Reduced VAT rate for renovations: age requirement raised to 10 years

Starting in 2016, the reduced VAT rate of 6% that applies to renovations of private residences will only apply for houses that are at least 10 years old. The government coalition agreement of 9 October 2014 provides that “the age requirement for construction works on private residences is increased from 5 years to 10 years”^[1].

A. Present regulation

The present Royal Decree no. 20 sets a number of conditions that must be met before one can enjoy the favourable rate of 6% for the renovation of a residence, namely:

1. the works must be actions done on immovable property, defined in Table A, XXXVIII, §1, 1°;
2. the actions must relate to a residence that, after their execution, is used either exclusively or primarily as a private residence;
3. the first use of the residence has to go back at least five years; the period of five years is fulfilled when the residence was for the first time (actually) taken into use during the course of the fifth calendar year that precedes the time of exigibility of the payment owed on the construction works;
4. the actions must be provided and invoiced to an end user;
5. finally, the invoice issued by the service provider must make mention of the presence of the elements that justify the application of the reduced rate.

If one does not meet the above-mentioned conditions, the VAT rate of 21% continues to apply.

B. New regulation

The adaptation to the age requirement relates to the third condition. In order to qualify for the reduced rate of 6%, the residence must no longer have been in use for 5 years but rather for at least 10 years. The other conditions continue to apply in full.

C. What works still fall under the current regulation?

In order to determine whether the age requirement of 5 years or 10 years is applicable, one must take account of the taxable act and the other causes for exigibility of the tax^[2]. This exigibility date does not necessarily correspond to the invoice date but coincides with the date of the delivery/service performance or of the receipt of the payment, depending on what takes place first chronologically (article 22 and 22bis of the VAT Code). Consequently, if the cause of the exigibility arises before 1 January 2016, the age requirement of five years applies (unless there is some abuse of right).

^[1]Government coalition agreement 9 October 2014, http://premier.be/sites/default/files/articles/Accord_de_Gouvernement_-_Regeerakkoord.pdf .

^[2]Questions and Answers of the Chamber of Representatives, 26 January 2015, no. 0083,185, http://www.dekamer.be/QRVA/pdf/54/54K0009.pdf.

For more information on this topic, you can consult Ewoud Willaert and Nel Van Daele.

In March 2015, Flemish Members of Parliament Lorin Parys and Jos Lantmeeters submitted a proposed decree for regulating the leasing of commercial premises for periods of less than twelve months. In recent years, such so-called "pop-up" businesses have made their entrance in Flanders.

By means of the "pop-up" concept, entrepreneurs can try out the viability of a certain initiative before undertaking a longer-term investment. According to those who submitted the proposal, these entrepreneurs nevertheless often encounter reluctance on the part of owners of vacant commercial premises, who fear that a temporary lease agreement will be requalified as a commercial lease, as a result of which the compulsory provisions of the Commercial Lease Act of 30 April 1951, including the obligatory minimum term of nine years, must be satisfied.

With their proposal, the Members of Parliament are attempting to resolve this supposed uncertainty by offering a separate legal framework for certain leases with a term of less than one year. The question arises whether such a framework is truly necessary, and indeed whether this proposal actually resolves the concerns that prompted it.

The proposed decree would apply to the lease of (parts of) built-up real properties which are to be used by the lessee for conducting a retail trade or the retail business of a craftsman, where there is direct contact between the lessee and the public and which, "due to the nature or the intended purpose of the property or according to custom, is authorised for less than one year" (art. 2).

This scope of application is not coincidentally almost literally identical to the current exclusion provided for in article 2, 1° of the Commercial Lease Act. By making the scope of application of the proposed decree and the exclusion area of the Commercial Lease Act virtually identical, the authors wish to allay the parties' fears of a lease being requalified as a commercial lease.

However, if a lease presently meets the conditions from article 2, 1° of the Commercial Lease Act there is no lack of clarity: the Commercial Lease Act will not apply. There has never been any question about this. In that event, the lease will be subject to the provisions of the common tenancy law.  

Only when the parties conclude a lease that is authorised for less than one year not due to the nature or the intended purpose of the property or according to custom does there exist a risk of requalification. Nevertheless, this uncertainty is not remedied by the proposed decree, given that such a lease would still fall under the Commercial Lease Act. The proposed decree gives no new criteria for verifying when there is a lease which “due to the nature or the intended purpose of the property or according to custom is authorised for less than one year”. With regard to that, the Court of Cassation has clarified that the criterion on this is not the duration of the lease. Leases that are longer than one year can also be excluded from the Commercial Lease Act, in so far as they meet the criteria of article 2, 1° (Cass. 25 March 1983, Arr. Cass. 1982-83, 913). The mention in the explanation that an (extended) lease of more than one year automatically becomes a commercial lease is thus incorrect.

The proposed decree thus creates a new separate lease regime with (presumably) compulsory rules, departing from the common tenancy law.

Furthermore, the proposal contains a number of inconsistencies and obscurities:

• Article 4 of the proposal provides for an ipso jure termination of the lease at the end date, without a right of “renewal”. The common tenancy law provides that, if the lessee continues to occupy the property after the ending date without the lessor’s objection, there is a renewal of the lease under the same conditions, also with regard to the term (art. 1738 of the Civil Code). The explanation of the proposal suggests that it was the intention to depart from this provision and to exclude any “extension”. By referring in the decree text to "renewal" (a commercial lease concept), it is unclear whether or not a tacit renewal of the lease in conformity with the common tenancy law is excluded.
• Article 9 contains the lessee’s right to perform renovation works that are useful for his business in so far as the costs for this would not exceed one year´s rent and subject to notification to the lessor. This provision is taken over almost verbatim from article 7 of the Commercial Lease Act, with the exception of the possibility for the lessor to object for legally valid reasons against the execution of the works. Although the lessor in accordance with article 9 from the proposed decree does not have to give his consent for the works to be performed, under article 10 he can have the works stopped in the absence of this consent. The two articles are in contradiction with one another. This creates a very uncertain situation for the lessee, who de facto would nevertheless do well to obtain the lessor’s consent.

In sum, we wonder whether there is really a need for yet another separate legal framework for a sub-category of leases - which in any case at present are already excluded from the scope of application of the Commercial Lease Act and fall under the common tenancy law. Furthermore, both substantively and textually the proposal contains a number of other unclear points.

The proposed decree was submitted on 5 May 2015 to the Commission for Economy, Work, Social Economy, Innovation and Science Policy of the Flemish Parliament for handling – and so far nothing has been done with it.

For more information on this topic, you can consult Ewoud Willaert and Evelyn Put (authors).