Real Estate: A Year Of VAT Changes Ahead?

The tax/VAT landscape in Luxembourg is changing, the new tax reform substantially increasing penalties for governance infringements. Thus, properly monitoring VAT obligations has become very important.

On a European level, services related to immovable property have been heavily discussed and inconsistently applied in the Member States, leading to double taxation or to non-taxation. Naturally, this has raised discussions about VAT registration obligations.

Therefore, it's not just asset or fund managers managing real estate portfolios who are affected by the new rules and explanatory notes effective 1 January 2017, but also legal or tax advisors.

The current context

According to the European VAT legislation, the place where immovable-property-related services should be taxed is defined by Article 47 of the VAT Directive, which provides that it shall be where the immovable property is located. The purpose of that particular provision is to ensure taxation at the presumed place of consumption of the service.

In contrast, according to the destination principle, the place of supply for services exchanged between taxable persons shall be where the recipient of the service is established.

This article gives an overview of the new provisions, and illustrates some areas of conflict which may arise while determining the place of supply for services which may or may not be connected to immovable property.

New and binding rules from 1 January 2017

As the application of the place-of-supply rule has been inconsistently applied in the past, the European Commission has responded to the need for more consistency and legal certainty concerning VAT treatment applied by adopting the VAT Implementing Regulation,1 > which became binding and directly applicable in all Member States on 1 January 2017.

After extensively consulting business representatives and the Member States, the EU Commission also published explanatory notes2 in October 2015 meant to provide guidance and additional practical examples on how to implement the European legislation as well as of the Implementing Regulation.

It is only with two new articles that the Commission intends to provide the necessary clarifications.

Definition of "immovable property"

Now, the European Legislator defined the concept of immovable property in Article 13b by including an exhaustive list of four categories helping to clarify what should qualify as immovable property. The first step is therefore to analyse...