Exempt rent and waiving the exemption: who may opt for VAT and why

Ms Kessler buys an empty office floor and has it fitted out for €150,000 net. The builders' invoices carry €28,500 of VAT. Her tenant will be a tax advisory firm. If she signs an ordinary lease without VAT, her rent is exempt and the €28,500 stays with her for good. One clause in the lease and correct invoicing would have brought it back.

The basic rule: letting is exempt

Anyone who lets land, a building or part of one for consideration is a business for VAT purposes. The rent is therefore a taxable transaction in principle. The law normally exempts it, however: section 4 no. 12 sentence 1 letter a UStG exempts the letting and leasing of land and buildings.

The exemption reaches beyond an ordinary lease. Letter b covers the use of land under a contract aimed at transferring ownership, for instance when a buyer moves in before title passes. Letter c covers rights in rem to use land, meaning the creation, transfer and granting of the exercise of such rights.

Exempt means the landlord charges no VAT and pays none over. That sounds like an advantage, but it is one only for a tenant who cannot deduct input tax itself. For the landlord the exemption has a downside, which only shows up on the cost side of the property.

Section 15(2) sentence 1 no. 1 UStG bars the deduction of input tax on every purchase the business uses for exempt supplies. Construction, refurbishment, property management, repairs: the VAT on those invoices becomes a final cost as soon as the space is let on an exempt basis.

For flats let long-term to private individuals, the exemption is the end of the story, because no option is possible there. How such rents are taxed for income tax is explained in the course on rental income. This course stays with VAT and with tenants who are businesses themselves.

Four cases in which the rent is taxable anyway

Section 4 no. 12 sentence 2 UStG expressly excludes four kinds of letting from the exemption. Nobody has to opt for them; they are taxable by law. A landlord who overlooks them and invoices without VAT still owes the tax and has to extract it from the agreed rent.

• living and sleeping rooms a business keeps ready for the short-term accommodation of guests, meaning hotel rooms, guest houses and holiday flats
• spaces for parking vehicles, meaning parking spaces, garages and spaces in underground car parks
• short-term letting on campsites
• machines and other equipment of any kind forming part of an operating installation, the so-called Betriebsvorrichtungen, even where they are integral parts of the land

Accommodation is the best-known case. That a holiday flat is therefore taxable, and which reduced rate applies to it, is covered in the course on rental income. It is enough to note here that this rule catches only short stays, not the long-term letting of a flat.

Of greater practical weight for commercial landlords are parking spaces. Letting garages or car parking separately is a taxable supply, whether the tenant is a business or a private person. Whether a parking space let together with an exempt flat or office floor shares its exemption is not answered by the statutory text; clarify it before signing.

Operating equipment is the case overlooked most often. A cold store, a crane system or a paint booth serves the business, not the building. If a hall is leased with such equipment, the rent has to be split: the part for the building is exempt, the part for the equipment taxable, even where both are firmly joined.

The first hurdle: the tenant is a business

Under section 9(1) UStG a business may treat a supply exempt under section 4 no. 12 as taxable if it is made to another business for the purposes of that business. The provision opens the same possibility for several other exemptions, including the sale of land under section 4 no. 9 letter a, which the second module covers.

The condition has two parts. The tenant must be a business, and it must rent the space for that business. A flat for a family is therefore ruled out, as is the flat a managing director lives in privately, even if he runs a business professionally. What counts is the purpose for which the space is rented.

The same holds for an association that has a commercial operation alongside a non-profit sphere. If it rents rooms only for its statutory, non-business work, the link to its business is missing. The option is then barred, however reliable the association may be as a tenant.

The second hurdle: what the tenant does with the space

For lettings, section 9(2) sentence 1 UStG adds a further condition. The waiver is permitted only to the extent that the tenant uses or intends to use the property exclusively for supplies that do not exclude input tax deduction. It is not enough for the tenant to be a business. Its own activity must carry a right to deduct.

The reason is plain. A tenant making exempt supplies itself could not deduct the VAT on the rent. It would bear it as a cost while the landlord relieved its construction costs. The rule prevents the option from shifting VAT from the landlord onto a tenant without a right to deduct.

Typical tenants for whom the option therefore fails are medical practices with their treatments under section 4 no. 14 letter a UStG, insurance agents and brokers under section 4 no. 11, and credit institutions to the extent they grant or arrange loans under section 4 no. 8 letter a. Letting to them means letting exempt.

