Limits to the application of VAT exemption for the rental of residential real estate for residential purposes

On October 8, 2021, the Minister of Finance, Development Funds and Regional Policy issued a general ruling No. PT1.8101.1.2021, in the scope of VAT taxation of renting or leasing residential real estate for housing purposes.

The general ruling concerns the possibility of applying the VAT exemption under Art. 43.1.36 of the VAT Act in the case of renting or leasing of real estate to an entity conducting business activity, which then makes the real estate available to other entities. In the market practice, this situation most frequently refers to the provision of residential premises by a business entity to its employees.

According to the general ruling, the VAT exemption cannot be applied because the entity conducting a business activity through renting a property from the owner does not pursue the purpose of housing, but the purpose related to its conducted business activity. Meanwhile, the condition that the purpose of renting/leasing real estate exclusively for residential purposes is fulfilled only at the stage when a real estate is made available to natural persons, and only then can the activity be exempt from VAT.

This general ruling presents a different position than those issued in recent years where the tax authorities allowed for the application of VAT exemptions when renting residential premises to entrepreneurs who made them available to their employees for housing purposes. Now this practice is bound to change and the rental of residential premises to entrepreneurs will, in principle, be subject to 23% VAT.

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