for immovable renting. The implementation of the optional VAT regime is one of the most important changes in the field of VAT of the past decade and must be celebrated.
The new regime in principle applies as of January 1, 2019 for lease of new real estate used exclusively for business purposes.
This could draw more attention to the real estate market for new commercial buildings, as the tax changes makes this segment more attractive for investors. The introduction of this regime will certainly boost the major refurbishment and construction sector in Belgium, as the VAT works will be deductible, if and when, the option is activated. The optional VAT regime reduces the competitive disadvantage of Belgium compared to its neighboring countries where the VAT on construction works has been deductible for a while.
Besides the optional regime, a mandatory VAT regime is introduced for short-term rentals (maximum six months) of real estate used exclusively for business purposes (residential leases and transactions of a socio-cultural nature are excluded).
VAT Regime Before the Reform
As a matter of principle in Belgium, real estate rentals were VAT-exempted. The consequence of this VAT exemption was that the lessor did not charge any VAT to the tenant and was—on the other hand—not allowed to deduct input VAT paid upon the construction works or the acquisition of the real estate. This exemption principle was applicable both on residential and commercial leases.
Several exceptions are provided by the Belgian VAT legislation to these exemption rules (e.g. to renting of parking, warehouse spaces, the rental of some furnished accommodation, camping, etc. that are subject to VAT). Because of these exceptions, in business-to-business ("B2B") situations the parties often try to find solutions in order to submit the rent to VAT.
Optional VAT Regime on Commercial Lease as of January 1, 2019
As of January 1, 2019, the optional VAT regime for (parts of) buildings leased exclusively for business purposes is applicable. The regime can apply to “parts of” a building provided that they can be operated independently from an economic perspective (separate access).
The advantage of opting for VAT on the rentals is that the lessor will apply VAT to the rentals and will then be entitled to deduct the input VAT paid on the construction and renovation costs relating to the rented building. The option to apply VAT will need to be jointly exercised by both contracting parties and the option will only be valid during the entire rental period.
The optional regime applies only to the rental of “newly constructed” buildings, including buildings undergoing a major refurbishment (the major refurbishment can be defined as a drastic modification of essential elements (i.e. the nature, structure or destination) or modifications for which the cost of the renovation amount at least 60 percent of the whole value of the building at the end of the works).
The option may only be exercised for buildings for which VAT on the construction costs has become payable for the first time on October 1, 2018 at the earliest. If the building was subject to exigible VAT before October 1, 2018, the optional regime will not be applicable.
Moreover, it is important to note here that it only concerns the rental of buildings which are exclusively used by the tenant in the framework of an economic activity that grants the tenant the status of a VAT-taxable person (even if VAT-exempted).
Additionally, the optional VAT regime only applies to the rental of buildings and not to land. However, if both (building + land) are rented simultaneously, the renting of the accompanying land is subject to VAT alongside the building. In this case, option formalities will have to be made for the land as well.
There is no possibility to opt for VAT for the rental of existing buildings or new buildings rented to private individuals, to taxpayers using the building for private purposes or to public bodies who use the building for an activity for which they do not qualify as a taxable person.
Rentals must, in principle, always be aligned with the normal market value. However, the rental (subject to VAT) will have to be at arm’s length if the lessor does not have a full right to the VAT deduction or if the parties are related.
If the parties opt for the VAT, an extended VAT revision period of 25 years is applicable (instead of the normal 15-year revision period for immovable property). This means that the lessor must let the entire building for at least 25 years with application of VAT, if his intention is to fully recover all the input VAT incurred at the time of the purchase or construction.
Mandatory VAT Regime on Short-term Leases as of January 1, 2019
In addition, the law provides a mandatory VAT regime for “short-term” rentals. “Short-term” rental means a period not exceeding six months, taking into account the terms of agreement. If successive agreements are concluded between the same parties concerning the same building, the total duration of all successive agreements is taken into account.
This regime applies to both B2B and business-to-consumer ("B2C") relations and does not apply in the following cases:
- the rental of immovable property destined for habitation;
- the rental of immovable property to natural persons who use the property for their private purposes or, more generally, for purposes other than those of their economic activity;
- the rental of immovable property to non-profit organizations; and
- the rental of immovable property to any person who uses the property for their VAT-exempt activities as set out by Article 44, paragraph 2 of the Belgian VAT Code (hospitals, schools, social aid, etc).
Rental of Warehouse Spaces
Under the prior regime, the rental of buildings which are exclusively used as warehouse spaces falls outside the scope of the VAT exemption and is, hence, subject to VAT. If the building is not exclusively used for storage, the VAT is not applicable (e.g. warehouse attached to offices or to a store cannot be rented with VAT).
As of January 1, 2019, the rental of a warehouse space in a B2C context is subject to VAT. No option is possible in a B2C context (application of VAT is automatic). The contracts which are already subject to VAT under the prior regime remain subject to VAT under application of that regime.
For the rental of a warehouse space in a B2B context for more than six months (under a rental period of six months, the mandatory VAT regime applies), it is necessary to opt for VAT under the new optional regime as of January 1, 2019.
Hence, the parties could opt to make the rent subject to VAT, otherwise no VAT will be due/deductible. For the warehouses, the condition of “newly constructed buildings” (with VAT payable on the construction works for the first time on October 1, 2018) is not applicable. This means that any new rental of an existing warehouse could be subject to optional VAT when the rental is new; that is, any rental concluded as of January 1, 2019.
For the existing contracts concluded before January 1, 2019 and for which VAT is already applicable under the prior regime, the VAT subjection is maintained (under the prior regime) until the end of the contract. For the ongoing contracts concluded before January 1, 2019 and for which VAT is not applicable under the prior regime, the parties are allowed to opt for VAT (as of January 1, 2019).
Moreover, the new law applicable as of January 1, 2019 clarifies and broadens the definition of “warehouse spaces”: all buildings mainly used (more than 50 percent) as storage space with the exception of buildings that are partly used as a shop or commercial space (more than 10 percent) are considered to be a “warehouse space.”
The exceptions related to warehouse spaces have apparently been decided in order to attract logistics business to Belgium (e.g. e-commerce).
These new VAT regimes will greatly influence the construction and real estate sector in Belgium. As of January 2019, Belgium will, in some cases, not be prejudiced any longer compared with its European neighbors where VAT is already applicable to (and deductible from) building rentals.
Concerning warehouse spaces in particular, the new VAT regime will make things easier, as warehouse spaces attached to offices and/or to a store will, as of January 1, 2019, (possibly) be subject to VAT, which was not possible under the prior VAT regime.
Laurent Donnay de Casteau is Partner, Head of Tax; Olivier Lambillon is Senior Associate and Nawel Benaisa is Junior Associate at Osborne Clarke, Brussels