VAT Treatment of Leases of Immovable Property and the Provision of Accommodation in Malta

Item 1, Part Two of the Fifth Schedule to the VAT Act, provides that the letting of immovable property is treated as an exempt without credit supply. In practical terms, as a default rule, a landlord renting out premises on a long let neither charges VAT on the rent nor recovers input VAT on costs such as renovation works, maintenance, agents' fees, or furnishings connected with that letting. While this keeps matters administratively simple, any irrecoverable VAT becomes an absolute cost embedded in the landlord's margin, and this should be factored into pricing and investment appraisals from the outset.

The exemption is, however, subject to several important carve-outs that bring certain lettings within the scope of VAT. The most significant of these concerns accommodation that requires a licence under the Malta Travel and Tourism Services Act, covering hotels, guest houses, holiday premises, holiday flats, farmhouses, and similar licensed establishments. The provision of accommodation is subject to VAT at the reduced rate of 7%, and the operator is entitled to recover related input VAT, including VAT incurred on the construction or refurbishment of the property.

A second carve-out applies to the letting of premises and sites for the parking of vehicles, which is taxable at the standard rate of 18% regardless of the status of the lessee.

The third, and commercially most consequential, exception concerns lettings of immovable property for business purposes in certain cases. Where a limited liability company lets property to another person registered under Article 10 for the purposes of that person's economic activity, the letting falls outside the exemption and is subject to VAT at the standard rate of 18%. This effectively converts an otherwise irrecoverable cost position into a fully taxable supply with corresponding input VAT recovery for the lessor on construction, fit-out and running costs, provided the tenant uses the premises for taxable economic activity. Structuring considerations here include the choice of legal form of the lessor (the supply becomes taxable only in the case of lettings by a limited liability company), the VAT status of the tenant, and the intended use of the space.

From a registration perspective, a person making any of these taxable supplies must hold an Article 10 registration to charge VAT and recover input tax, whereas a lessor whose activity remains exempt, or who qualifies as a small undertaking, may instead register under Article 11. Any subsequent change in the use of the property, for instance moving from a taxable commercial letting to an exempt residential letting, can trigger a capital goods scheme adjustment, clawing back a proportion of input VAT previously recovered. Given the financial stakes involved, the VAT position of any lease should be assessed transaction by transaction, ideally before contracts are signed.

Get in Touch:

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Josef Mercieca

jmercieca@quazar.mt / +356 2388 4600