In more detail

Probably because accommodation services are objectively not "exportable services", European regulators did not see this freedom to determine the scope of the covered services as a potential problem. In this respect, it is fair to say that at the end of the 1970s, no one could have foreseen the impact of the combined development of the travel industry, the internet and the new expectations of travelers in terms of services, nor the fact that these changes would lead some investors to consider this activity as a real business.

Given this new environment, on 8 December 2022, the European Commission published a draft directive titled "VAT in the digital age" (COM(2022) 701 final / 2022/0407 (CNS) Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC as regards VAT rules for the digital age). Part of this draft is focused on the accommodation and furnished rental services sectors. Notably, its implementation is proposed for 2025. The following are the draft's main proposed amendments:

• The concept of the applicable hotel services is harmonized Short-term furnished lettings not exceeding 45 continuous days would be treated as accommodation services similar to hotel services, whether or not they are accompanied by services such as breakfast, reception of customers, cleaning or supply of household linen (Article 135(3) of the draft). As a result, these rentals would become automatically subject to VAT where the property is located, unless the exemptions available to small businesses are applied.
• Platforms "facilitating" short-term furnished rentals would be deemed to provide the accommodation themselves if they act on behalf of operators who are not taxable on the basis of the applicable allowances or if the operators have "failed" to identify themselves to the relevant tax authorities when they should have done so. In such cases, the platforms would systematically become liable for tax instead of the operator (Article 28a of the draft).
• Intermediation services, including facilitation, provided by a platform and remunerated by the fees charged for short-term furnished rentals would also be taxed at the location of the property (Article 46a of the draft). 
• Access to a one-stop shop would enable VAT payers not established in the country of taxation to pay the tax from a single country.

Considering that these changes could have significant impact, it is interesting to see how different countries are currently dealing with this activity.

France

France has recently reformed its VAT system, but the scope has not changed much in years. In principle, the supply of furnished accommodation is exempt from VAT. However, it is subject to VAT (at a reduced rate of 10%) if it forms part of a hotel or similar activity (para-hotel). Before the new legislation came into force, this exemption applied to any service that, in addition to accommodation (i.e., a furnished room, apartment, house, villa, chalet or even a castle), included three of the following four services: breakfast, regular cleaning of the premises, supply of household linen and reception of customers, even if not personalized. The Conseil d'État (Council of State) found that the French system did not comply with the VAT Directive (Avis, n° 471877, 5 July 2023), in particular because the legal criteria did not consider the length of the stay, and the system had to be reformed. The Finance Act for 2024 has therefore amended the previous regime by providing for VAT to be charged on furnished lettings where the duration of the stay is less than 31 nights (without prejudice to the possibility of renewal), if the lessor provides at least three of the four services listed above. It should be noted that the application of VAT remains subject to the general principles: the service provider must be acting as a business, i.e., in the context of an economic activity, and is not eligible for VAT relief for small businesses.

Germany

The supply of furnished accommodation is taxable at the location of the property. The supply of rental and business lease is in principle exempt from VAT (with a number of nuances). However, the letting of living rooms and bedrooms for the short-term accommodation of strangers is excluded from the exemption and is therefore taxable. This relates primarily, but not exclusively, to services in the hotel industry (the rules also apply to the letting of parking spaces for vehicles, the short-term letting of camping sites, and the letting and leasing of machines and other kinds of equipment that are part of a business facility (business equipment), even if they are essential components of a property). This concept is intended to achieve a differentiation in particular from the rental turnover of the hotel and catering industry, which does not correspond to the general purpose of the tax exemption to exempt residential rents from VAT.

The implementation into German law is not criticised by the European Court of Justice. The court considers the duration of the accommodation (short-term nature of the accommodation) to be an appropriate criterion for distinguishing between the tax-free letting of accommodation and taxable services in the hotel industry and sectors with a similar purpose.

A rental period of up to six months is deemed to be short-term within the meaning of this provision. However, it is not the actual rental period in the individual case that is decisive in retrospect, but the landlord's intention at the time that the service is provided. To determine this, the overall circumstances of the individual case must be assessed. The provisions of the rental agreement are particularly important. The landlord must keep the rooms available for the short-term accommodation of strangers. This is a subjective element insofar as it does not depend on the actual duration of the letting but on the landlord's intention to do so, which can be deduced from the external circumstances.

