Brussels has adopted the first pillar of the proposed VAT in the Digital Age (ViDA) by which all member states should levy VAT on short-term accommodation rentals of up to 30 consecutive nights from 2028. The regulation ends the VAT exemption for private rentals of holiday accommodation, which do not provide hospitality services such as cleaning during the stay or changing bed linen and towels.
Until recently, owners of tourist apartments and private house rentals, who provided fewer services such as breakfast and cleaning, did not charge VAT because they were exempt from it. By contrast, owners of hotels, which provide a wide range of services, could apply the reduced rate of VAT, which was 10% in most member states. At the same time, the standard rate of VAT for hotels, was deductible for them as input tax against their taxable profits.
Level Playing Field with Deductions
From mid-2028, this VAT exemption for private rentals will disappear as a result of the new rules. Still, there is a silver lining for the owners of private rentals because they will be able to benefit from deductions of input tax. As for now, they cannot deduct any input tax, so renovation works, purchase of furniture and other goods, and even agency fees when renting on Booking, Airbnb, or other portals were not deductible. It is supposed to equalize the playing field for different types of accommodation.
Mixed Picture Across Europe
According to the latest report by the European hospitality association Hotrec, most of the member states apply preferential rates of VAT for tourism-related services. In general, this industry has a special role in many economies as it supports millions of jobs directly and indirectly.
Nevertheless, a few states have already repealed the reduced rate of VAT for hotels and tourist accommodation. For example, Denmark applies the standard rate of VAT (25%) to hotel accommodation. Moreover, as of January 2022, the Netherlands also cancelled the reduced rate and made hotels pay 21% VAT. Outside Europe, the UK applies a standard rate of 20% to hotel accommodation and other forms of tourism-related services.
Upward Pressure on Rates
Although most of the European countries have a policy of lower taxes for tourists, it is a trend that cannot go on for long. In some countries, governments have already responded with increased taxes on accommodation. Over the last few years, Ireland, Romania, the Czech Republic, Estonia, and Finland have raised the value-added tax (VAT) on accommodation to close the revenue gap.
In particular, the Netherlands decided to fully revoke the reduced rate of VAT for hotels. Experts warn that increased taxes on tourist accommodation will affect both tourists and local businesses. First, increasing the taxes is equivalent to restricting tourism exports because local hospitality providers compete directly with foreign competitors such as U.S., Swiss, and Thai hotels. Experts argue that a VAT increase in European countries may lead to decreased tourist traffic as well as make tourists choose other destinations with lower taxes. In addition, higher taxes on accommodation may reduce spending capacity, which would indirectly affect transport companies, shops, and cafes. Consequently, increased taxes on hotels and private rentals would harm the business environment, job creation, and economies of tourist-dense countries.
The regulation adopted by Brussels will allow member states to prepare for the gradual increase in taxes on the tourist sector. Thus, thousands of owners of private rental housing should expect new taxes from 2028. Moreover, they will be able to use input tax deductions, which were previously available only to hotels. It remains to be seen how the individual states will implement the rules and what reduced rates of VAT for tourist accommodation they will choose.
