News article

15-year VAT revision term for renovation works?

A ruling by the European Court of Justice could drastically change the Belgian VAT revision rules for renovations. Possibly, the 15-year revision period could apply. This could obviously play to the advantage of the VAT payer if he can deduct additional VAT on renovations.

The Drebers case

Following the abolition on 1 January 2014 of the general VAT exemption for lawyers’ services, as a result of which these VAT payers were in principle entitled to deduction from that date, a law firm reviewed the VAT due on renovation works to the office building that was originally not deducted. In doing so, the VAT taxpayer took into account the review period for real estate assets, regularising 1/15 of the non-deducted VAT in its favour for 2014 and each subsequent year of that 15-year review period.

Since the renovation did not give rise to the creation of a ‘new’ building, the tax authorities argued that the five-year revision period applied, so the VAT taxpayer regularised a 90,000 euro VAT overpayment in her favour.

During the trial, the Ghent Court of Appeal was alerted by the VAT payer to a possible conflict of the Belgian regulation with the European VAT Directive. And that was apparently enough for the court to put two preliminary questions to the European Court of Justice. These boil down to whether the 15-year review period should also not apply to immovable works that result in a building that is not a ‘new’ building but have a similar economic lifespan as a ‘new’ building and, if so, whether the VAT payer can invoke that 15-year period before the courts on the basis of the direct effect of the VAT Directive.

The European Court’s ruling

The ECJ finds that Belgium has used the option provided by Article 190 of the VAT Directive to nevertheless consider services as capital goods if they have characteristics similar to those normally attributed to capital goods. Since ‘immovable capital goods’ are a special type of ‘capital goods’, that provision also applies to immovable capital goods, even if it is not expressly provided for in the legislative text.

Based on the file, the Court finds that the works carried out:

• have lasted for several years;
• led to a major renovation of the building in question;
• have also extended the building by adding a glass annexe and a lift shaft;
• have a cost of €1,937,104.

According to the court, the result of these works therefore appears to have the same economic lifespan as a new building, and the works themselves clearly resemble immovable capital goods rather than other capital goods.

In such a case, if the five-year revision period is applied to the renovation works, this could lead to a different tax treatment of those investments compared to a VAT taxpayer who has invested in the construction of a new building (15-year period), even if, given their economic characteristics, these investments are similar or even functionally identical.

Whether the building qualifies as a ‘new’ building for VAT purposes for the purposes of its supply, is irrelevant to the determination of the review period.

And finally, the Court confirms that if a Member State (in this case Belgium) erroneously does not classify such works as immovable capital goods, then a VAT taxpayer can rely directly on the VAT Directive before the courts in order to consider the works in question as immovable capital goods to which the extended revision period (in this case 15 years) applies.

Possible consequences

This Court ruling (C-243/23 dated 12.09.2024) may be of interest to VAT taxpayers who have exercised the so-called historical VAT deduction in recent years because their activity was initially exempted by article 44 of the VAT Code, but at some point became taxable with VAT. It is important to check carefully whether the five-year period was not wrongly applied and therefore more VAT could have been recovered. This can still be rectified today, but obviously only insofar as the right to the revision is not yet expired.

Feel free to contact us for assistance in such files. This could include, for example, files where historical VAT deduction was exercised in 2022 on a building whose provision has been considered, since 1 July 2022, as the provision of accommodation subject to VAT and no longer as an exempt real estate rental. But also other cases where the use of a renovated building was changed in 2021 or later, allowing a VAT revision in favour of the VAT payer.

If VAT deducted on renovations has to be partly refunded (e.g. sale with registration duty of the renovated building), this ruling could mean that more VAT has to be refunded than under the five-year review period.

We look forward to the tax authorities’ reaction.