New guidance note from the Tax Agency: Changes to the VAT rules for real estate

The Danish Tax Agency has issued a new guidance note that changes the practice for VAT deductions on real estate. This affects property developers and investors who change the intended use of a property from a VAT-liable to a VAT-exempt activity. Previously, a change of use triggered the repayment of the VAT deducted during the construction phase. However, under the new rules, the VAT liability will now be based on the market value of the property at the time of occupation, which could potentially increase the VAT liability.

On 28 January 2025, the Danish Tax Agency issued a new guidance note that significantly changes the practice for correcting VAT deductions on real estate. This guidance may have a significant impact on property developers and investors who change the intended use of a property from a VAT-liable to a VAT-exempt activity. We highlight the key points of the guidance note below.

Background: The previous practice

Under the old VAT rules, if a property was originally built for a VAT-liable purpose (e.g., sale) but was later changed to a VAT-exempt purpose (e.g., residential letting), the full amount of VAT deducted during the construction phase had to be repaid. This repayment had to be made in the same year as the completion and occupation of the property.

The new guidance notechanges this practice. Instead of repaying the full amount of VAT, there is a new method of correcting the VAT deduction.

What has changed: The new guidance note

As of 28 January 2025, the Danish Tax Agency has officially changed its practice, following a court ruling last April. From now on, when the use of a property changes from VAT-liable to VAT-exempt, it will no longer be possible to correct the VAT by paying back the full amount of VAT originally deducted.

Instead, the correction will be determined on the basis of the market value of the property at the time of occupation. Accordingly, the VAT will be recalculated on the basis of this market value and not on the basis of the original construction cost. As the market value of real estate projects is often higher than their cost price, this change could result in VAT liability.

This represents a profound shift towards a value-based system, which is likely to result in significant financial burdens for developers and investors.

Impact on developers and investors

The new guidance note significantly intensifies the risk of increased VAT liability, particularly for properties that have appreciated in value. Developers and investors are therefore advised to carefully consider whether it remains financially advantageous to retain VAT-liable activities as a means of mitigating potential VAT exposure.

In addition, property projects that were originally intended for a VAT-liable use should be closely monitored. A change of use to a VAT-exempt purpose may trigger a revaluation of the property and a corresponding VAT adjustment under the new practice.

Strategic recommendations

In light of the new guidance note, we recommend taking the following steps:

• Review both current and planned projects to identify potential risks of VAT-exempt use.

• Ensure thorough documentation of intended use, cost structures and valuation history.

• Consult with specialists as the guidance note can be applied both retrospectively and prospectively – i.e. it can affect both future and past property projects, depending on the specific circumstances.

Need assistance?

As the new guidance note introduces complex changes to the VAT treatment of real estate, Gorrissen Federspiel’s specialists in our Real Estate and Tax groups remain available to provide guidance and support.