Property rental and VAT

What it means

Under the VAT Act, leasing land, buildings and premises is in principle an exempt supply. The landlord does not add VAT to the rent, but cannot deduct VAT on costs related to the lease either, such as repairs or energy for the let building.

A landlord who is a VAT payer may opt to tax a lease to another VAT payer. It then charges VAT on the rent and keeps the right to deduct VAT on constructing, buying or running the property. This option is not available for leases to individuals who are not VAT payers.

The exemption does not cover everything. Taxable supplies include short-term accommodation, letting parking spaces for vehicles, renting permanently installed equipment and machinery, and renting safes. In a mixed lease, the individual components must be assessed separately.

How it works in practice

The decision to opt to tax affects the landlord's economics. If it has invested large sums with VAT in the building, opting to tax lets it deduct that VAT. A tenant that is a VAT payer with full deduction loses nothing, whereas a bank or insurer with exempt activities would bear the VAT on rent as a real cost.

If a landlord lets some premises with VAT and others exempt, the deduction is split. For shared costs a pro rata coefficient reflecting the share of taxable supplies is used. The lease agreement should state whether the lease is taxed and how related services are handled.

For VAT purposes a building is a capital good with a twenty-year adjustment period. If the landlord switches from a taxed to an exempt lease, for example with a new tenant who is not a VAT payer, it must repay part of the deducted VAT for the remainder of the period.

What to watch out for

Services linked to the lease, such as energy, cleaning or property management, may be treated differently from the rent itself. If invoiced separately, they are assessed separately; if they form a single supply with the lease, they follow its treatment. Getting this wrong leads to VAT assessments in an audit.

Short-term letting of flats through platforms is an accommodation service, which is taxable if the landlord is a VAT payer or exceeds the registration threshold. For investment property it is therefore important to decide in advance what type of letting will be offered.