All real estate transactions carried out by a taxpayer are subject to Luxembourg VAT. The rate caries depending on whether the business:
- purchases a building to be constructed or an existing building;
- or decides to lease it.
The purchase of buildings to be constructed is subject to Luxembourg VAT.
In principle, the rental and purchase of existing buildings are exempt. In such cases, the business has the right to opt for VAT, which allows it to waive the exemption in order to then deduct input VAT.
Who is concerned
Any natural person or legal entity that purchases or leases a building may be liable for VAT on real estate.
How to proceed
Purchase of buildings
VAT on real estate purchases may be applied differently depending on whether the buildings in question are buildings to be constructed or pre-existing buildings.
Buildings to be constructed
"Buildings to be constructed" refers to the land on which the construction company will construct the building: the constructions therefore do not exist at the time the contract is concluded. In such cases:
- the purchase of land is only subject to registration fees of 7 % or 10 % depending on the use of the land;
- the construction of the building is not subject to registration fees but will always be subject to VAT at a rate of 17 %.
Input VAT may be recovered by the business, up to the limit of its recovery rate (100 % for a business whose total turnover is subject to VAT).
The purchase of existing buildings is in principle exempt from VAT.
The buyer may however waive this exemption, thereby asserting the right to opt for VAT.
In principle, the leasing of buildings is exempt from VAT.
However, in some cases the leasing of real estate remains subject to VAT: providing temporary accommodation for persons, leasing of holiday camps/campsites, leasing of sites adapted for temporary parking of vehicles, leasing of operating facilities or leasing of safety deposit boxes.
It is however possible to opt for the application of VAT to rental payments and thus waive the VAT exemption usually provided for.
Right to opt for VAT
When existing buildings are purchased or buildings or parts of buildings are leased, the right to opt for VAT, which consists in waiving the VAT exemption that would normally apply, is available.
The reason behind this right results from the principle of neutrality of VAT established by the recovery mechanism of input VAT.
Indeed, when the lease (or sale) of real estate is exempt, the lessor (or seller) may not recover input VAT paid on goods and services used for this activity.
As such, unrecoverable input VAT becomes a cost for the lessor (or seller) that is passed on in the rental price (or sale price). Ultimately, this cost is borne by the lessee (or buyer), because even if he were entitled to the right of deduction, this hidden VAT cost cannot be reclaimed.
By waiving the exemption and subjecting the rental to VAT:
- the lessor/seller:
- allows himself the possibility to recover the input VAT incurred on the activity;
- avoids a cost of non-recoverable VAT;
- may readjust the rental price or sale price requested;
- the lessee/buyer may thus recover the VAT paid on the rent/acquisition price, within the limits of the right to deduction.
The right to opt for VAT may be exercised under certain conditions:
- the transaction must either occur between taxable persons, or involve the lease of a building by anyone to a taxable person;
- the transaction must involve a building dedicated to the pursuit of activities that allow the following to be deducted:
- 100 % of input VAT, in the case of businesses for which the whole turnover is subject to VAT;
- at least 50 % of input VAT, in the case of:
- mixed-use buildings, meaning buildings that are not solely dedicated to the pursuit of activities that enable input VAT to be deducted. In such cases, the right to opt for VAT may only be exercised for the majority portion that is dedicated to the pursuit of such activities;
- partially taxable persons, for whom the recovery rate exceeds 50 %.
- the Registration Duties, Estates and VAT Authority (Administration de l'enregistrement, des domaines et de la TVA - AED) must grant its approval in order for VAT to be applied.
- a bank whose VAT recovery rate is 40 % cannot opt to subject the purchase of its administrative building to VAT;
- a grocer rents the ground floor of a 3-storey building. He uses part of the ground floor for his trade (70 %) and lives in the other part (30 %). The lessor can opt for VAT on the rent, since the business use of the property (building with mixed use) accounts for more than 50 %;
- a grocer rents a 3-storey building, with his trade being carried out on the 2 lower floors and him and his family living on the top floor. As the 3rd floor constitutes a "separate unit that can be occupied for private use", it shall be considered to be a separate building for VAT purposes. Therefore, this cannot be regarded as mixed use of a building, but rather the simultaneous use of two buildings, one for business use and the other for private use. Because of this, VAT will be fully deductible in respect of the two lower floors. The VAT due as a result of occupying the 3rd floor, which constitutes an act of private use, may not be deducted.
The business must file a declaration to opt for VAT with the AED, which will differ depending on whether it concerns a rental or a sale. After reviewing the application and within one month of its receipt, the department will either approve the exemption waiver or not.
If the AED grants its approval, VAT is then applicable as of the first day of the month following the decision.
In the case of sales, the department's approval must have been obtained before recording the notarial deed.
In the case of leases, the lease contract must have been approved by the tax authorities, which also requires the lease to be registered (registered at the fixed rate) with the AED within 3 months. This is then submitted to the lessor's tax office which ultimately approves the application of VAT on the rent.
An owner sells a building comprising commercial premises for EUR 2,000,000 excluding tax, i.e. EUR 2,300,000 including VAT at a rate of 17 %.
The building is leased to a taxable business as of January for a monthly rent of EUR 15,000.
- If he does not opt for VAT, the owner will pay VAT on the construction of the building at the acquisition price (inclusive of taxes) of EUR 2,340,000 (depreciable over 50 years).
- If he exercises his right to opt for VAT, the rent of EUR 15,000 is subject to VAT (15,000 + 2,550 = EUR 17,550). However, the input VAT paid on the construction becomes deductible.
- Result for the year in which construction ends:
- the owner charges VAT on the rent: 12 months x EUR 2,550 = EUR 30,600 of VAT to be remitted;
- but the VAT (EUR 30,600) becomes deductible from the construction: 340,000 - 30,600 = EUR 309,400;
- advantage for the owner: the rental payment is not affected and he may benefit from a refund of VAT paid on the construction;
- advantage for the lessee: the VAT on the rental payments constitutes deductible input VAT.
- Result for the year in which construction ends: