Leasing out real estate is as a main rule exempt from VAT. This means that the lessor cannot recover VAT on costs incurred, for example the VAT on renovation costs. However, in some cases, the leasing of real estate is subject to VAT, such as short-stay rentals. In those cases, the lessor can recover VAT on (renovation) costs.
For renovations not resulting in newly built real estate (in wezen nieuwbouw) for VAT purposes, the right to recover VAT is final after the financial year of first occupation. This is different for a renovation that does result in newly built property. In that case, the right to recover VAT is subject to a revision period of nine years following the financial year in which first occupation takes place (i.e., a capital goods scheme).
By first using a property that was renovated without creating newly built real estate for a short-term period (until the end of the financial year) for VAT-taxed lease such as short stay, VAT recovery can be realized, after which the property is used for VAT-exempt lease such as long-term rentals to private individuals. The Dutch VAT legislation does not provide any possibility to correct the fully recovered VAT in such a case. In this way, the landlord can ultimately lease out a property VAT-exempt for a long-term period and still recover all the VAT on the renovation costs.
The Dutch Ministry of Finance considers this practice not in line with the purpose of the legislation, and resulting in an unlevel playing field for real estate investors. To tackle this, the government proposes extending the existing VAT deduction revision period (already applicable to tangible investments like laptops and buildings) to services related to real estate valued at least €30,000, such as renovations and major maintenance. Entrepreneurs will need to track the initial VAT deduction for four years after the year such a renovation or maintenance is delivered. In this way, the VAT recovered on these costs will be monitored for a longer period and could possibly be revised when switching from VAT-taxed to VAT-exempt lease within the revision period.
The proposed change aims to reduce the attractiveness of VAT-saving structures involving short stay rentals. Earlier proposals in 2005 and 2017 faced criticism for complexity and broad scope, leading to this more targeted approach. Nonetheless, the currently proposed measure would also have a broad scope, as the VAT revision obligation would apply to all immovable assets, including non-residential real estate and immovable assets other than buildings such as pipelines, wind turbines and other (industrial) infrastructure. Further, the revision obligation would also apply to entrepreneurs who own real estate that is used in their own business, tenants and other users of real estate procuring services valued at least € 30,000.
A transition period is proposed, with the measure set to take effect on January 1, 2026. The Ministry of Finance has opened an internet consultation on this proposal from March 5 to April 2, 2024, allowing stakeholders to provide input. Feedback received during the consultation may be considered in the final regulation. This measure was previously already announced in the Spring Memorandum 2023 and in a letter to Parliament on Budget Day 2024.