There are various administrative instructions on the short-term nature of accommodation. In this respect, the administration has adopted case law on campsites and would like to apply the principles to other types of short-term letting. The principle is explained by the Federal Ministry of Finance using examples.

Example 1:

A camping site is let for an indefinite period. The contract can be canceled on a monthly basis. The letting is to be regarded as long-term and, therefore, tax-free. However, if the actual transfer of use ends before six months have elapsed, it is a taxable short-term letting.

Example 2:

A camping site is rented out for three months. The rental agreement is automatically extended by one month at a time if it is not canceled beforehand. The letting is to be regarded as short-term and is, therefore, taxable. However, if the actual period of use exceeds six months, this is a tax-free long-term rental.

Case law and other tax guidelines also illustrate the concept. The half-hourly or hourly provision of rooms in an "hourly hotel" is not accommodation within the meaning of the law and is, therefore, tax-free (based on German case law). The letting of furnished rooms or buildings is tax-exempt if it is a permanent and not a short-term letting. A stay of more than six months can no longer be considered short-term. Tax exemption will not be applicable if the entrepreneur offers the same rooms for either long-term or short-term letting, because in this case the rooms are in any case also kept available for short-term accommodation. If a contract is concluded for less than six months but is automatically extended, it must be examined whether the intention was to let the property on a short-term or long-term basis. This requires an assessment of the overall circumstances. The agreed contract term, the ability to terminate the contract at short notice and the actual length of stay of the guest can provide indications. In the case of an open-ended tenancy agreement for a flat in a holiday area that can be terminated at short notice, where the rent is calculated on a weekly basis, there are good reasons for a short-term tenancy.

The term "stranger" is used to differentiate it from favors, in particular to relatives and acquaintances. Employees are also not strangers in this sense. The provision of company flats and staff accommodation to employees of the landlord is, therefore, tax-free regardless of the duration of the letting.

The reduced VAT rate of 7% applies to the letting of living rooms and bedrooms provided by an entrepreneur for the short-term accommodation of strangers (this also applies to the short-term letting of camping space). The reduced tax rate does not apply to services that do not directly serve the purpose of letting, even if these services are covered by the remuneration for letting.

The tax reduction favors not only the letting of land and buildings permanently attached to it, but also the letting of living and sleeping accommodation for the short-term accommodation of strangers in general. It, therefore, also covers accommodation in non-stationary facilities (based on German case law). In addition to the short-term nature of the letting, the decisive factor for the application of the reduced VAT rate is that the main focus of the supply is the provision of living or sleeping rooms for accommodation (UStAE 12.16.).

Italy

Under the Italian VAT Law, the VAT treatment applicable to rentals of immovable property may vary depending on the features of the service provided.

As a general rule, pure rentals of residential immovable properties are exempt from VAT, without prejudice for the lessor (if it is a construction enterprise) to opt for application of VAT at 10% (reduced rate).

On the other hand, if the transaction qualifies as a hotel or hotel-like service, the supply is subject to VAT at 10% (reduced rate).

To distinguish between exempt pure rental activities and taxable hotel or hotel-like services, reference should be made to the following:

• Regional laws on tourism, identifying the types of accommodations for tourism law purposes
• The provision of additional services, such as cleaning services and supply of bed/bathroom linen

Italian tax authorities acknowledged that typical hotel or hotel-like services are services aimed at allowing guests to dwell with satisfaction of their needs and necessities, thus including not only the mere rental of a property but also services such as cleaning services and change of bed or bathroom linen. Therefore, the relevant VAT regime (10% rate) should apply to rentals, inter alia, of house and apartments for vacation, including additional services that comply with the above principles.

According to the Italian Supreme Court, a hotel business exists not only when a facility such as that of proper hotels is in place, but also when a residence is concerned, where guests are supplied a mini-apartment and not a room. The Supreme Court concluded that when the rental includes "personal" services such as cleaning services and/or change of bed linen, it shall qualify as a business activity aimed at providing accommodation services subject to the same rate applicable to hotel services.

Luxembourg

According to the Luxembourg VAT Law,¹ the exemption applicable to the leasing or letting of immovable property is not available for the following services:

• Accommodation reserved for temporary accommodation of people
• Rental of holiday camps or on sites developed for use as camping sites

However, the above-listed services benefit from the super-reduced rate currently at 3%, one of the lowest within the European Union.

