Will the 6pct VAT rate for the demolition and reconstruction achieve its objectives?
What are the general rules
Firstly, the reduced rate for the demolition and reconstruction of dwellings is not brand-new. It was introduced in 2007 with the aim to modernise the housing structure in 32 Belgian cities. But its legal scope was rather limited. For example, the reduced rate was only applicable to building services which excluded the actual sale of a new dwelling from its scope. Hence, the reduced rate as such was not a direct incentive for project developers. On top of that, its geographical scope was limited to 32 cities, a limitation that was not overruled by the Constitutional Court. Both restrictions were lifted in the new rules, meaning that project developers can sell new dwellings with application of the 6pct and all the projects in Belgium can qualify for the reduced rate. But the broader scope of the rules came with other restrictions, especially to safeguard the social aspect of the measure. Generally speaking, these are the rules to take into account:
- The buyer is a natural person, excluding therefore all kinds of legal entities;
- It is the sole dwelling of the buyer who must occupy it;
- The dwelling cannot exceed 200m² but many type of spaces can be excluded from the square metre calculation;
- The 6% reduced VAT rate is applicable to VAT that is due during 2021 or 2022. In practice, the invoices issued in 2021 and 2022 can apply the 6%-rate.
- The seller and/or builder need to fulfill some formalities, especially an upfront electronic notification;
- The contracts need to contain certain clauses and information;
- The demolished building had to be made of durable materials;
- The old building is significant, and may be compared with the new dwellings if necessary.
The Belgian tax authorities have gone the extra mile to publish relevant information e.g. it published already in December 2020 a Frequently Asked Questions and an administrative circular on 25 February 2021. It goes without saying that this general guidance cannot cover all factual circumstances nor all practical difficulties encountered during a project. So how do tax payers and clients get legal certainty on the VAT due on the price of their dwelling? Are there already some ‘lessons learned’, five months after the reduced rate entered into force?
Lessons learned after 5 months
Since this concerns a tax incentive, the minister of Finance proposed a lenient application of the reduced rate, meaning that the reduced rate should be applied as broadly as possible within the legal boundaries. But where are these boundaries? A relevant question, since crossing these boundaries leads to an extra payment of 15% VAT accompanied by an administrative penalty and late payment interests. We list below some practical lessons learned:
- Regarding the notification that needs to be filed by the developer in case of a sale of a new dwelling, it is highly recommended it be filed prior to the first invoice with 6% VAT being issued. However, the tax advantage is not lost when the notification is filed later as long as it is done prior to the tentative acceptance. Invoices issued as of 1 January 2021 can be corrected by issuing a credit note and re-invoicing the price.
- It is common in the housing market for dwellings to be sold by another entity that holds the land on which the dwelling stands. For the application of the 6pct VAT, it is mandatory that the same entity demolishes and reconstructs the dwelling. This means that the landowner must ensure that the right to build includes the right to demolish the previous buildings before granting building rights to the construction company. The proper wording and scoping of these rights is therefore crucial. But practice shows that the demolition of the old buildings is a task often undertaken by the landowner. As the new rules include projects that started before 2021, the VAT authorities have published a temporary tolerance measure for projects that were started before 2021, i.e. they accept that the landowner carried out the demolition works as long as (i) it is clear from the outset that new dwellings would be built and (ii) the landowner and the construction company are related companies. A careful analysis of the facts and the contractual relationship between the parties involved remains crucial.
- As the invoice date is the most practical and relevant point in time to assess whether the reduced rate can be applied (2021/2022), it might be tempting to issue advanced invoices at the end of 2022. The technique of issuing advanced invoices needs to be assessed within the legal framework of the ‘Wet Breyne’ and the concept of abuse of VAT law. The latter concept has been applied by the tax authorities in the past on similar temporary incentives and is therefore not be considered as a mere theoretical risk.
- The condition of having a durable and significant building is difficult to assess. Although a lenient interpretation is the guiding principle, it will always remain a factual discussion. No general principles are available at this point. In case of doubt, you can always turn to the FPS Finances to seek legal certainty.
As buyers and developers need certainty regarding their budget and sales price, some of these outstanding and factual discussions can underpin that desire to obtain (legal) certainty. It is therefore not surprising that many developers seek guidance in obtaining a decision from the Belgian tax authorities. What are the possibilities in Belgium?
- The ruling commission issues concrete rulings, including the application of the reduced rate. A request to obtain such a ruling is only permissible as long as the ‘preliminary’ character is safeguarded, i.e. as long as the transactions have not produced ‘a tax consequence’, which means, in practice, as long as the transaction does not need to be reported in the VAT return. The procedure is quite straightforward, but obtaining legal certainty takes a few months. Issued rulings are also published anonymously sometime after their issuance.
- The local VAT authorities can be contacted as well in order to obtain their opinion on a specific case. It is important to note however that, although guidance is issued centrally, different local offices may have deviating interpretations.
- The Central VAT authorities may also be contacted. They can also interpret facts and give their opinion on the application of the reduced VAT rate. It takes a few months to receive an answer however. In the framework of this specific measure, the Central VAT authorities play a role in supporting the local VAT offices in interpreting the administrative guidance.
- Lastly, a general e-mailbox has been created to submit requests and projects, i.e. VATconstruction6pct@minfin.fed.be.
Will it achieve its objectives?
As mentioned above, the Belgian government wanted to support the construction sector and buyers will certainly be encouraged to buy a new dwelling. In that sense, it will definitely fuel sales for the project developers.
But the specific timeframe applied to the reduced rate may jeopardize these goals.
In the first instance, the reduced rate will for sure give existing projects a boost but will miss its effect for projects in the pipeline. A recent study has shown that it takes more than a year to get a building permit, so it is not very likely that projects, for which no request has been filed yet, will benefit from the incentive.
Secondly and in the same context, it seems very unlikely that enough progress can be made during these two years in renewing the dwellings in Belgium to ensure a significant impact on our environmental goals. As the reduced rate will mainly apply to projects that already had a building permit - which means that these new dwellings were already planned - it is difficult to see how the reduced rate can actually increase the number of energy-efficient dwellings in the long run.
Thirdly, supporting vulnerable people in acquiring their own home will require a continuous effort and not a two year incentive.
Lastly, legal certainty remains a pitfall in the short term, and not just because the fact that the stakes are high for all parties and some factual discussions could not be covered by the administrative guidance. Parties can seek legal certainty by contacting the VAT authorities but getting a decision takes time. Practice also shows that the decisions from the local VAT authorities are sometimes inconsistent. On the other hand, not making the effort to obtain legal certainty and considering that time as ‘lost’, may prove to be the wrong decision in the longer term, especially when the specific project has grey areas which could result in discussions with the VAT authorities during an audit leading to a potentially significant VAT adjustment notice with penalties and late payment interests. For once, taking a bit more time may result in more money or less risk. Or prolonging the incentive after 2022 may be worthwhile…
If you have any questions concerning the items in this newsflash, please get in touch with your usual Deloitte Legal - Lawyers contact at our office in Belgium or:
- Danny Stas, firstname.lastname@example.org, + 32 2 800 70 11
- Joaquim Heirman, email@example.com, + 32 2 800 71 27
For general inquiries, please contact: firstname.lastname@example.org, + 32 2 800 70 00
Be sure to visit us at our website: http://www.deloittelegal.be
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