VAT adjustment period for major renovations in Belgium: Five or fifteen years? (ECJ Case 243/23)
Gauthier Duquesne
by Gauthier Duquesne
Context
Value-added tax (VAT) incurred on the acquisition of capital goods is immediately deductible. However, it is subject to a clawback during an adjustment period, calculated pro rata based on the years remaining in that period.
Belgian VAT legislation provides for different adjustment periods for capital goods and for services which have characteristics similar to those normally attributed to capital goods. The standard adjustment period is five years. For immovable property acquired as capital goods, this adjustment period extends to 15 years (or 25 years in specific cases).
For renovation works, Belgian tax authorities consider that the extended adjustment period is only applicable where they are of such significance that they result in a conversion of the property, within the meaning of Article 12(2) of the VAT Directive (“new” building). In such cases, renovation works are considered as “immovable property acquired as capital goods”.
ECJ Case 243/23
Due to a legislative change in 2014, a taxpayer who owned a building that underwent extensive renovations starting in 2007 obtained the right to deduct VAT on the construction works for which he was initially not entitled to deduct VAT, provided the adjustment period had not yet expired.
Belgian tax authorities determined that the renovation works did not qualify the building as new for VAT purposes. Consequently, they applied a five-year adjustment period, while the taxpayer argued that the 15-year adjustment period should apply to the renovation work.
The dispute reached a national court, which sought clarification from the Court of Justice on whether the 15-year adjustment period could apply to renovation work, even if the building was not classified as new for VAT purposes.
The court first emphasised the right to deduction is a fundamental VAT mechanism ensuring tax neutrality, and that the adjustment mechanism aimed to further guarantee this neutrality by enhancing the precision of deductions. The court then ruled that the definition of “conversions of buildings”, within the meaning of article 12(2) of the VAT Directive, was irrelevant to determining the adjustment period applicable to capital goods or services considered as such and provided for in article 190 of the VAT directive, as the purpose of these provisions was not the same. The court stated that the principle of VAT neutrality requires that renovation works which extend the economic life of a building to that of a new construction be treated as such.
According to the court ruling, it appears that the renovation works at stake have an economic life identical in duration to that of a new building, and should therefore be subject to the Belgian adjustment period applicable to immovable property acquired as capital goods, i.e. 15 years.
And now?
Although debatable, the Belgian criteria for classifying a building as new for VAT purposes used to provide a degree of legal certainty for taxpayers. There is now greater uncertainty regarding how to determine the applicable adjustment period for renovation works in Belgium.
Gauthier Duquesne is a member of the Brussels Bar, and an associate on the tax team at DALDEWOLF. Gauthier specialises in VAT, customs law, and excise duties.Contact Gauthier.
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