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.4
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?5 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.6 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.
 The VAT Code includes a number of exceptions with respect to exempted property leasing, but we shall not examine those in this article.
 Bearing in mind the review period of five years or fifteen years, at the time that the VAT group is established.
 Financial and organisational affiliation can also be demonstrated by other means.
 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.
 When article 21bis of Royal Decree no. 3 is applied.
 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.
 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.