How the Summer Agreement affects VAT groups

Establishing a VAT group in order to avoid losing the right to deduct input tax on the grounds of renting out immoveable property
It is a regular event for a company (such as a real estate company) that is part of a group of companies to buy or build property, which it then makes available for use by another of the group’s companies (such as an operating company). The latter company will then perform its activities therein. In most cases the provision of this immoveable property (‘property leasing’) is exempt from VAT,1 which means that the real estate company cannot deduct the VAT it paid when building or purchasing the property. The VAT paid for later renovations or alterations is likewise non-deductible. And so the VAT for this property becomes an expense for the company.

When it comes to leasing within a group of companies, the fact that this VAT expense is settled through the rent – which means that the tenant/operating company must cover the costs – is frequently not an ideal situation. And so alternatives are sought out so that the real estate company can avoid this VAT expense, with a common solution being the creation of a VAT group between the real estate company and the operating company. That is because a VAT group is deemed to be a taxpayer and its right to deduct input tax is determined on the basis of its outgoing transactions with third parties/non-members, without taking the internal transactions between the members into account. So if the real estate company lets out the property solely to the operating company and conducts no VAT-exempt transactions with third parties, while the operating company only performs VAT-liable transactions with third parties, then the VAT group that they established shall have the full right to deduct VAT. That means the VAT payable for the building or purchase of the property, as well as for later renovations to that property, shall be fully deductible.²

The requirement of financial, economic and organisational affiliation at the time that the VAT group is created
A VAT group can only be established between members that are closely affiliated on a financial, economic and organisational level. Financial affiliation is generally demonstrated by means of the shareholdership and organisational affiliation by the joint management.³ Such conditions for affiliation are generally easy to fulfil, subject to a few changes to the shareholdership or the management, where necessary. Economic affiliation is demonstrated by, inter alia, a situation where one taxpaying company performs all or part of its activities on behalf of the other members of the VAT group. That includes our real estate company making property available to the operating company where the latter performs its activities. Given that this economic affiliation must already exist at the time that the VAT group is established, a lease and/or proof of payment of the rent shall have to be furnished. Future property leasing will not suffice.

The right to deduct input tax can be affected when the review period for deducting VAT is already in progress at the time that the VAT group is established. Let’s say that our real estate company purchased the property in 2016 and has been letting it to the operating company since that time (it occupied the new building in 2016). So if a VAT group between two companies with the right to the full deduction of VAT is only established in 2017, only 14/15th of the VAT paid on the purchase price will be subject to an upwards revision and the other 1/15th of the VAT will be an unavoidable expense. What it boils down to is that the VAT group should have been created in 2016, but as stated, that is only possible if the lease is already in place. 

The (negative) consequences of a VAT group
When establishing a VAT group one must take into account the following (possibly negative) consequences. Firstly, the conditions of affiliation between the members must remain fulfilled for the duration of the VAT group’s existence. That means management changes or the transfer of shares could result in the VAT group being dissolved, which means that the deduction of VAT for operating assets is subjected to review (which is a negative outcome for the VAT unit and which could be a positive one on the part of the members). Where the conditions of affiliation remain fulfilled, the members are required to remain a part of the VAT group for three years.

If a member of a VAT group acquires a participating interest in excess of 50% in another company, then that latter company is required to join the VAT group, unless there are well-grounded reasons that demonstrate that this new company should be excluded. The members are jointly and severally liable for paying the VAT, for penalties and for interest incurred by the VAT group, which means that the tax authorities can claim outstanding VAT from one member even if that sum is wholly due to a fault on the part of another member of the VAT group. That is why it is a good idea for the members to set things out contractually, especially when a member also holds property that is used privately. Finally, a VAT unit entails a great deal of administrative work, given that all the transactions between the members must be included in a single VAT return, which the VAT group submits, as well as other matters.

The Summer Agreement may offer an alternative for establishing a VAT group that is specifically created to avoid losing the right to the deduction of VAT for property leasing
The Summer Agreement contains an announcement that an optional system shall be introduced in 2018 under which the renting of immoveable property to professionals shall be subject to VAT. This measure can consequently offer another alternative for avoiding the loss of the right to deduct VAT when a real estate company purchases or builds property and makes it available to an operating company that performs its economic activities therein. At present there are still a number of unanswered questions as regards the scope and the effects of the intended scheme.

