Current VAT developments in real estate
The field of VAT taxation on immovable property is constantly changing. Act No. 235/2004 Coll., on Value Added Tax (the “VAT Act”), determines the basic rules of operation. The Financial Administration has also provided an interpretation of the law, publishing comprehensive information about the application of the VAT Act to immovable property at the end of 2015.
From the point of view of VAT payers and tax advisors, this information was not sufficiently clear and the Financial Administration received additional questions. The Financial Administration published FAQs and answers regarding the application of VAT to real estate at the end of September 2016.
The questions were mainly about:
- The moment when the site is considered structural
- First approval
- Functional unit
- BUILDING SITE
VAT is only applied to the transfer of a building site for a consideration; other transfers of unbuilt sites are exempt. Based on the replies provided by the Financial Administration, the extent of the land considered a building suite (and therefore subject to VAT transfer) is clearly very wide.
In the opinion of the Financial Administration, the land becomes a building site already upon a proposal for a change of the land plan, if a building can be built on the given land. However, if the owner of the land or a person with an elemental relationship to it does not receive it and the owner does not take active steps towards this proposal, then the land becomes a building site until the change of the land plan is approved.
So, if you are planning to sell an unbuilt plot, we recommend that you verify the town plan in advance.
The tax administrator believes that in this case it does not matter whether the parties buy the land for construction or agricultural crops, for example, which seems to conflict with the case law of the Court of Justice of the European Union (CJEU).
The EU Member States are committed that the provisions of national legislation which have been implemented into national law by a binding European Community directive must be interpreted in accordance with the wording and purpose of the relevant directive to achieve the directive’s intended results.
In the judgments of the CJEU in case C-543/11 Woningstichting Maasdriel, C-461/08 Don Bosco, C-326/11 Komen, the Court emphasises the need to examine each case in light of all the circumstances of the transfer objectively known on the date of delivery, i.e. including the intention of both parties.
Delivery of immovable property (building) is exempt from VAT if more than 5 years have elapsed since first use or first approval, or since building approval after a substantial change of the building. This definition expands the range of buildings that are subject to VAT when selling.
- FIRST APPROVAL
For the occupancy permit process, the Financial Administration considers the approval permitting the simultaneous use of the immovable asset, therefore it may be the second or third approval (in the case of the Financial Administration, it is the first approval). These include, for example, a situation where the property has been approved as an apartment building and now, after minor modifications (or without any modifications) the apartment building is re-authorised as a hotel. The new five-year deadline begins from the time of the new occupancy permit.
The professional public points out that the time limit according to the Eurocomfortable interpretation should only be reintroduced if the new occupancy permit is granted in connection with the construction of the building. An administrative change in the purpose of building use should not recommence the five-year test period for the possibility of exempting the delivery of the property from tax. However, the financial administration acknowledges that mere formal administrative acts and changes in concepts (changing the obsolete concept of “old home” to the concept of “home for seniors”) are not considered as the first (or other) occupancy permit decisions, and therefore are not taken into account when calculating the time limit for applying the tax exemption.”
The delivery of immovable property is also exempt after 5 years from the substantial change in the completion of the building. A substantial change is a superstructure with more than one storey or an extension where floor space is increased by more than 50% or other work subject to approval if the financial value in excess of 50% of the indicative or observed price before construction. This value can be determined by an expert report or as a target value, the approximate calculation of which can be found at www.financnisprava.cz. The choice of the price (whether according to an expert opinion or according to the target value) depends on the tax entity.
- FUNCTIONAL UNIT
The functional unit allows the same tax regime and the same tax rate to be applied to a set of different assets (which would otherwise be taxed at different rates). A unit consists of land and buildings which are used together with the main construction. The reality of this joint use must be considered at the time of the delivery of the real estate and this condition cannot be met in the future.
It is clear from the above that the Financial Administration has undertaken an extensive interpretation and extends the law by its interpretation – either by information or by answering the questions of tax subjects.
In this context, we do not have many options to defend such an extensive interpretation, because according to EU Directive No. 2006/112/EC on VAT, the definition of building land is at the discretion of each state.
However, it is questionable whether in this situation it is possible to use, for example, the aforementioned CJEU judgment in case C 543/11 Woningstichting Maasdriel, which dealt with the definition of building land. The case involved delivery of land on which the building was first demolished. The ESD ruled that one of the indications that it is a building site is the intention of the contracting parties to build something on the site. I would point out that the exemption must be interpreted strictly in this regard, because it constitutes an exception to the general functioning of VAT. Therefore, even in this case, the transaction must be viewed as taxable and, upon the fulfilment of all conditions, it can be regarded as exempt.
The fact that the transaction in question is not exempt and subject to tax may in some cases be advantageous to the payer, since it is possible to deduct input VAT. The law therefore allows voluntary taxation instead of the use of liberation.
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