Suppose your company rents out an apartment (exempt from VAT). Do you need to submit a notification for being entitled to the actual use VAT deduction method? The answer to this question was published on June 21, 2023, 9 days before the notification deadline (for taxpayers who already applied actual use last year). And unfortunately, the answer is not entirely clear.
Since January 1, 2023, there is a new procedure for mixed taxpayers to exercise VAT deduction based on the principles of actual use. Taxpayers who want to apply actual use must provide a notification "in advance". For taxpayers who already applied actual use before 2023, there is a transitional procedure that expires on June 30 (or July 1, depending on whether you read Art. 46 of the Belgian VAT code or Art. 18bis of Royal Decree nr. 3). Many taxpayers were waiting for clarification from the tax authorities to decide whether or not to submit the notification. This clarification is now available in a circular letter that explains many (other) legislative changes (Circular 2023/C/63 dated June 21, 2023).
Circular letter refers to "occasional" transactions
In this circular letter, the administration explains that mixed taxpayers who apply the general pro-rata and fully taxable persons who occasionally engage in activities referred to in Article 13 of Royal Decree No. 3 do not need to submit a notification for the actual use method. This is somewhat remarkable.
Article 13 of Royal Decree No. 3 states that "the following shall not be taken into account for the calculation of the general pro-rata:
1° the proceeds from disposing of investment goods used by the taxable person in his business;
2° the proceeds and income from real estate and financial transactions, unless those transactions belong to a specific economic activity of that nature;
3° the amount of transactions carried out abroad, when they are carried out by a business establishment which is independent from the Belgian establishment and the expenses related to those transactions are not borne directly by the latter establishment."
We are mainly interested in the first two parts. A taxpayer who sells an "old" building (investment goods) under the VAT exemption does not need to include the turnover from that sale in a general pro-rata. Consequently, he does not lose the right to deduction for his "core business".
On the other hand, the question arises as to what is meant by the second part of this provision. Income from real estate and financial transactions do not need to be included in the pro-rata, unless those transactions belong to a specific economic activity of that nature.
And then, of course, the question arises as to what constitutes a "specific economic activity". In practice, it is assumed that a lawyer who rents out an apartment (exempt from VAT) falls under this provision. Consequently, he does not need to submit a notification for the actual use regime. According to the tax authorities, he falls under the actual use system "by force of law": he has no right to deduction on the apartment, but the turnover from the rental does not need to be included in the (general) pro-rata.
In the context of the notification for actual use, the tax authorities now seem to state that it must concern "occasional" transactions.
However, is this interpretation correct?
There is much debate regarding what constitutes a specific economic activity and what does not. Interestingly, the circular letter now includes the requirement for an "occasional" activity, which is different from a "specific economic activity of that nature" referred to in Article 13 of Royal Decree No. 3. Furthermore, the VAT Directive states that "incidental transactions relating to immovable property and incidental financial transactions" should not be included in a general pro-rata calculation (Article 174(2)(b)). Case law from the Court of Justice reveals that this refers to a different situation than merely occasional transactions (see the two key judgments CJEU 11 July 1996, C-306/94, Regie Dauphinoise and CJEU 29 April 2004, C-77/01, EDM). In these judgments, the Court of Justice examines whether the rental activity is an extension of the usual business of the taxpayer in question and/or whether significant costs (including VAT) are incurred for the activity. Thus, the Court of Justice does not necessarily consider the occasional nature of the transactions. Moreover, the text of Belgian legislation deviates from the VAT Directive, raising additional questions.
Determining whether or not to submit a notification is a complex matter. In our opinion, the case law of the Court of Justice should prevail. In that case, a lawyer renting out an apartment should not be required to submit a notification for the actual use method, even if the rental activity is year-round and not occasional. However, one can anticipate the ensuing debates, including discussions on how many apartments would disqualify the activity from being considered incidental.
Will everyone have to submit a notification soon?
Meanwhile, the Minister of Finance announced that an upcoming law will introduce an expanded notification procedure for various provisions. This will also apply to mixed VAT taxpayers subject to a general pro-rata and partial VAT taxpayers.
The intention behind these changes is clear: the tax authorities want a comprehensive overview of all VAT taxpayers who, due to their status, have limited VAT deduction rights. Additionally, they want to remotely monitor how taxpayers calculate their right to deduct VAT. As a result, mixed VAT taxpayers applying the actual use method will be required to provide structured data on their VAT deduction from next year onwards. Undoubtedly, a similar obligation will be imposed on partial VAT taxpayers and mixed VAT taxpayers subject to a general pro-rata.
What is the significance of submitting a notification?
The justification for submitting a notification for the actual use method is usually based on the CTT judgment of the Court of Justice (CJEU 30 April 2020, C-661/18). In that judgment, the Court of Justice stated that Member States can refuse retroactive application of the actual use method. However, it does not necessarily imply that taxpayers who do not submit a notification should fall under a general pro-rata calculation.
To understand this, it is necessary to refer to the VAT Directive. Article 173 of the Directive stipulates that a general pro-rata applies to goods and services used by a taxpayer for both taxable and exempt transactions. Member States may deviate from this and apply one of the systems listed in the second paragraph of that article. One such deviation is the general pro-rata method applied in Belgium.
In essence, by imposing the general pro-rata on all VAT taxpayers, Belgium deviates from the basic system of the directive. According to the directive's basic system, costs are initially allocated directly to taxable and exempt activities, with or without a right to deduct VAT. It is only for mixed costs that a pro-rata calculation is applied in the directive's basic system.
This nuance is crucial in relation to the CTT case. In that case, the issue revolved around the use of an "actual use" system in which costs are allocated to exempt or taxable activities based on certain formulas. In other words, it involves a specific system of actual use that utilizes keys other than turnover (as stipulated in Article 173(2)(c) of the VAT Directive). Portugal argued that such a deviating system could be allowed under specific conditions, including non-retroactivity. The Court of Justice agreed with Portugal's argument.
Therefore, it would be an overreach to claim that Belgium is entitled to subject VAT taxpayers who do not submit a notification to a general pro-rata calculation. At the very least, taxpayers should have the opportunity to apply the basic system provided for in the VAT Directive, which involves actual use (allocation to exempt and taxable turnover) combined with what we call a specific general pro-rata.
The final word has not been spoken yet...
This contribution has been published on TaxWin (available at www.taxwin.be).
This contribution has been published on TaxWin (available at www.taxwin.be).