The statute says exclusively. Whether the tax authorities accept a minor exempt use by the tenant is not in the statutory text and was not read for this course. A landlord whose tenant has a mixed activity should therefore settle this question with an adviser before opting.

The words to the extent matter just as much. The option need not be exercised uniformly for a whole building. In a property with several tenants it can be tested for each unit separately: opting towards the advertising agency on the first floor, exempt towards the medical practice on the ground floor.

Section 9(2) sentence 2 UStG places the burden of proof on the landlord. It must show that the tenant uses the space for supplies with a right to deduct. A lease clause in which the tenant describes its activity, must report any change without delay and may sublet only with consent is therefore more than a formality.

Older buildings: when the second hurdle falls away

The restriction to tenants entitled to deduct does not apply to every building. Section 27(2) UStG contains a transitional rule that is still in force in 2026. Under it, section 9(2) does not apply to older buildings, so that for them only the first hurdle counts: a tenant renting for its business.

The rule turns on two dates, the start of construction and completion, and on the purpose the building serves. Both conditions must be met. A building completed before the cut-off date whose construction only began after the relevant start-of-works date does not fall under the exception.

In practice this mainly concerns office and commercial buildings completed before 1998 whose construction had begun before 11 November 1993. For them the landlord can opt even towards a medical practice, provided the practice is a business renting for its business. For the practice, though, the VAT on the rent then becomes a cost.

Form, invoice and timing of the option

For lettings, section 9 UStG lays down neither a form nor a deadline. The text requires no special declaration to the tax office. The landlord opts by treating the supply as taxable: it agrees the rent plus VAT, invoices it that way and reports it in its advance VAT returns.

The sale of land is different. There section 9(3) UStG requires the waiver to be declared in the notarised contract. That form does not apply to rent, but it shows how seriously the law takes the waiver. The second module comes back to it.

The invoice is the real tool. Under section 14(1) UStG an invoice is any document by which a supply is billed, whatever it is called. A lease that shows the consideration, the rate and the amount of tax can do this job, completed by the other mandatory particulars of section 14(4) UStG.

Once the rent is taxable, the duty to invoice applies too. Under section 14(2) sentence 2 no. 1 UStG the landlord must issue an invoice within six months for a supply to a business. For exempt rents this duty expressly does not apply. The e-invoicing obligation is covered in the course on e-invoicing.

An error in the other direction also costs money. If the landlord shows VAT although the option is not permitted, for example towards a medical practice in a new building, it owes the amount shown under section 14c UStG. The practice cannot deduct it as input tax, and it can only be corrected under the rules of that provision.

The waiver is not irreversible. Section 14c(1) sentence 3 UStG expressly mentions reversing a waiver under section 9 and refers to the procedure in subsection 2 for correcting the invoice. A landlord withdrawing the option must therefore also correct the VAT shown properly, or it continues to owe it.

A small business under the Kleinunternehmer scheme cannot opt. Section 19(1) sentence 2 UStG expressly declares section 9 inapplicable to it. A small landlord who wants to use the option must first give up the small business scheme, with the commitment set out there; the course on that scheme describes the step.

Incidentally, exempt rents do not count when testing whether someone is a small business at all. Section 19(2) sentence 1 no. 1 UStG deducts supplies under section 4 nos. 11 to 29 from total turnover. A landlord with large exempt rents can thus stay below the threshold for its other, taxable supplies.

Why landlords opt: input tax deduction

The benefit of the option lies solely in input tax deduction. With it, the letting becomes a taxable supply and the bar in section 15(2) sentence 1 no. 1 UStG no longer applies. The landlord can deduct the VAT on purchase, construction, fit-out and running upkeep under section 15(1) sentence 1 no. 1 UStG.

This requires a proper invoice from the builders, architects and service providers that the landlord holds. On large projects the input tax often arises long before the first rent payment. Section 9(2) expressly refers to the intended use as well. A landlord who wants to opt should therefore document that intention early, for example with draft leases.

For the right tenant the option is neutral. The tax firm from the introduction pays the rent plus 19 percent and deducts that amount itself as input tax. Only the net rent remains a cost for it. The landlord pays the VAT over and in return has relieved its construction costs.

The option has a price that may fall due later. It ties the deduction to the use of the space over many years. If the tenant changes or the building is sold, part of the input tax deducted may have to be repaid. These risks are the subject of the second module.

If the owner uses part of the building privately, for example as a home, section 15(1b) UStG limits the input tax deduction to the part used for the business. How such private use is treated for VAT is described in the course on private withdrawals and private use.