Norway enacts 10-year rule

News

Nicola Cappin

07 April 2008

Revised value-added tax laws mean that landlords can recover the 25% VAT incurred on the building costs only if their tenant pays VAT and stays in the building for 10 years

This year, Norway revised its value-added tax (VAT) on buildings. Under previous rules, developers were able to claim back VAT on the building’s costs if they agreed to lease the building to a VAT-paying business for three years.

A surfeit of non VAT-paying tenants

The problem, however, is that there are many tenants that do not pay VAT. Unlike retailers, businesses such as banks and financial service institutions do not add VAT on to the cost of the services. Hence, renting a building out to a bank in the first three years would have meant the VAT could not be claimed back.

Trond Ingebrigtsem, who is a partner and lawyer at PricewaterhouseCoopers Norway, explains that the Norwegian government has now changed the three-year rule to ten years.

“If you invest in real estate from 2008 you should rent out to VAT-taxable business for a ten-year minimum,” he says. “If you rent it to a taxable business for only five years and then rent it out to a non-taxable organisation you will now have to pay back 50% of the VAT that you have claimed back.”

Therefore, if a building was built for a total cost of NKr10m, including VAT, the recoverable amount would be NKr2.5m, based on the country’s 25% VAT rate.

“In order for you to recover that you must perform a VAT-taxable activity that enables you to register as a VAT-paying landlord,” says Ingebrigtsem. “However, you have to keep the VAT status for a 10- year period.

“If you have only a five-year rental agreement, and you don’t renew the agreement with another taxable business, then you would have to pay back five years’ worth of recovered VAT.”

The VAT has to be spread across an exhaustive spreadsheet in order to work out how much is payable per year. If a business has to pay back VAT recovered over five years, based on a recovery of NKr2.5m, it would have to pay back NKr1.25m. The rules apply to new buildings completed after 1 January 2008.

Although the level of development has been low in Oslo over recent years, across Norway there is a significant pipeline of development and many construction companies are unhappy with the new rules and additional work required of them to calculate the VAT.

Demand for residential properties

Nils Arne Gundersen at Newsec Norway says that there is a decreasing demand for residential property in Norway and that developers are looking more to the public and commercial sectors.

“The cost of building is expected to level out owing to more spacious contractor orderbooks,” he says. “There will then be a rise in new commercial projects boosted by this and by continuing rising rent levels during the coming years. Most of the projects already underway are due to complete between 2008 and 2010 and are in the centre of the country and westwards to Skøyen, Lysaker and Fornebu.”

Revised value-added tax laws mean that landlords can recover the 25% VAT incurred on the building costs only if their tenant pays VAT and stays in the building for 10 years This year, Norway revised its value-added tax (VAT) on buildings. Under previous rules, developers were able to claim back VAT on the building’s costs if they agreed to lease the building to a VAT-paying business for three years. A surfeit of non VAT-paying tenantsThe problem, however, is that there are many tenants that do not pay VAT. Unlike retailers, businesses such as banks and financial service institutions do not add VAT on to the cost of the services. Hence, renting a building out to a bank in the first three years would have meant the VAT could not be claimed back.Trond Ingebrigtsem, who is a partner and lawyer at PricewaterhouseCoopers Norway, explains that the Norwegian government has now changed the three-year rule to ten years.”If you invest in real estate from 2008 you should rent out to VAT-taxable business for a ten-year minimum,” he says. “If you rent it to a taxable business for only five years and then rent it out to a non-taxable organisation you will now have to pay back 50% of the VAT that you have claimed back.”Therefore, if a building was built for a total cost of NKr10m, including VAT, the recoverable amount would be NKr2.5m, based on the country’s 25% VAT rate.”In order for you to recover that you must perform a VAT-taxable activity that enables you to register as a VAT-paying landlord,” says Ingebrigtsem. “However, you have to keep the VAT status for a 10- year period. “If you have only a five-year rental agreement, and you don’t renew the agreement with another taxable business, then you would have to pay back five years’ worth of recovered VAT.” The VAT has to be spread across an exhaustive spreadsheet in order to work out how much is payable per year. If a business has to pay back VAT recovered over five years, based on a recovery of NKr2.5m, it would have to pay back NKr1.25m. The rules apply to new buildings completed after 1 January 2008. Although the level of development has been low in Oslo over recent years, across Norway there is a significant pipeline of development and many construction companies are unhappy with the new rules and additional work required of them to calculate the VAT.Demand for residential propertiesNils Arne Gundersen at Newsec Norway says that there is a decreasing demand for residential property in Norway and that developers are looking more to the public and commercial sectors. “The cost of building is expected to level out owing to more spacious contractor orderbooks,” he says. “There will then be a rise in new commercial projects boosted by this and by continuing rising rent levels during the coming years. Most of the projects already underway are due to complete between 2008 and 2010 and are in the centre of the country and westwards to Skøyen, Lysaker and Fornebu.”