Possibilities for VAT deduction for costs of unoccupied buildings
Unoccupied buildings are, unfortunately, very common. During the vacancy, various costs can be incurred, such as conservation costs. It is advantageous to the owner of the property if the VAT on these costs is deductible. Recently, the Dutch Supreme Court ruled that this is the case in certain situations with vacant office buildings.
Unoccupied buildings and the right to VAT deduction
The ability to deduct VAT depends on the use the entrepreneur plans to make of the property. If costs incurred during the vacancy relate to future taxable activities (such as taxable rentals), then the VAT may be eligible for deduction. If a building is vacant, however, it is often not clear whether the building will be used for taxable or exempt activities. The rental of a building is, in principle, exempt from VAT under the Dutch VAT Act, but landlords and tenants can opt for a taxable rental if certain conditions are met.
Three types of costs associated with vacant property
There are three different types of costs associated with vacancy:
- Maintenance costs. These are costs incurred to keep the building in good condition, for example heating costs.
- Costs for the improvement of the building, such as renovation.
- Costs for the purchase or construction of the property when the property has not been in use for more than 10 years after purchase or construction by the entrepreneur.
VAT deduction for conservation costs
The purpose the entrepreneur intends to use the vacant building for at the moment costs are incurred is decisive. To be deductible for VAT purposes, the landlord’s intention must be to rent out the building with VAT. According to the Dutch Supreme Court, the intention to opt for a taxable rental does not have to be supported by objective data. Therefore, the mere intention to rent out the property is sufficient. The VAT on costs of an unoccupied property intended for taxable rental, after a tenant has been found, is therefore deductible. In our opinion, this is different if the property is clearly intended for exempt rental, for example if it concerns an empty house, school building, or hospital, provided that the use of the building will not change in the future. In such cases it is not possible to opt for taxable rentals.
Deduction of VAT for costs of improvement of the building
If new investments are made to change a building in order to make it ready for future use, such as a conversion, the situation is different for VAT purposes. First, the VAT is deductible if the property is intended for taxable rental at the time the costs are incurred. In this case, based on the recent ruling of the Dutch Supreme Court, the intention to rent out the property is already sufficient, unless it is clear that it will not be possible to opt for a taxable rental in the future. When the vacant building is rented again, the landlord must adjust the deducted VAT on the investments if he or she nevertheless rents out the property exempt from VAT.
Adjustment of VAT in the event of a vacancy
If the landlord has not bought the property or had it built more than 10 years ago and has deducted the VAT, the question arises as to whether VAT should be adjusted when the property is vacant. In the case of immovable property, for VAT purposes, the deduction of VAT is reviewed nine years after the year of occupation. If there is a change in use within these nine years, VAT must be repaid or can be reclaimed, depending on the nature of the change. The Dutch Supreme Court ruled on these adjustments rules in case of vacancy in 2014. According to the Dutch Supreme Court, here, too, the intended use is decisive. Together with the recent ruling, this means that if the intention is to rent (and taxable rental is not excluded in advance), the landlord is entitled to the deduction of VAT. If the landlord has let the property with VAT to its tenant before the vacancy, the landlord will have deducted all VAT on the purchase or construction of the property. In that case, the landlord does not have to repay this VAT in the period of vacancy. At a later stage the landlord may, however, need to repay VAT. For example, if the landlord finds a new tenant and cannot opt for a taxable rental with this tenant. If the landlord has let the property exempt from VAT before it became vacant and it cannot be ruled out that a taxable rental may also take place in the future, the landlord can reclaim part of the VAT on the purchase or construction costs. The time at which the new lease commences after vacancy can also have consequences for the adjustment.