VAT authorities tackle artificial split of sales of new housing building!

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A recent decision (click here for decision in French and Dutch ) has been published by the central VAT authorities to tackle a structure that appears on the rise within the real estate sector and, so it seems, even received administrative approvals in the past in certain circumstances.

1. When transforming old into new…

In some cases, a developer buys an old building on a plot of land and wishes to destroy the old building and erect a new building on the land in order e.g. to sell new apartments to private persons.

2. Transfer tax differences in function of the transactions at stake…

The sale of a new building (and the adjacent land) by a developer is normally subject to 21% VAT whereas:

  • the sale of an old building is subject to registration duties (10% in Flanders or 12,5% in Brussels and Wallonia) ;
  • the demolition and reconstruction of housing buildings are subject in certain areas and under certain conditions to a reduced rate of 6%.

3. Drive the developer to split the transaction…

Considering private housing is destined to purchasers with no right to deduct the VAT, the sector and its advisors had been creative and proposed a structure whereby the sale of a new housing building on a piece of land where an old building lies (e.g. sales on plans) is split between the sale of the old building on the one hand and a demolition and reconstruction contract on the other hand.

4. Which will in most instances be deemed artificial by the VAT authorities…

Belgian VAT authorities seem to have accepted the structure in a few specific instances via individual decisions and likely fear a wider use of this structure. They have therefore published a general administrative decision in which they provide that such split will in principle be:

  • deemed artificial and rejected when the transaction seems to correspond to a single sale in the hands of the parties, which appears often to be the case when the seller of the old building is the same as the supplier of the works (demolisher/developer of the new housing building) ;
  • examined on a case by case basis in the light of the provisions re. abusive practice to determine whether motives other than tax motives can legitimate the structure in cases where the seller of the old building is NOT the same as the supplier of the works (demolisher/developer of the new housing building).

5. Unless it had been secured in the past!

Moreover, the general decision specifies that it applies to past situations. However, individual decisions received in the past that would contradict this general decision would remain valid, but only with respect to the specific projects for which they had been rendered.

Last but not least, some taxable persons may deem that they can rely on “implicit agreements” of the VAT authorities contradicting this general decision. Their situation would in such hypothesis be looked at on a case by case basis. Such implicit agreements can occur in case of (i) projects with conditions exactly similar to those of a former project for which a positive decision had been received in the past or (ii) projects for which a request had been filed and no answer had been provided yet by the tax authorities when this general decision has been published. In the latter instance, a potential posterior agreement from the VAT authorities could only apply to sales which would have taken place before the publication of the general decision. This last condition obviously aims at restricting the use of such structures to exceptional circumstances.

Should you wish more information in this respect, do not hesitate to contact your VAT contact or our real estate team