The Luxembourg government has adopted a series of new laws in relation to the housing policy with the objective of encouraging the supply of housing through precise and targeted measures. The new laws reduce the tax burden applicable on the sale of building lands, residential buildings as well as on the purchase and construction of residential buildings.
The VAT rate in the Grand Duchy of Luxembourg is 15%. However in some cases one can benefit from a super-reduced rate of 3%.
What does creation and revovation
of a dwelling mean?
The creation of dwelling encompasses:
- the construction of a dwelling, including the construction of a garage or a site (provided it forms a single unit with the dwelling used as the main residence), pursuant to a contract of sale of buildings to be built and / or of a contract for the supply of services or facilities;
- Construction works fully or partly carried out by the owner or with the assistance of various categories of tradesmen;
- Conversion into a dwelling of a building or part of an existing building previously used for other purposes (e.g. Conversion into a dwelling of an office building or conversion of a barn into a dwelling);
- The extension of an existing dwelling through the addition or enlargement of dwelling rooms.
The renovation of dwelling encompasses:
- Substantial improvement works carried out following the purchase of a dwelling. The said works must be completed within five years of this purchase. Purchase means an acquisition for consideration (e.g. Sale) and an acquisition free of charge, inter vivos or following death (e.g. Donations, inheritance);
- Substantial improvement works on a dwelling constructed at least twenty years before the start of the said works. These works must be completed within two years as from their start. Renovation periods can occur in succession with or without a break.
The following are excluded from the tax relief regime
- furniture (including fitted kitchens) except for heating stoves;
- Interior joinery other than staircases, ramps, doors and window sills;
- Special technical equipment, such as installation of an alarm;
- Development of the surroundings, except for the direct access road to the dwelling or garage;
- Notary, architect and consulting engineer’s fees
Works that may be eligible for VAT relief:
|Works||Creation of housing||Renovation following the acquisition||Housing renovation least 20 years old|
|Load-bearing units used for the stability and solidity of the building||Yes||Yes||Yes|
|Units used for purposes of enclosure, cover and water tightness, including screeds||Yes||Yes||Yes|
|Construction or demolition of interior walls separating||Yes||Yes||Yes|
|Breakthrough new doors or windows||Yes||Yes||Yes|
|Walling of existing doors or windows||Yes||Yes||Yes|
|Staircases and ramps||Yes||Yes||Yes|
|Ceilings and fixed partition-walls||Yes||Yes||Yes|
|Parts of ducts, pipe-work, lines and shafts of all types inside walls, ceilings or floors, as well as those underground and used for connection to public infrastructures||Yes||Yes||Yes|
|Lifts and elevators in houses or apartments as well as fixed structures||Yes||Yes||No|
|Stiles and frames of interior doors||Yes||Yes||No|
|All types of covering for walls, floors and ceilings||Yes||2||No|
|Interior and exterior paint including painted paper||Yes||2||No|
The refund procedure
- For the purchase of construction materials, i.e. when the owner undertakes the works himself without having recourse to the various categories of tradesmen;
- For the sale of new buildings the intended use of which is not yet defined and for contracts of sale of buildings to be built insofar as they concern new constructions undertaken at the time of the contract;
- For invoices where the amount exclusive of tax do not exceed €3 000;
- In cases where the effective use of the dwelling is not yet determined at the time of its creation or renovation.
Each invoice must separately relate to an amount exclusive of VAT exceeding one thousand two hundred and fifty Euros (€1 250).
Any right to VAT refund is limited to 5 years as from the 31st of December of the calendar year in respect of which the tax is to be refunded.
Any person having undertaken or has caused to be undertaken the works listed above, without benefiting from the direct application of the rate of 3% can request VAT refund, provided that:
- The request relates to a total amount, excluding VAT, exceeding €3 000 and covers a minimum period of 6 months;
- The time limit for VAT refund has not expired;
- The total amount of the VAT relief does not exceed €50 000 per dwelling created or/and renovated.
A list of invoices accompanied by the originals of the invoices as well as proofs of payment must be annexed.
Reimbursement of the tax relief
According to the regulations applicable before the coming into effect of this law, the tax relief granted was in question when the dwelling for which it was granted was sold or used for purposes other than as the main residence within ten years as from the 1st of January of the year of completion of works for which is the relief is granted.
- In the event of a sale, there was no need to adjust the VAT amount as long as the buyer took over the related obligations from the seller.
- The tax relief granted was to be refunded up to 1/10th per remaining year to complete the ten-year period.
Pursuant to the new law, the tax relief is to be fully returned with interests at the legal rate as from the day of its grant if the dwelling is used for purposes other than as the main residence within two years as from the 1st of January of the year following the one during which the eligible works were completed.
- The beneficiary of the tax relief is exclusively responsible for the reimbursement.
- Failure to define the intended use within the timeframe is deemed to be use for purposes other than as the main residence.
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.
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.