VAT Accounting in Real Estate Renting in Estonia

In this article, we focus  primarily on the perspective of a VAT-registered landlord and review a couple of important VAT-related tax issues.

When the parties enter into a residential lease agreement, it does not matter whether the renter is an individual or a company. Residential rent is VAT-exempt and cannot be voluntarily taxed with VAT (according to VAT Act § 16 subsection 3 point 2). However, attention must be paid to VAT-related nuances when acquiring furnishings and forwarding utility bills to the tenant.

VAT Accounting for Furnishing a Residential Property

For VAT-registered entities, it is important to clarify the purpose for which the property is acquired (i.e., for sale or for renting) when reclaiming input VAT. The VAT Act does not contain provisions that explicitly force the owner to repay all the input VAT deducted on the purchase of apartments and furnishings if the intended purpose of the purchased apartments (taxable resale) changes. There is only a provision that requires the adjustment of input based on the use of fixed assets (§ 32 subsection 4). The deduction of input VAT on fixed assets and goods and services acquired for fixed assets is based on the projected proportion of taxable turnover for which the fixed assets are used. For example, the purpose of the purchased real estate changes if the real estate was acquired for sale but is actually rented. The purpose also changes in the opposite case.

Input VAT is adjusted according to the actual proportion of taxable turnover for which the fixed assets and goods and services acquired for fixed assets are used during the input VAT adjustment period. Input VAT is adjusted only for goods and services acquired for fixed assets that increase the accounting value of the fixed assets. These amounts should be adjusted over 5 years. For the residence itself, over 10 years. The adjustment of deducted input VAT (repayment to the tax authority) takes place at the end of each calendar year in the December declaration. However, this does not mean that the tax authority will not demand the repayment of all input VAT deducted on leased apartments from the moment they are leased out if subjected to a tax audit. Based on the described situation, it might be worth considering a pre-agreement with the tax authority to confirm that the entire deducted input VAT does not need to be repaid immediately when rented VAT-exempt, but that the adjustment takes place annually during the adjustment period.

How to Handle a Utility Bill from the Housing Association (hereinafter HA) that is not Subject to VAT?

The HA is not a VAT-registered entity, so the invoices issued by it already include VAT, which the HA paid for the purchased services such as electricity/water/gas, etc., which are distributed among the apartments. If the landlord were to add VAT when re-invoicing such a bill, double taxation would occur, which is not in line with the principles of the VAT Directive. This situation is not regulated in the VAT Act. According to VAT Act § 16 subsection 2 point 9, goods for which there was no right to deduct input VAT are VAT-exempt.

However, if you look at the HA invoice, it does not always include only goods but often also services provided to the housing association, such as carpet replacement, maintenance, etc., which might indicate that it is a composite service (based on the principle of a single supply), aimed at ensuring the upkeep of the building (i.e., providing a service), and thus the mentioned provision is not applicable. Here, VAT Act § 12 subsection 9 can be applied: „Taxable value shall not include the amounts received from the purchaser of goods or the recipient of services as repayment for expenses incurred in the name and for the account of the purchaser or recipient which are entered in the books in a suspense account. Proof of the actual amount of this expenditure must be furnished.

A taxable person shall not deduct the input value added tax included in the expenses paid out in the name and for the account of the purchaser of goods or the recipient of services..“

This situation is not exactly as described in the provision, i.e., it is not formally an expense made on behalf of and at the expense of the tenant, as the invoice is issued to the lessor, as the owner of the apartment, not to the tenant, although at the tenant's expense. In such a case, the forwarding of the expense or the receipt of reimbursement from the tenant is not turnover within the meaning of the VAT Act.