The rise in VAT was predicted, projected then confirmed a short time ago to become a reality starting January 1st, 2015 in Luxembourg. Up until then, the real estate sector has enjoyed a special VAT regime at 3% instead of 15% and will surely be affected by this reform. But to what extent? That remains to be seen.

How will this change VAT to be applied to real estate?

Because the law has not yet been approved, changes are still possible. That said, the conditions for applying the change in VAT already seems rather clear: up to now, the state has granted a reduction of 12% of the VAT – applying tax of 3% instead of 15%, the standard rate – to the construction of new housing meant to become a main residence as well as for renovation construction work, up to EUR 50,000 per residence. This provision is adjusted depending on the situation.

For a main residence

The state intends to maintain the ultra-reduced rate of 3% for the construction of new housing meant for a main residence. However, given the way taxation limits are calculated, the conditions of application will be noticeably modified. Indeed, since these limits correspond to a difference between the standard rate and the ultra-reduced rate, the increase of 15 to 17% of the standard rate will involve a reduction of the amounts affected by the ultra-reduced rate. In short, eligible amounts will go from EUR 416,000 to EUR 359,000.

For investors

For a rental investment, the ultra-reduce rate of 3% will simply be removed until January 1st, 2015. The VAT rate will then be 17%, meaning costs will increase by 14%. Of course, construction work started up to December 31st, 2014 will not be affected by this measure.

Impacts on the real estate market

Even though is currently a certainty, this increase in VAT may still be modified and naturally, real estate professionals intend to weigh in on this decision. Indeed, even though it is rising overall, the real estate market in Luxembourg has also been affected by the crisis. The lack of social housing and rental housing has also caused problems. The change to the VAT regime will strongly affect lower-income households by restricting access to owning property. Furthermore, there is no doubt that going from 3% to 17% for the construction of housing meant to be rented will slow down investments and may discourage the launch of large real estate projects. The shortage of rental properties will surely also continue...