Is renting flats, family houses, or residential premises always VAT exempt?
According to the current VAT Act, renting real estate is VAT exempt. However, if the tenant is a VAT payer who uses the premises for economic activity, the landlord can apply VAT on the rent and claim the input VAT deductions on related received supplies. Those can be, for example, repairs or improvements on the real estate.
The prepared VAT amendment, which is now being debated in Parliament, should reduce the application of VAT on renting real estate. The aim is to restrict the claim of VAT deductions.
Mandatory exemption of renting residential premises from VAT
From 2021, VAT exemption should always apply to renting flats, residential premises, family houses, or buildings where at least 60 per cent of the floor area is residential premises, including renting plots of land or the right of a building where the building is part of it. Landlords who rent the above-mentioned real estate to other payers for their economic activities (e.g. offices, seats, shops) or other entrepreneurial purposes will not be allowed to apply VAT to such rents.
Termination of VAT claim deduction
From 2021, such landlords will not be allowed to apply VAT on purchased services and goods used for such rents. Moreover, they will be obliged to verify whether they are obliged to adjust VAT claims deducted in the past with respect to their real estate because of the newly applied VAT exemption. Namely, these can be VAT deductions claimed at acquisition or reconstruction of real estate that were performed in a period of 10 years before the exempt rent started.
Practical issues
There will surely be uncertainties as to what real estate will be affected by the above-mentioned limitation. According to the explanatory memorandum, the change focuses on buildings, parts of buildings, units, building rights, and plot of land with a part which is fully or partially premises designated for permanent housing. In reality, there are often discrepancies in - for example - the purpose of a building as it was approved and registered in the land registry and how it is really used.
Even though the obligation relating to VAT exemption is planned for 2021, we recommend that landlords who can be affected assess the specific impact on them as soon as possible, because this can influence some other decisions concerning their real estate.