Pursuant to Article 47 of the VAT Directive, services connected with real estate property are located and subject to VAT where the property is located (depending on the countries concerned, the reverse charge mechanism may apply or not).
Pursuant to Article 44 of the same Directive, services not connected with real estate property are located and subject to VAT where the recipient is established (under the reverse charge mechanism).
In practice, the scope of application of both provisions was unclear and largely subject to interpretation. These difficulties have led to double or nil taxation and VAT risk exposure due to possible opposite interpretations by VAT authorities.
To help economic operators, the Regulation provides definitions, clarifications and guidelines:
- the services connected to immovable property must have a sufficiently direct connection with immovable property. This condition is met if the services are derived from immovable property and such property makes up a constituent element of the services and is central to, and essential for, the services supplied; or if they are provided to, or directed towards, immovable property, and are aimed at carrying out the legal or physical alteration of such property;
- the Regulation also provides for non-exhaustive lists of examples covered by Articles 47 and 44 and therefore subject to VAT in the appropriate country (i.e. the country where the property is located or the country of the recipient). Such classification might imply foreign VAT registration, even if some Member States have introduced so-called reverse charge rules which shift the obligation to pay VAT to the beneficiary of the service.
The Regulation is particularly pertinent for all types of real estate structures, especially those characterised by numerous fee flows with various service providers and possible recharge of costs within the structures involved. Promoters, asset managers, investors, servicers and directors should seriously consider these new guidelines to better manage complex VAT rules in a global and international environment.
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