VAT on the lease of real estate

On 1 January 2021, a provision of the VAT Act restricting the option to tax leases of selected real estate entered into effect. At the end of 2020, the General Financial Directorate (GFD) issued information to ensure a better understanding of the lease of real estate from a VAT perspective and to clarify certain areas of the new provision.

The lease of real estate is (with certain exceptions) exempt from VAT without the entitlement to VAT deduction. Until 31 December 2020, VAT payers could decide to declare output VAT on leases of real estate to another payer for the purposes of the other payer’s economic activity. In accordance with exceptions in effect from 1 January 2021, it will no longer be possible to decide to tax leases of certain real property items, such as:

  • a family house under the legal regulations on the Real Estate Register 
  • residential premises
  • a unit that does not include non-residential premises other than a garage, cellar or store room 
  • a building in which at least 60% of the floor area of such building, or of the part of a building if such part is leased, are residential premises
  • a plot of land that includes a family house, residential premises or building under paragraph d) with which the land is leased 
  • a superficiary right of building that includes a family house or a building under paragraph d) with which the superficiary right of building is leased.

The legislators did not try to conceal that the primary purpose of this provision is to prevent the abuse of the option to tax leases of real estate intended for permanent housing by claiming the entitlement to VAT deduction. The possibility of permanent housing is the very condition that unites all the real property items contained in the new provision. The GFD emphasises that buildings for permanent housing are determined as such mainly based on information from the Real Estate Register and based on other legislation and decrees regulating construction and technical layout requirements. In other words, it will be most crucial for the tax administrator what is the character of the real estate item at issue under relevant construction regulations.

The GFD’s information confirms certain facts that have so far not been clear from the law: for example, if a unit recorded in the Real Estate Register does not meet the requirements for permanent housing in terms of its purpose and its construction and technical layout, it will still be possible to tax the lease of such a unit. Such units are most often designated as studios.

Another area that deserves interest is the lease of buildings in which at least 60% of the floor area are residential premises. There are opinions according to which the lease of such a building can only be taxed if the building is not divided by the lessor into units based on the owner’s declaration. In other words, the lease of the entire building, after it was divided into units based on the owner’s declaration, would be unacceptable, as this lease would actually involve the lease of separate units whose taxation is restricted. Nevertheless, the GFD has not yet opined on the matter. The question therefore remains how tax administrators will proceed in such cases. 

In connection with the above, we also draw attention to the fact that any adjustment to VAT deduction relating to buildings, units and their technical improvements must be performed within 10 years of their acquisition.

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