The sale or rental of a property or commercial premises is generally not subject to value-added tax (VAT), even if the seller or landlord is otherwise VAT liable in other business activities. However, letting activities may be separately registered for VAT liability.
Value Added Taxation of Rental Activities
The rent for the commercial premises under the lease agreement usually includes value-added tax, based on the owner's registration for VAT. In such cases, the subtenant, tenant, and landlord must all ensure compliance with the relevant VAT regulations.
Although leasing of property rights pursuant to Section 27 of the VAT Act is generally VAT-exempt, landlords may opt to become VAT liable if conditions in Section 30 of the VAT Act are met. This obligation does not apply if VAT is not added to the rent. The landlord can opt for VAT liability providing that the tenant (or subtenant) conducts VAT-liable or VAT-refundable activities in the premises, granting them at least partial input VAT deduction or refund rights on the rent. Registration for VAT liability on rental activities must always be applied for separately, even if the landlord is already VAT registered due to other business activities.
Following registration, the landlord will perform VAT accounting on the rents or charges related to the premises and may deduct VAT on acquisitions made for this activity. The tenant (or subtenant) can deduct the VAT included in the rent to the extent that the premises are used for taxable business activities.
To ensure their right to deduct VAT and the correct payment of VAT, tenants or subtenants must verify whether the landlord is registered for VAT on the leasing of the property. Registration status can be checked at YTJ (www.ytj.fi). If the landlord is not registered, VAT must not be charged on the rent.
Requirements for Registering as VAT-liable
The application condition is that the end user (tenant, subtenant or even a sub-subtenant) uses the premises continuously and at least partially within a VAT-liable business or an activity entitled to tax refund.
The applicant may be the property owner, a shareholder of a mutual real estate company (housing company), or their tenant. The applicant can also be a subtenant, extending to the last landlord in the chain.
Application always pertains to a property or part thereof, where the smallest unit to which the application can apply is an apartment or another clearly distinguishable part forming a functional whole smaller than an apartment.
The same premises may be sublet multiple times (VAT Act, Section 30, Subsection 2). For the rental chain to qualify, it is a prerequisite that any tenant who sublets the premises is also registered as a taxpayer. The registration chain must be continuous from the first registered lessor to the final lessor, and the end user must always engage in activity that is at least partially subject to VAT.
Use of premises and alterations
The tenant does not register for VAT liability on their lease unless they sublease the rented premises to a third party (or as a sublease). The landlord's VAT registration is evidenced, for example, by the lease agreement and charging rent inclusive of VAT. The tenant must ensure their own activities qualify for VAT deduction as defined by the VAT Act. The tenant must also inform the landlord of any changes in their operations that might affect this matter. The landlord generally cannot independently assess the nature of the tenant's operations.
The end user (tenant/subtenant) must continuously conduct at least partially VAT-deductible activities in the premises. Ensuring these criteria are met is the responsibility of the tenant/subtenant before signing the lease and throughout the lease term if the nature of their operations changes. Lease agreements typically address VAT liability and compensation to the landlord for losses caused by loss of VAT deduction rights. This compensation obligation can be significant, as the landlord may be required to repay VAT deductions related to the leased property to the tax authorities (and, in certain cases, to the real estate company) for periods when the landlord would not have had deduction rights, for example due to the nature or change of the tenant’s business.
Additional Notes
Value-added tax issues can also be relevant in the relationship between the shareholder (landlord) and the housing company if the company's articles require collecting VAT-charges, as changes in the tenant's or landlord's operations or taxation status may lead to VAT adjustments and additional related costs. Therefore, if the operations of either party change (for example, if the tenant is a VAT-exempt business), the shareholder should clarify the implications with the housing company.
When selling a property, attention must be paid to the provisions of Chapter 11 of the Value Added Tax Act concerning the adjustment of VAT deductions on property investments. A property investment refers to the purchase or self-execution of construction services related to new construction or major renovation (VAT Act Section 119), but not to measures of a repair nature. Deductions already made must also be adjusted, for example, if the property's intended use changes or if the property is sold during the adjustment period (VAT Act Section 120), which is 10 years from when each investment was made. The general rule (VAT Act Section 121e) states that upon sale, the adjustment right transfers to the buyer unless otherwise agreed in the sale, provided the seller is a business operator and the buyer purchases the property for business purposes. In such cases, the seller must provide the buyer with a statement of the investments made and their dates (VAT Act Section 209k).
The information provided is based on general principles and is indicative, as the agency is not a tax expert. Therefore, we cannot comment on the circumstances under which deduction rights arise or cease. Questions related to VAT liability should be clarified with your accountant and/or tax advisor or the tax authorities. VAT matters should always be confirmed prior to the commencement of the lease and agreed upon in the tenancy agreement to avoid misunderstandings.
Author: Kristian Danielson, Responsible Manager, Bachelor of Laws, Licensed Real Estate Agent
