How to adjust and file VAT on real estate investments
Companies can deduct VAT on their real estate investments if the real estate will be used for activities subject to VAT. If the purpose of use changes later or if the real estate is sold, for example, the company has the right or obligation to adjust the VAT deduction on the real estate investment.
When needed, adjustments must be made for a period of 10 years from the year in which the building was accepted, or the refurbishment of the building was completed. No adjustment is made if the adjustment right and obligation is transferred to a buyer registered for VAT.
The definition of real estate
For purposes of value added taxation, real estate refers to
- land (on or below the surface) on which the right of ownership or possession may arise
- buildings or constructions that are fixed to the ground above or below the sea level and that cannot be easily dismantled or moved
- components that are installed in a building or construction such that they form an integral part of it, i.e. the building or construction would be incomplete without the components, such as doors, windows, roofs, staircases and lifts
- components, equipment or machinery that has been permanently installed in a building or construction and that cannot be moved without destroying or altering the building or construction.
What is a real estate investment?
Real estate investments refer to the purchase or performance of construction services related to new construction or refurbishment of real estate. The purchase of a new building is also regarded as a real estate investment if the seller has paid taxes on their own use of the construction services. If a company has made a real estate investment for purposes of business activities, an adjustment right and obligation regarding the investment arises for the company.
When is it necessary to adjust VAT deductions?
The company may have a right or obligation to adjust the VAT deduction on a real estate investment in the following situations:
- the company’s use of a real estate unit that entitles it to a VAT deduction has increased or decreased
- the company sells or transfers the real estate unit
- the company’s liability to pay VAT ends
- the company removes the real estate unit from its assets.
An adjustment period is the period during which changes made to the use of the real estate unit entitle or oblige the company to adjust the VAT deduction on their real estate investment.
The length of the adjustment period is 10 years from the beginning of the calendar year in which the construction services relating to new construction or refurbishment were completed. If the real estate unit has been purchased, the 10-year period starts at the beginning of the year in which the completed real estate unit was accepted. If a real estate unit that has been taken into use is sold further, the adjustment period does not start from the beginning.
Changes to the use of real estate are reviewed over a calendar year (adjustment year). Adjustments are made if the use of the real estate unit has changed during the calendar year included in the adjustment period. Each year, 1/10 of the VAT included in the purchase of the real estate investment is adjusted.
You can calculate the tax amount to be adjusted using the following formula:
1/10 x (the use that entitled the business operator to the original deduction in proportion to the entire use – the use that entitled the business operator to a deduction in the adjustment year in proportion to the entire use) x tax included in the purchase
How to file an adjustment on a VAT return
Enter the amount to be adjusted as either an increase or a decrease of the deducted VAT in section “Tax deductible for the tax period” on the VAT return. If the amount adjusted is negative, it will increase the tax deducted for the tax period. If the amount adjusted is positive, it will decrease the tax deducted.
If the purpose of use has changed, file the adjustment on the VAT return submitted for the last calendar month of the adjustment year.
If the real estate unit has been sold, the VAT liability has ended or the real estate unit has been removed from business assets, attribute the adjustment to the calendar month of the change.
Example: If the amount of deductible tax increases
A commercial real estate unit of a company that engages in retail was completed on 1 January 2020. Twenty percent of the real estate unit has been leased exempt from VAT to another company under a 2-year agreement. After the termination of the lease agreement, the company takes the entire real estate unit for its own use, using it for VAT-liable activities as of 1 January 2023. The real estate unit’s building costs included €100,000 in VAT. The deduction was made from the portion corresponding to the VAT-liable use (80%).
In 2020–2022, the portion of VAT-liable use does not change, so no adjustment is made.
The amount to be adjusted in 2023 is calculated as follows:
1/10 x (80−100%) x €100,000 = –€2,000
The VAT on sales reported for other activities on the VAT return amounts to €50,000, and the VAT deducted is €30,000 before adjustment. The amount to be adjusted in 2023 is –€2,000. The amount to be adjusted will increase the deducted VAT by €2,000. As the purpose of use has changed, the adjustment is filed on the calendar year’s last VAT return.
VAT return:
+ VAT on sales €50,000
− deducted VAT €32,000
= payable tax €18,000
Example: If the amount of deductible tax decreases
A company offers sports and fitness services in its own real estate unit, which was completed on 1 January 2017. The activity is subject to VAT. The company expands its activities and begins to offer VAT-exempt massage services alongside the sports services. On 1 January 2023, the company starts using 15% of the real estate unit that was previously in VAT-liable use for VAT-exempt activities. The investment originally included €40,000 in VAT.
In 2017–2022, the portion of VAT-liable use does not change, so no adjustment is made.
The amount to be adjusted in 2023 is calculated as follows:
1/10 x (100−85%) x €40,000 = €600
The VAT on sales reported for other activities on the VAT return amounts to €10,000, and the VAT deducted is €4,000 before adjustment. The amount to be adjusted in 2023 is €600. The amount to be adjusted will decrease the deducted VAT by €600. As the purpose of use has changed, the adjustment is filed on the calendar year’s last VAT return.
VAT return:
+ VAT on sales €10,000
− deducted VAT €3,400
= payable tax €6,600