On 18 May 2017, the Dutch Ministry of Finance published a draft proposal online that seeks to expand the scope of the VAT adjustment to include ‘high-cost services’ effective 1 January 2018.
The proposed amendment will have a major impact as investments will have to be followed for a longer period of time. The expansion of the scope of the adjustment scheme will result in additional administrative obligations.
Under Dutch VAT rules, capital goods are subject to an adjustment scheme: movable property is followed for a period of 5 years and immovable property is followed for 10 years. At present, no VAT adjustment scheme applies to high-cost services. Based on the draft proposal, the VAT adjustment scheme will also apply to investment services that a business owner purchases and will use in his business for a longer period of time. It concerns high-cost services in respect of which a business owner deducts costs for personal and corporate income tax purposes, such as refurbishments, intellectual property rights, and the purchase of software.
As matters stand, the VAT deduction associated with high-cost services is final after one financial year, but if the proposed scheme comes into force, businesses will in the case of high-cost services also be obliged to continue to follow the original VAT deduction. This will create more situations in which the VAT-adjustment scheme will apply, which will result in businesses being confronted with an additional administrative burden.
Implications for the real estate practice
The draft proposal will have major impact especially on transactions involving real estate that is let. When let real estate is transferred, the buyer assumes the seller’s place and the buyer is obliged to review whether the VAT deducted by the seller must be repaid. In the case of a refurbishment where these high-cost services will no longer be used for activities subject to VAT in the adjustment period, the original VAT deduction will have to be adjusted. As such, after the proposed amendment has been implemented, switching from a lease subject to VAT to a VAT-exempt lease for a refurbished building will result in an annual obligation to repay VAT and the refurbishment costs. Conversely, the buyer may be entitled to a VAT refund if the situation involves switching from a VAT-exempt lease to a lease subject to VAT.
According the Ministry of Finance, the purpose of the proposed scheme is to eliminate the imbalance between VAT deduction on capital goods on the one hand, and investment services on the other hand. It is unclear whether a transitional scheme will be introduced. Interested parties have until 15 June 2017 to give their input on the draft proposal.