The advantage of opting for VAT-taxed rent is that the landlord can then deduct the VAT on the purchase and maintenance of the property. This can only be chosen if the tenant is an entrepreneur for VAT purposes and the real estate is used for at least 90% (and in certain situations 70%) for VAT-taxable transactions. If a tenant cannot reclaim VAT, it is common for a surcharge to be paid, which compensates the landlord for the financial disadvantage it experiences as a result thereof. This surcharge can vary from a few percent to as much as 35% of the rent.

On 14 December 2023, the Minister of Finance issued a new VAT decision with regard to real estate. From 1 January 2025, the VAT regime for service charges will follow the VAT regime for the rental of real estate if these services cannot be regarded as independent. This also has consequences for existing rental agreements where taxable rent has not been opted for.

What are independent and additional services?

It is customary that when renting out real estate, certain items or services, such as utilities, are provided by or on behalf of the landlord for a fee (the service charges). The landlord can only charge VAT on this if the supply of these goods and services constitutes an independent action in addition to the rental or if there is one integral action. The basic principle is that every action must be regarded as independent. However, there are two exceptions: If an action is in addition to a primary action or if the actions constitute an indivisible economic action. Independent services must be qualified separately from rental. It is therefore not important for this category which VAT regime applies to the rental. Additional and indivisible services, together with the rental, form one service and therefore the VAT regime for the rental.

The new assessment framework in the VAT real estate decree

To date, service costs and utility costs when renting real estate were usually regarded as independent services. These services were therefore subject to VAT, even if VAT-taxable rental was not opted for.

The European Court of Justice stipulated in 2015 that the rental and the deliveries, services and utilities provided in that context only constitute independent services if the tenant itself can choose the suppliers or service providers and can decide for itself to what extent it purchases the goods or services. According to the Court, an important indication of this independence is if an individual meter has been installed with regard to the utilities. A second indication is if the invoicing is based on actual use and separate from the rent. In concrete terms, this means, for example, that a separate invoice must be provided for each service provided. Due to this new assessment framework, many services that were initially classified as independent will be qualified as additional as of 1 January 2025, meaning that the same VAT regime applies to service charges as to rental payments.

What does this mean for the tenant?

In most rental relationships, as a tenant you have no say in the delivery of goods, services and utilities to be provided by the landlord. The idea of service charges is that the landlord organises these matters for a fee. In many existing rental agreements, service charges and utility costs are therefore quickly viewed as additional services.

This means that if VAT-taxable rental is not opted for, the landlord may no longer charge VAT on service charges and utilities from 1 January 2025 if these are regarded as additional services. The landlord can also no longer deduct the VAT on the purchase of the services. The VAT regime for additional services follows the VAT regime for rental.

It will be a considerable task to determine what the landlord’s VAT disadvantage is now that the VAT on service charges and utilities can no longer be offset. For each part of the supplies, it must be determined which part has been purchased for the benefit of the tenant who is not liable for VAT and the element of VAT on the purchase that cannot therefore be offset against it. It will not be financially disadvantageous for a tenant. In the old situation, the full 21% of the service charges and utilities would have to be paid as costs. In the new case the compensation will be less than 21%.

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