January 16, 2024
Netherlands revises Decree on VAT treatment of immovable property
The Ministry of Finance has updated its policy regarding the value-added tax (VAT) treatment of the sale and rental of immovable property. Several adjustments have been made. The new version of the Decree applies as of 1 January 2024. This Indirect Tax Alert explains some of the most important adjustments for the immovable property sector.
Definition of a building
Any structure permanently connected to the ground qualifies as a building from a VAT perspective. It is not required that the object is connected to the ground in a way that it cannot be separated. Fixed to the ground means: not easily disassembled or movable.
Among other things, the Decree clarifies when brick paving (in Dutch: ''klinkerbestrating") qualifies as a building. For example, brick paving qualifies as a building if it forms a part of a whole in which the top layer has been excavated and includes drainage and site lighting. If there is a site with bricks that do not form a part of a whole and the bricks are easy to remove, it does not qualify as a building, according to the Ministry. The same reasoning applies to a site covered with stelcon plates (in Dutch: "stelcon platen").
Definition of independent
VAT is charged at the level of an independent immovable property. Caselaw on apartment rights (in Dutch: "appartementsrechten") shows that each apartment right represents an independent immovable property. The Ministry of Finance now states that this is the case as well for an apartment right to a yet-to-be-built apartment, which only exists on paper (e.g., blueprints). The VAT treatment of such apartment right requires that the land where the future apartment is projected is taken into account in a proportional manner.
Until now there was no published policy for landlords who were renting out both a house and non-integrated solar panels located above or next to the house. In practice, the policy of the Dutch Tax Authorities was that the rental of non-integrated solar panels was taxed. Under the Decree, the Minister now takes the position that the rental of the non-integrated solar panels is a service that is subsumed by the rental of the property, which generally is exempt from VAT. Both activities are therefore exempt from VAT. The Ministry recognizes that, given the revised policy line, a different VAT treatment is currently more common in practice. The Ministry has therefore included transitional law. Landlords who had deducted VAT on the purchase of solar panels prior to 2023 will not have to revise this VAT. However, until the end of the revision period, VAT must then be paid on all fees received for operating the panels.
Rental of immovable property: utilities, service costs and energy performance fee
The previous Decree conceded that service fees follow the VAT exemption for the rental of residential property (private dwellings). Until recently, service costs in the commercial property sector were treated as stand-alone VAT-taxed services. This policy has now been nuanced in the new Decree: what matters is whether the tenant can actually choose if and to what extent the services are purchased from the supplier of these services. Apart from that, the Ministry indicates that the energy performance fee will always be included in the exempt rental of residential property.
This is a very important adjustment for the property management practice. A transition law applies under which the old Decree can still be applied until 1 January 2025.
Option for VAT-taxed leasing
Generally, the rental of immovable property is exempt from VAT. If landlord and tenant meet certain conditions and choose to do so collectively, it is possible to opt for a VAT-taxed rental. The Decree clarifies that in the case of apartment rights, the option must be applied for each apartment right separately.
If parties have failed to opt for VAT-taxed rental, the option for VAT (under certain conditions) can still be applied from the start of the rental agreement. The Ministry of Finance stipulates two strict conditions for this approval. First, the rented property must be used for activities that entitle the tenant to a VAT recovery right of more than 90%. Second, the parties must also have acted throughout the entire period as if they had validly opted for a VAT-taxed rent. Therefore, VAT must have been charged on the rent.
Rental and short-stay property
The rental of immovable property in the hospitality industry (e.g., hotels, and sectors with a similar function) to persons staying there only for a short period of time is always subject to VAT. This is an exception to the general rule exempting rentals from VAT.
The Ministry of Finance notes that the term "sectors with a similar function" should be interpreted widely. VAT applies in the situation of an accommodation that the lessor rents to temporary residents, in furnished condition. Flats and houses furnished for short stays also fall under such accommodation, as long as there is competition with the hospitality industry. This is in line with previous case law. In a recent Ministry communication, it became already clear that the Dutch Tax Authorities believe that the rental should take place in a "corresponding manner" as with a hotel. In our view, the new Decree is considerably less restrictive and more nuanced on this point.
Important practical implications
The prior Decree had been in place for more than a decade. For that reason alone, this new version is welcome practical guidance for the property (management) sector. The policy decision is quite descriptive, explaining the current state of case law, which does not always have relevance for practice. However, certain parts do convey a particular view or a concession.
The concession for VAT-taxed rentals, where parties have (erroneously) not opted for VAT, stands out. This is very welcome for practitioners. It will be much easier to check whether there is a VAT risk in due diligence investigations. The extension would likely also apply to leasing situations that started prior to 1 January 2024.
Regarding the positions taken, note that the Ministry of Finance's statement on clinker paving seems somewhat restrictive. It also seems quite limited to state that stelcon plates could never constitute a "building" for VAT purposes. Additionally, the positions taken in the Decree with regard to solar panels and service costs is difficult to follow. The two views represented do not seem entirely in line with one other. On the one hand, when it comes to service costs, the degree of the tenant's freedom of choice must be considered, based on European caselaw. Yet, in the case of non-integrated solar panels, freedom of choice is ignored, as solar panels are always subsumed by the exempt rental. This consequence seems inconsistent and therefore difficult to understand.
For solar panels there could be room to take a different view, depending on the relevant facts and circumstances. A dissenting view may be more difficult for service costs. In practice, this means that the VAT treatment of service fees must be determined on a case-by-case basis: do the service costs form part of the rent or not? In this respect, it is helpful that the Ministry of Finance has included transitional law.