The Zeeland-West Brabant District Court ruled in a case in which the Inland Revenue stated that flat rentals are not subject to VAT.
Sale or short stay rental
The case concerns a monumental farmhouse converted into five flats. The BV carrying out the project initially intended to sell the flats. As the property is existing, this would be a VAT-exempt transaction. As a result, the VAT charged on the (re)construction costs is not deductible.
In 2022, the BV decides not to sell the flats but to rent them out fully furnished and unfurnished, targeting temporary tenants such as expats and students. In the prospectus, the BV said: “Given the unique character of the overall Object and the development of the Municipality of Veldhoven and ASML in particular ... currently ... chooses to lease and operate the properties on a “short-stay” basis.”.
Hotel or holiday spending business
The letting of residential property is exempt from VAT. This is different if the rental is:
- in the hotel, guesthouse, camp and holiday spending business;
- to persons staying there for a short period only.
The court noted that the BV is not a hotel or holiday spending business. But activities that have a similar function also fall under the exception to the VAT exemption. If so, they must be accommodation equipped for short stays, without the tenant being charged with taking care of the inventory.
The court considered that the BV made it plausible that it intended to rent out the flats for a short duration (no more than 6 months), fully furnished, without the tenant being in charge of taking care of the inventory. In doing so, the court said, the BV is entering the market of hotel and holiday accommodation companies in competition. The circumstance that hotel and holiday companies generally apply a shorter minimum purchase period does not detract from this (the Court considered that it had also not been shown that hotel and holiday accommodation companies never enter into contracts for - at most - six months).
The court concluded that the BV was renting out the flats taxed with VAT, so the tax authorities should grant the request for refund of the VAT charged on the (re)construction.
In this case, the BV has extensively substantiated its intention to let short stay. The importance of this is demonstrated by, among others, a case we describe in our article Short stay not sufficiently substantiated. Importantly, the court also looked not only at the (envisaged) maximum duration of the leases (6 months), but more importantly at whether it was in competition with the hotel and holiday spending business.
Review on investment services
For renovations, such as in the case tried by the court, which are put into use as from 1 January 2026, the new revision scheme for investment services will apply. Under that scheme, VAT deducted in respect of investment services must still be paid (in part) if the remodelled property is used VAT-exempt within 10 years of its (re)commissioning.