As per Implementing Regulation No. 1042/2013 (accordingly implemented by the Luxembourg VAT Law), the provision of accommodation in the hotel sector or in sectors with a similar function, such as holiday camps or sites developed for use as camping sites, including the right to stay in a specific place resulting from the conversion of timeshare usage rights and the like, shall be regarded as having a sufficiently direct connection with immovable property.

In this respect, it is worth noting that Luxembourg is one of the few EU member states that have not implemented Article 194.1 of the VAT Directive. It means that, for instance, the supplier of services under a hotel management agreement relating to a hotel located in Luxembourg would have to register, in any case, for VAT purposes in Luxembourg. It also means that such supplier would have to issue to its customer(s) invoices compliant with the Luxembourg VAT Law.

As regards the VAT in the Digital Age (ViDA) proposal, it is to be noted that the Luxembourg VAT authorities have not yet issued any communication with respect to the implementation of the deemed reseller rules for online platforms that facilitate short-term accommodation services (≤ 45 days) by certain service suppliers.

Spain

The Spanish VAT Act² regulates an exemption for the leasing of real estate that has exclusively the use of dwelling (including parts of buildings, garages, other ancillary parts and furniture).

However, it is specifically provided that the exemption should not apply when the above-mentioned leasing is provided together with "any of the complementary services typical of the hotel industry, such as restaurants, cleaning, laundry or other similar services". In this case, leasing (with its complementary services) will be subject to VAT at a reduced rate of 10%.

Regarding the meaning of "complementary services typical of the hotel industry", even though in some cases it could be a grey area, the VAT Spanish General Directorate of Taxes (VAT) has issued several tax rulings confirming the criteria (e.g., CV3337-23 issued 28 December 2023, among others). Specifically, the Spanish General Directorate of Taxes understands that services typical of the hotel industry are characterized by extending customer service beyond simply making a property or part of it available.

In this way, the services typical of the hotel industry are characterized because it normally includes the provision of a series of services, such as reception and continuous customer service in a space intended for this purpose, periodic cleaning of the property and accommodation, periodic change of bed and bath linen, provision of other services to the client (laundry, luggage storage, press, reservations, etc.), and, sometimes, provision of food and beverage services.

On the contrary, it has been specifically stated by the VAT Spanish General Directorate of Taxes that the below services provided together with the leasing of dwelling do not constitute complementary services typical of the hotel industry:

• Cleaning service and change of linen provided upon entry and exit of the period contracted by each tenant
• Cleaning service for the common areas of the building (portal, stairs and elevators), as well as the surrounding area in which the building is located (green areas, access doors, sidewalks and streets)
• Technical assistance and maintenance services for eventual repairs of plumbing, electricity, glassware, blinds, locksmiths and appliances

It remains to be seen whether the ViDA Directive, which is still under discussion at EU level, will lead to harmonization or not.

Belgium

As a general rule, the letting of accommodation is exempt from VAT in Belgium. Short-term rentals, however, are an exception. The short-term rental (i.e., for periods of less than three months) of furnished accommodations is mandatory subject to VAT at the reduced VAT rate of 6% under specific conditions. In this context, we note the following distinction:

Short-term rentals (less than three months) of furnished lodgings provided by hotels and motels are mandatory subject to VAT (6%).

The short-term rental (less than three months) of furnished lodgings provided by an establishment similar to a hotel is mandatory subject to VAT (6%) when at least one of the following services is provided:

• In-person guest reception: Providing a personal welcome to guests upon their arrival
• Linen services: Providing linen, and replacing them if the stay extends beyond a week
• Daily breakfast: Providing guests with breakfast every day

Operators are permitted to charge an additional fee for any of these services, allowing for flexibility in pricing strategies without the requirement of an all-inclusive rate.

A significant benefit of this VAT regime is the entitlement it grants operators to a full deduction of input VAT. This means that VAT paid on costs directly associated with the short-term rental activity subject to VAT can be fully recovered. Such costs might include expenditures on furniture, renovations, or services that are necessary for the operation of the rental. This provision encourages investment in the sector by mitigating the financial burden of VAT on operators.

1 Law dated 12 February 1979 on value added tax, as amended.

2 Law 37/1992 on Value Added Tax.