Proposed removal of reduced 6% VAT rate on demolition and reconstruction for real estate developers as from 1 January 2024

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On 9 October 2023, Belgium’s federal government reached an agreement on the 2024 budget, which would make significant changes to the existing housing demolition and reconstruction schemes. A temporary measure, which made it possible to sell certain reconstructed homes at a reduced 6% rate of VAT, would be removed, and the permanent system of applying the reduced rate to projects in urban areas would also undergo important changes. 

New regime

As from 1 January 2024, the sale of properties by developers under a demolition-reconstruction project would no longer benefit from the 6% VAT rate. This temporary measure allowed developers to sell reconstructed homes to private individuals for use as their sole residence.

At the same time, the existing permanent scheme for the demolition and reconstruction of housing in Belgium’s 32 central cities would be extended nationwide. This geographical expansion would incorporate the social conditions applied under the temporary scheme in these cities. Therefore, as from 1 January 2024, the reduced VAT rate would only apply to relevant property sales throughout Belgium if the following conditions apply:

• The property is the sole residence of the owner, and is mainly used as a private home where that person is expected to reside for at least five years; and
• The total habitable surface area of the newly constructed home does not exceed 200 square metres (m²).

The combination of the "single, owner-occupied residence” requirement with the fact that the permanent scheme only applies to construction contracts (i.e., no off-plan sales are permitted), means that in practice the new scheme would only apply to a private owner who has demolished and rebuilt their sole residence. 

Transitional arrangements

As the new regime provides for a substantial reduction in the scope of both schemes, the following two transitional arrangements have been proposed:

• The temporary scheme for the demolition and reconstruction of owner-occupied homes that expires on 31 December 2023 may continue to be applied to supplies of homes and the associated land after 31 December 2023 if the relevant environmental permit was applied for no later than 30 June 2023, and any VAT becomes due and payable no later than 31 December 2024. Project developers can therefore invoice the works still to be completed at the reduced VAT rate, as long as the permit was applied for before 1 July 2023.
•  The permanent scheme for the demolition and reconstruction of housing in central cities may also be applied to work on immovable property that does not meet the sole and owner-occupied home or the surface area conditions, if the environmental permit is applied for no later than 31 December 2023 and as long as any VAT on the works becomes due and payable no later than 31 December 2024.

Impact

The proposed removal of the temporary demolition-reconstruction scheme and the integration of its social conditions into the permanent scheme has far-reaching implications, and the scope of the reduced rate of VAT would be significantly restricted. 

Property developers

As from 1 January 2024, new homes that property developers sell to private individuals after demolition of an existing building (i.e., on plan) would be, in principle, excluded from the reduced VAT rate of 6%.

For sales not covered by the transitional arrangement, the developer’s invoices could only benefit from the reduced rate until 31 December 2023 (as long as any VAT becomes due and payable by that date). If the environmental permit was applied for before 1 July 2023, the works to carry out a sale (on plan) could still be invoiced at the reduced rate until 31 December 2024.

Rental projects

The restriction of the new scheme to owner-occupied sole homes, with residency requirements, implies that investment in real estate for rental located in one of the 32 central cities would no longer be subject to 6% VAT, which would have a major impact on future rental projects. Currently, investors may tear down and rebuild old buildings, applying 6% VAT, and then rent them out to private tenants or students. This would no longer be possible as from 1 January 2024 as the "single, owner-occupied residence" requirement excludes the application of the reduced rate in these circumstances.

It may be important to note the only nuance in this respect is that the demolition followed by the reconstruction of a house intended for rental to a social rental agency (currently housing companies) will still be able to benefit from the 6% rate.

The second restriction concerns the fact that private owners who realise a demolition-reconstruction project in one of the 32 central cities are also likely to be subject to social conditions as from 1 January 2024; however, the transitional arrangements may apply. 

Comments

Although the government’s representation of the changes is that the demolition-reconstruction scheme will essentially be retained, and that it benefits young families, in practice the new scheme would have a very limited scope.

Only private individuals who acquire an existing home to demolish it and then have a new home built on the land, with a total habitable surface not exceeding 200 m², would still be able to benefit from the reduced VAT rate of 6%. The question is whether many young families have the time and the expertise to start a demolition and reconstruction project, and whether this measure does not in fact primarily increase the selling price of older homes.

From a tax and legal perspective, the clear exclusion of property developers could be subject to challenge (for example, in a possible review at the Constitutional Court).

What is certain is that the new regulation undermines the financial feasibility of current and future redevelopment projects and is an important brake on the required regeneration of existing real estate.