If you cannot opt for taxed rental, it is customary to pay the so-called VAT compensation to the landlord in addition to the rent. But from 2025, in many cases this will no longer only apply to the rent, but also to the service charges.
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.
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.
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.
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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