Netherlands: Dutch VAT Adjustment Rules For Immovable Property Services: Public Consultation

On 5 March 2024, the Dutch Ministry of Finance launched a public consultation that runs until 2 April 2024 to extend the Dutch VAT adjustment rules (i.e., revision period rules) to cover certain immovable property services. The current VAT adjustment rules are limited to capital goods, such as immovable property itself. In this publication, our experts elaborate on the consultation and what to consider looking ahead.

Background

The proposal aims to combat a VAT saving structure for residential property that can be achieved through "short stay lease". This is a structure whereby residential property that has, for example, been renovated is subsequently leased out on a short stay basis for a limited period of time. As short stay lease is mandatorily subject to VAT – opposed to regular lease of residential property which is VAT exempt – this can give right to a full recovery of the VAT incurred on the renovation costs by the taxpayer, which would not exists when the residential property would have been used for residential purposes directly after the renovation.

Two options to combat this VAT saving structure have been considered by the Dutch Ministry of Finance: (1) to adjust the rules for "short stay lease" and (2) to introduce a VAT adjustment period for certain immovable property related services. Ultimately, the second option has been chosen which will have a much wider scope then just combatting the VAT saving structure by adjusting the rules for short-stay leases of residential property.

Immovable property services

The legislative proposal that is being consulted would extend the Dutch VAT adjustment rules applicable to capital goods to also cover "services to immovable property, such as the renewal, enlargement, repair or replacement and maintenance of immovable property or parts thereof, including materials, installations and machinery that are included in the service or, after installation or assembly, qualify as immovable property, provided the remuneration for those services amounts to at least EUR 30,000."

VAT adjustment rules

As a general rule, the deduction of input VAT incurred on the immovable property services is claimed for the first year in which the services are used, and must be reduced in proportion to the VAT exempt activities of the taxpayer in which the services are used during that year. The VAT adjustment rules would require the amount of the VAT deducted in the first year of use to be further adjusted in cases where there is a subsequent 'change in use' (i.e., a change in the proportionate use of the services in a taxable activity versus an exempt activity) during the next four years, which would result in an additional VAT payment or an additional VAT deduction. The adjustment period would thus be five years for immovable property services.

Timeline

The Ministry of Finance has stated that the new VAT adjustment rules for real estate services would become effective as of 1 January 2026. The reason for choosing 1 January 2026 as the effective date – opposed to 1 January 2025 – is to give taxpayers sufficient time to anticipate on this legislative change.

The public consultation period runs until 2 April 2024 and a stakeholders meeting will take place on 12 April 2024.

The legislative proposal is expected to be formally submitted on Budget Day later this year (i.e., 17 September 2024).

A&M Says

As mentioned in the introduction, in the Netherlands there is currently already a VAT adjustment period for capital goods such as immovable properties that have been purchased with VAT through an option/by virtue of law and for newly built immovable properties. When a transformation would lead to a newly built immovable property, the services would be captured by the existing rules. However, considering that it follows from Dutch Supreme Court case law that only in limited cases a transformation results in a newly built immovable property it is expected that the new rules will have an administrative impact for almost all transformations in the Netherlands.

The new rules will require market parties to make changes to current accounting and VAT administration procedures to adequately calculate and report VAT adjustments. The VAT adjustment period would need to be administered per service and starting as of 'first use' of that service. Next to the administrative impact, the new rules will potentially also have a financial impact on commercial properties where a VAT exempt lease changes to a lease subject to VAT (or vice versa) due to a change in tenant during the VAT adjustment period.

Originally Published 6 March 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.