Direct application of the 3% rate

Since 1 January 1992, the normal VAT rate is 15%. In order to stimulate housing construction, the government subjects the creation and renovation of a dwelling to the super-reduced rate of 3%, provided that it is used as the main residence, either directly by the owner or indirectly by the tenant.

Dwelling means any building or part of buildings representing a distinct unit (e.g. an apartment) likely to be used as the main residence, including the garage, cellar or interior common areas related to it.

The simultaneous use of a dwelling as the main residence and for other purposes gives right to the tax relief, provided that the area reserved for the main residence is more than three quarters of the total area. If this area is less than or equal to the said proportion, the tax relief is granted in proportion with the part reserved for the main residence.

Procedure for direct application of the super-reduced rate of 3%

May be authorised for creation and renovation works carried out by categories of tradesmen within the limits and conditions set out in the Grand-ducal regulations of 30 July 2002 concerning the application of Value Added Tax on the use of a dwelling as the main residence and on creation and renovation works carried out in the interest of dwellings used as the main residence and setting out the related terms and conditions.

This new procedure is only allowed for works carried out after 31 October 2002.
The taxpayer (the supplier), responsible for carrying out the work, submits a request for direct application of the super-reduced rate to the administration de l'enregistrement et des domaines (land registration and estates department) for approval. Besides information relating to his company, he must also provide information on his client and the concerned building. As can be expected, these details are completed by the owner. Finally, he gives a brief description of the nature of works to be undertaken as well as the approximate cost.

The request, which should be in the format recommended by the department, is signed by the taxpayer and countersigned by his client. In practice, the company may send the said request with its quote to the client who approves, completes and signs it.

In the absence of prior authorisation, the company is required to invoice at the rate generally applicable in this respect and the owner must follow the refund procedure in order to benefit, if applicable, from VAT refund up to the super-reduced rate of 3%.

The tax relief arising from the direct application of the super-reduced rate of 3% respectively of the refund up to the rate of 3% cannot exceed €50 000 per dwelling created or/and renovated.

Additional information

If the beneficiary or his right-holders sell the dwelling or change the intended use thereof within 10 years, they must reimburse all or part of the tax relief. However, in the event of a sale, this reimbursement is not required if the buyer continues to use the dwelling as the main residence and provided he declares that he continues the personality of the transferor whose rights and obligations in respect of VAT he assumes.

Any transfer for consideration or any use other than as the main residence is to be declared in writing to the department within one month, failing which a penalty may be imposed.