Opting for taxation according to sec 6 para 2 Austrian VAT Act in the case of a subtenancy agreement and the sale of the property

In a letter to the Austrian Chamber of Tax Advisers and Public Accountants (KSW) on 26 April 2024, the Ministry of Finance (BMF) commented on the possibility to opt for taxation in section 6 para. 2 Austrian VAT Act (hereinafter UStG) in connection with the sale of the property in the case of a sublease. If the option for taxation is exercised, the letting of the property is subject to VAT. If the property is sold, a new main tenancy agreement between the owner and the tenant will be concluded, for which the possibility to opt for taxation must be examined independently. However, the new main tenancy agreement has no impact on the qualification of the already existing and unchanged subtenancy agreement for VAT purposes.

Facts and Circumstances

The request of the KSW included the following facts and circumstances:

The property owner (E1) rented several flats subject to VAT to the tenant (M1) before 2012 (1. Tenancy agreement = main tenancy agreement). With the consent of E1, M1 concludes a subtenancy agreement for the same flats with UM1 before 2012 (2. Tenancy agreement = subtenancy agreement).

UM1 provides VAT-exempt services. For the subtenancy agreement between M1 and UM1, M1 has exercised the option for taxation according to section 6 para. 2 UStG (before 2012).

After 2012, E1 sells the property to E2.

Questions of the KSW

With reference to the case at hand, the KSW asked the BMF the following questions:

1. Does the transfer of the property from E1 to E2 “only” lead to a new tenancy agreement between E2 and M1 from a VAT perspective?

2. In order for E2 to examine whether the recipient (=M1) uses the flats almost exclusively for transactions that are not exempt from VAT without the right to deduct input VAT, does E2 have to take into account the correct rent invoice subject to VAT issued from M1 to UM1 or are the services UM1 provides, relevant?

VAT assessment of the BMF

In general, the letting and leasing of properties is in accordance with section 6 para. 1 no. 16 UStG exempt from VAT without the right to deduct input VAT. In accordance with section 6 para. 2 last subparagraph UStG opting for taxation is possible, if the recipient uses the property or a structurally completed, independent part of the property almost exclusively (at least 95%) for transactions, which are not exempt from VAT without the right to deduct input VAT. If this condition is met, the letting of the property can be treated as subject to VAT. This provision is to be applied on tenancy and lease agreements, which begin after 31 August 2012. A change of the tenant or lessor establishes a new tenancy or lease agreement for VAT purposes.

The transfer of ownership of the property from E1 to E2 leads to a new tenancy agreement between E2 and M1. However, the new main tenancy agreement has no impact on the qualification of the subtenancy agreement between M1 and UM1 for VAT purposes. Because the agreement is an “old” agreement (the tenancy agreement was concluded before 1 September 2012), M1 has further the possibility to opt for taxation and thus, treat the letting of the property to UM1 as subject to VAT, as long as the tenant or lessor of the subtenancy agreement are not changed.

In this case, E2 can also opt for taxation, and thus, treat the letting of the property to M1 as subject to VAT because – although the tenancy agreement between E2 and M1 is a “new agreement” – M1 only carries out transactions subject to VAT.

A change of M1 or UM1 has the consequence that the tenancy agreement between the new subtenant and the tenant is qualified as “new agreement” for VAT purposes. If the new subtenant does not use the property almost exclusively (at least 95%) for transactions, which are not exempt from VAT, the tenant can no longer opt for taxation and treat the letting of the property as subject to VAT. This conclusion applies to the tenancy agreement from the time of the change of tenant. As a result, E2 can no longer opt for taxation and treat the letting of the property to M1 as subject to VAT, because M1 no longer uses the property almost exclusively (at least 95%) for transactions that are not exempt from VAT, because M1 has to treat the letting of the property to the new subtenant as exempt from VAT. The same applies for a change of M1, because this change leads to the qualification of all tenancy agreements as “new agreements” for VAT purposes.