New real estate term in VAT area – adjusted law proposal to the Council on Legislation

On the first of January 2017, and as we have reported upon previously, a new real estate term in the VAT area will be introduced. After this proposal was reviewed in a consultation process, the Government has now referred it to the Council on Legislation.

A number of the parties concerned reviewing the proposal have, amongst other things, expressed the requirement of a clear definition of the significant terms as regards the new definition of real estate. The referral bodies’ views have led to the Government modifying their original proposal as regards the following two aspects.

1. The original proposal stipulated the elimination of the rule implying that the provision of electricity, gas, water, heating comprising a component in the letting of real estate is exempt from VAT. According to the new proposal, this rule should remain but should be somewhat reformulated. The exemption for the granting of usufruct is to cover the subordinate services, for example, gas, water, electricity, heating, network equipment for receipt of radio and television if such provision is a part of the granting of usufruct.
2. The idea is that ”machines and equipment comprising real estate” are to be considered to comprise movable property according to the regulations on VAT adjustment, and are, then, subject to a correction period of 5, instead of 10, years as usually applied to real estate. After extensive criticism, the Government has clarified that ”machinery, equipment and special interior decoration” can only be considered to comprise movable property according to the rules on VAT adjustment if 1) they have been added to such a building or part of a building as is set up for a purpose other than to be used as a residence and 2) they have been acquired to be directly used in special operations undertaken in the property in question.

Comments

The future new rules will probably imply a delimitation problem as to what comprises VAT liable property. The Government’s reworked proposal is welcomed but not all of the questions have been addressed.

As the assessment as what is to comprise real estate must be made based on the circumstances of the individual cases, the Government turns the more detailed evaluation of this over to the courts.

Consequently, we recommend that companies, well in advance of 1 January 2017, ensure that they understand how they are impacted by the new regulations. This applies, particularly, to companies who are property owners and/or are active within the construction industry.