Insights
VAT
Prohibition of Input Tax Deduction for Luxury Properties
For properties acquired after 31 December 2025 that are particularly representative, the VAT liability on rentals is abolished, as is the input tax deduction.
Until now, the VAT rules provided that anyone who constructs a residential property and lets it out subject to VAT can, as a trader, reclaim the input tax on acquisition and production costs from the tax office – regardless of how exclusive the building is.
In principle, the letting and leasing of land is exempt from VAT in a non‑taxable way, meaning that no VAT is charged for the service and no input tax can be deducted for inputs. This exemption has historically excluded the letting of land for residential purposes (reduced VAT rate of 10%). Where the letting of residential properties was carried out as part of a business activity, the landlord was entitled to deduct input tax on the inputs related to the rental object (acquisition and production costs, ongoing expenses). This could lead to large input‑tax credits at the start of a letting, also because the letting entrepreneur could usually claim input tax at the standard rate of 20% on the costs, while only having to charge 10% VAT on the rental income.
Option to be taxable not possible
Following numerous and long‑standing discussions about the letting of expensive properties by corporations to their shareholders, the letting of particularly representative properties for residential purposes has been removed from this VAT liability and a compulsory non‑taxable VAT exemption for such rental revenues has been introduced. An option to opt into tax liability is not possible, so no input tax deduction is available for these properties.
This mandatory VAT exemption is not limited to cases of letting to close relatives or shareholders – where the conditions are met, the letting of such a property to third parties (even at market‑based terms) is also compulsorily non‑taxable.
Particularly representative property for residential purposes
A property is deemed particularly representative for residential purposes when the acquisition and/or production costs, capitalisable expenses and/or major‑repair costs for the property for residential use, including ancillary buildings and other structures, exceed EUR 2,000,000 within a period of five years from acquisition or the start of production. This amount is net of VAT. For apartment houses there is a relief, as the cost threshold is applied per individual dwelling unit rather than for the whole building.
The new rules came into force on 1 January 2026 and apply to all objects acquired or produced after 31 December 2025. With regard to the timing of determining the relevant cost threshold, the provisions in force at the time of exercising the input‑tax deduction must be applied. This is, for example, the case with advance or pre‑payment invoices (e.g. invoicing of partial payments during building construction) when the payment has been made. For acquisitions or productions of the property up to 31 December 2025, a letting for residential purposes is therefore not covered by the new statutory provisions and continues to be subject to the 10% VAT rate.
In principle, the letting and leasing of land is exempt from VAT in a non‑taxable way, meaning that no VAT is charged for the service and no input tax can be deducted for inputs. This exemption has historically excluded the letting of land for residential purposes (reduced VAT rate of 10%). Where the letting of residential properties was carried out as part of a business activity, the landlord was entitled to deduct input tax on the inputs related to the rental object (acquisition and production costs, ongoing expenses). This could lead to large input‑tax credits at the start of a letting, also because the letting entrepreneur could usually claim input tax at the standard rate of 20% on the costs, while only having to charge 10% VAT on the rental income.
Option to be taxable not possible
Following numerous and long‑standing discussions about the letting of expensive properties by corporations to their shareholders, the letting of particularly representative properties for residential purposes has been removed from this VAT liability and a compulsory non‑taxable VAT exemption for such rental revenues has been introduced. An option to opt into tax liability is not possible, so no input tax deduction is available for these properties.
This mandatory VAT exemption is not limited to cases of letting to close relatives or shareholders – where the conditions are met, the letting of such a property to third parties (even at market‑based terms) is also compulsorily non‑taxable.
Particularly representative property for residential purposes
A property is deemed particularly representative for residential purposes when the acquisition and/or production costs, capitalisable expenses and/or major‑repair costs for the property for residential use, including ancillary buildings and other structures, exceed EUR 2,000,000 within a period of five years from acquisition or the start of production. This amount is net of VAT. For apartment houses there is a relief, as the cost threshold is applied per individual dwelling unit rather than for the whole building.
The new rules came into force on 1 January 2026 and apply to all objects acquired or produced after 31 December 2025. With regard to the timing of determining the relevant cost threshold, the provisions in force at the time of exercising the input‑tax deduction must be applied. This is, for example, the case with advance or pre‑payment invoices (e.g. invoicing of partial payments during building construction) when the payment has been made. For acquisitions or productions of the property up to 31 December 2025, a letting for residential purposes is therefore not covered by the new statutory provisions and continues to be subject to the 10% VAT rate.