Letting of immovable property and ancillary services: how about VAT?

Letting of immovable property is VAT exempt. But not every situation whereby immovable property is provided qualifies as letting of immovable property. What if additional services are provided, e.g. renting an office space including maintenance, housekeeper services, supply of electricity and gas. Then the situation changes. We take a look at the VAT treatment.

General rule: exemption for letting of immovable property

In principle letting of immovable property is VAT exempt. An important disadvantage for the letter is that he cannot deduct the VAT paid on building the immovable property.

Example
Real estate company Y erects a building of 1 mln and pays 21% VAT = 210.000. The company divides the building in retail unit and lets these to the tenants. The letting of this immovable property is VAT exempt without right to deduct the VAT: Y can therefore not charge VAT and cannot deduct the 210.000 VAT which it has paid. This is expenditure which is lost.

Special case: letting with ancillary services which are also VAT exempt

The letting of professional real estate (e.g. retail unit in a shopping mall, office space in an office building) goes often together with a number of other services. The letter offers e.g. the following services (for all tenants or for certain tenants): security, maintenance of the building, cleaning, post delivery, reception of the visitors, energy and heating, ...

In principle these ancillary services supplied by the letter are also VAT exempt. When these services however would be supplied independently, they would be subject to VAT. In this case they follow the VAT treatment of the main service (letting) and are given the same VAT treatment.

What if the ancillary services become so important that the letting of immovable property is no longer the main service

It may occur that the ancillary services become so important that the letting of the immovable property is no longer the main issue. The object of the contract between the letter and the tenant is no longer the letting of immovable property, but a complexity of services (in which the disposal of the real estate is just a small part).
In order to clarify, this a distinction is made for VAT purposes between passive letting, where the letting itself is the main service, and the active letting, which concerns a number of services.

There is active letting with business or service centers offering a complete infrastructure with several services for the users, e.g. an office building including meeting rooms, toilets, telephone network, copiers. Such active letting of immovable property is subject to VAT.

Example
Let's take a look at our previous example. If Y would also offer security, maintenance, .. for the shopping mall, telephone services, toilets for the visitors, we can argue that Y supplies a complex service. Y can subsequently charge VAT and deduct the 210.000 which it paid.

It is not so easy to determine as to whether there is the letting of immovable property with ancillary services and whether there is a taxed active letting. The tax authorities however determined minimal criteria: (i) all services should be supplied against a lump sum price, (ii) the tenant does not have the possibility to waive certain services in order to obtain a lower price and (iii) utilities (water, heating, electricity) should be included in the complete offering.

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