The first one entails what conditions shall have to be met so that the option of taxed leasing can be exercised. For example, will it be required that the tenant must use the property for a specified percentage of taxed activities, as is the case in the Netherlands? Moreover, to which contractual agreements shall this new scheme be applicable? The Minister has already stated that this option for taxed immoveable leasing will only be able to be used for contracts that are concluded after 1 January 2018 and that the regularisation of past contracts is explicitly excluded. So what about contracts up for renewal, or what if an existing contract is terminated and replaced by a new one that is concluded in 2018? Will the taxman consider this misuse of the law? Can one invoke the violation of the principle of equality if this new measure is limited solely to new contracts concluded as of 1 January 2018? Then there is also the possible (partial) deduction of VAT in 2018 that has been paid before 2018 in respect of the purchase or building of property or of renovations, when a lease is concluded in 2018 and the option of paying VAT has been chosen. Can this VAT still be deducted, bearing in mind the standard three-year expiry date or the historical deductions facility?

Whether or not historical VAT deductions will be possible will, in my view, have to be judged on a case-by-case basis. When, for example, a new building is purchased plus VAT in 2017 for the purpose of letting it out, can one argue that you already qualified as an exempted taxpayer in 2017, which means that historical VAT deductions in 2018 should be possible when the building is rented out subject to VAT in 2018, even though you were not yet actually providing an exempted service in 2017?If that is true, then 15/15th of the VAT on the purchase price for the building can be deducted in 2018, given that the new building is only occupied in that year.Or let us say that a landlord performs renovations to a building in 2017 that it is presently letting to party A. The landlord has not deducted that VAT for the renovations, thanks to the exempted immoveable leasing of the building. But when the lease expires in 2018 and the landlord lets the building out to party B subject to VAT, then surely one could argue that at that time the landlord is entitled to deduct historical VAT for the renovations performed on the building in 2017?7

So what can you do now?
If you are presently considering establishing a VAT group solely for guaranteeing the right to deduct VAT when purchasing or building a property, because that property will be rented to a taxpayer that shall be using it for a taxed economic activity, then it may be wise to wait for the new scheme to be implemented, or in any event to be further clarified. Furthermore, economic affiliation will have to be demonstrated in another manner than the leasing of the property.

Please note: Should you end up deciding to establish a VAT group in 2018, it could mean the loss of 1/5th or 1/15th of the VAT deduction for renovations to an existing property or for the purchase of a new property (assuming that this new property was already occupied in 2017). But if the property is still being built or if the renovations will be so extensive as to result in a ‘new building’ for tax purposes, then VAT will not be lost when you establish a VAT group in 2018 if you cannot use the building before 2018. That is because the review period for the deduction of input tax will then only start on 1 January of the year in which the building is occupied.

What happens to VAT groups in 2018 that were specifically created in the past for preventing losing the right to deduct VAT due to property leasing?
As soon as this optional scheme for taxable leasing comes into effect and all the conditions and consequences are known, then it can be examined on a case-by-case basis whether a VAT group should continue to exist or if it is better to terminate it. However, if members are not yet a part of the group for three years, it shall only be possible to dissolve it once the conditions of affiliation are no longer met. A change to management or shareholdership could of course lead to the VAT group being dissolved at an earlier date. A VAT group does naturally offer the benefit of avoiding advance VAT payments when, for example, a real estate company lets out a property subject to VAT to an operating company. So the upshot is that all the advantages and disadvantages of a VAT group shall have to be weighed up against each other and a decision shall have to be made with thorough knowledge of all the issues at stake.

[1] The VAT Code includes a number of exceptions with respect to exempted property leasing, but we shall not examine those in this article.
[2] Bearing in mind the review period of five years or fifteen years, at the time that the VAT group is established.
[3] Financial and organisational affiliation can also be demonstrated by other means.
[4] Three years, starting from 1 January of the year following the year in which the VAT group was established or in which they joined an existing VAT group.
[5] When article 21bis of Royal Decree no. 3 is applied.
[6] One could possibly also ask whether the VAT can be deducted in 2018 under the pretext of ‘preparatory actions’ for renting subject to VAT. We will not deal further with this issue in this article.
[7] One could also debate whether you could apply a positive revision at that time on the basis of article 10.1 of Royal Decree no. 3 without having to raise the argument of historical VAT deductions, but that would be going too far within the scope of this article.

