From 1 January 2021, property owners will be affected by a fundamental change in the application of VAT. According to the current regulation of the VAT Act (the "VATA"), the lease of immovable property is exempt from VAT by default. However, Section 56a (3) allows landlords, who are VAT payers, to apply VAT if the property is rented for the provision of economic activity. Voluntary taxation gives the landlord the advantage of claiming a VAT deduction on all purchased inputs associated with the lease, from which it would not otherwise be entitled to a deduction (e.g. from the input price of the property, repairs and technical improvements of real estate, legal services, etc.). Taxed rent also improves the coefficient for deducting VAT on inputs that the taxpayer uses to achieve taxable and exempt (non-deductible) outputs.
However, the amendment to the VATA effective from 1 January 2021 significantly limits this exception in the application of VAT on the lease of real estate between two payers. Newly, payers will not be able to tax the rental of space used for housing, i.e.:
- a family house in accordance with the legislation governing the Land Register;
- living space;
- a unit that does not include non-residential space other than a garage, cellar or storage room;
- a building in which at least 60% of the floor area of that building or part of the building, if that part is rented, consists of living space;
- land of which such a building is a part;
- the rights of the building of which such a building is a part.
The lease of this real estate will be compulsorily exempt from VAT from 1 January 2021, without the right to deduct tax.
This change will have three major implications for property owners who now tax the rent of these properties.
1. Because of this change, the landlord will not be entitled to deduct VAT on purchased services and goods related to the lease. This means that landlords who lease the above-mentioned types of real estate to other payers, for example as an office, warehouse, business premises or for other business purposes, will no longer be able to apply VAT to this lease. The payer also definitively loses the opportunity to obtain the full right to deduct input VAT in the event of the purchase or construction of a real estate property that will be leased to another payer.
2. The second, probably more fundamental, impact of the amendment will be the obligation to adjust the input tax deduction. Property owners will be required to correct past VAT deductions related to these properties. The change will therefore have a significant effect on VAT deductions applied for purchases or technical improvements that have occurred since 2012. The time limit for adjusting the deduction for real estate and its technical improvement is 10 years and starts with its acquisition or technical improvement. During this period, the payer is obliged to monitor the use of the property (whether it is used for taxable transactions from the point of view of VAT). If it changes, it is necessary to assess whether the new use of the property still gives rise to a right to deduct VAT, or to what extent. From 1 January 2021, the lease of the real estate in question will no longer be a taxable supply, but an exempt transaction without the right to deduct. The property owner will therefore have to make an annual correction of the VAT deduction according to Section 78 of the VATA for each real estate and technical improvement separately until the 10-year period is met. This means returning one-tenth of the originally applied deduction practically every year for the remaining years when the rent will be exempt.
3. A third significant impact will be a change in the coefficients. Payers taxing the lease are now carrying out a taxable supply. However, from 1 January 2021 they will carry out an exempt supply without the right to deduct. This will lead to the need to calculate the coefficient according to Section 76 of the VATA and to reduce the tax deduction from received inputs, which the payer uses both for the implementation of taxable transactions and for the implementation of exempt transactions (e.g. overheads). The payer will not have to reduce anything only if the resulting coefficient is 95% or more.
If these changes also affect your business, it is high time to become acquainted with them and to get prepared. We have many years of experience with VAT issues, so do not hesitate to contact us if you have any questions. Our VAT experts will be happy to help you with everything.