The consequences for companies
VAT on your own construction work: an explanation of the amended law
On 29 November 2017 amendments were made to several points in the VAT Code. This amended law was explained by the administration on 12 February (in the Circular 2018/C/20). In this article we aim to consider the consequences of the amended law for companies constructing their own company building or carrying out their own repair/maintenance or cleaning work. Former situation Whenever a VAT-reg
Setting up a plegde on moveable assets will be easier
The new Pledge Act: introduction of a non-possessory pledge and extension of the retention of title
The new property law came into force as from 1 January 2018 (the act of 25 December 2016 establishing the amendment of various provisions with regard to the collateral on moveable assets, Belgian Official Journal 30 December 2016). This makes it easier to set up a pledge on moveable assets thanks to the introduction of a Pledge Register and it extends the effect of retention of title. Non-posse
New fixed benefits in kind as from 2018
Split bill rule can avoid benefit in kind for smartphones
Whenever an employer provides an employee with a free tablet, mobile telephone, telephone or data subscription that may be used for private purposes, this is considered a taxable benefit in kind. Since the beginning of this year there are fixed charges for such benefits, but in some cases it is possible for a benefit to be avoided. Fixed benefits in kind as from 2018 A fixed amount has been
An interesting way to obtain capital more advantageously?
The Belgian tax treatment of the surrender of Dutch pensions under self-administration
Just before the end of the year, the tax administration finally made the decision and published a circular (Circular 2017/C/87 dated 22 December 2017), which addresses the Belgian treatment of the phasing out of the Dutch “pension under self-administration”.  Phasing out Dutch pensions under self-administration  Until 1 April 2017, a Dutch director-major shareholder or “DGA”
Who is now obligated to use this cash register?
The long-expected circular on the 'white cash register' has been published
Many words have been written over the past few years about the registered cash register system (the 'white cash register'). In exchange for a rate reduction for restaurant and catering services to 12% (instead of 21% - except for drinks), there was a requirement for hospitality businesses to work with a registered cash register system in order to combat fraud in the sector. The question over the p
The new tax rules
New car tax legislation: wheels in motion
Traditionally in Belgium, January is all about cars. Each year, the Autosalon (Motor Show) attracts hundreds of thousands of car fans to the Heysel. This year, the spotlight will not just be on the latest models of cars – the new car tax legislation will also be grabbing all the attention. So, once more, it’s time to set out the most important changes – in both corporation and personal incom
A simple and flexible way for companies to give a bonus to their employees
The profit premium from 1 January 2018
The new profit premium gives companies the opportunity to allocate part of their profits as a bonus to their employees in a simple and flexible way. The employees receive a premium, which amounts to either a fixed sum or a percentage of their wages without the employee being allocated a voting right in the company. Definition of profit premium and conditions The profit premium is a premium pa
Reduced corporation tax: in favour of or to the detriment of the taxpayer?
A new minimum remuneration requirement
The Summer Agreement, partially translated into the Corporation Tax Reform Act of 25 December 2017 (published in the Belgian Official Gazette of 29 December 2017) introduces a reduced corporation tax rate that falls to 25% by tax year 2021. Under certain conditions, a small company can even benefit from a reduced rate of 20% on its first tranche of € 100,000 of taxable revenue. However, the
A number of regulated professions are being abolished
Abolition of professional competence in Flanders: the consequences at a glance
In accordance with the Establishment of Businesses Act, every SME, natural person or legal entity wishing to engage in a commercial activity must prove the necessary entrepreneurial skills. For most professions, a basic knowledge of business management is sufficient but for a number of others, specific professional competence is required. This is in contradiction with European legislation that sta
The 4 action points thoroughly discussed
How the Summer Agreement affects the ATAD Directive
By now it’s hardly news that Belgian corporation tax will be comprehensively reformed as part of the Summer Agreement. The proposed reforms as set out in the drafts of the Programme Act (authorising government expenditure measures) and the Recovery Act were approved on 27 October by the Cabinet. The government presented the Programme Act bill to the House of Representatives on 6 November 2017, w

Subscribe to our newsletter