VAT on real estate

As we pointed out last year, the application of a VAT exemption to the transfer of real estate has undergone fundamental changes as of 1 January 2016, especially in the case of the transfer of land intended for development or the transfer of buildings that have been renovated. The VAT Act provides a new definition of "building land" and a new approach to restarting a three-year period for the compulsory application of value-added tax to the sale of buildings after the so-called "substantial change".

Starting in January 2016, under the VAT Act, "building land" means, simply put, land on which it is possible to construct a building connected to the ground by a solid foundation, and where some steps have already been taken for the purpose of such development (administrative acts, preparatory works). The transfer of such land is subject to VAT. Without exaggeration, we can say that many parcels whose transfer would have been exempt from tax in 2015 will be transferred in January 2016 with VAT already included in the final price. However, it is difficult to determine the exact attributes of land whose transfer will undoubtedly be exempt from VAT in 2016 (or the transfer of which will undoubtedly be subject to tax). The definition of building land as construed in the VAT Act is in fact so relative that it covers the whole range of fundamentally differing views on whether building land is transferred or not. Below are three key contentious areas:

1. Is a parcel building land if it is generally possible to build on it and this characteristic may increase its attractiveness for the buyer (because it allows the buyer to implement a plan to build in the future)? Or can a parcel be building land only once there is a plan to construct any as yet unspecified project involving buildings connected to the ground by a solid foundation? Or can a parcel be building land only once there is a plan to construct any sufficiently specified development involving buildings connected to the ground by a solid foundation?

2. Further to the previous point, a question then arises as to whether a set of administrative acts mentioned by the VAT Act may be formed by administrative acts either in the phases of general planning permission proceedings (simply put, in the phase of preparing the land for future plans to build on it), or only in the phases of administrative proceedings related to the sufficiently specified development. Similar questions can also be asked in the search for a set of "construction work" for the purposes of constructing the building.

3. Is an act being made in administrative proceedings (i.e. for example by the applicant with the competent administrative authority) an "administrative act", or is it only a constitutive administrative act of an administrative authority (should it or should it not be in legal force already)?

In our view, these questions can be answered in a satisfactory manner only if the VAT Act is construed in light of the case law of the Court of Justice of the European Union. Without it, any attempt to interpret the VAT Act is doomed to failure.

Similarly difficult to interpret is the concept of "substantial change", which applies to the application of VAT in the sale of buildings, but is not further defined by the law. In principle, the VAT Act imposes on taxpayers the obligation to monitor whether the buildings in their ownership have undergone substantial renovations - if they have, the transfer of such buildings would compulsorily be subject to taxation throughout the following period of three years, even if the renovated real estate is decades old.

The General Financial Directorate responded to the new exemption by issuing methodological information with the intention of presenting the rules to taxpayers. Unfortunately, the ideas of the General Financial Directorate apparently failed to be implemented; the methodological information tends to obscure even what seemed quite clear in the VAT Act until then. It can be emphasized once again that the only way to grasp the meaning and purpose of the new tax exemption on the transfer of real estate in the VAT Act is through European legislation (specifically the case law of the Court of Justice of the European Union).

The good news is that the new legislation does not apply to the transfer of buildings acquired before 2013. In their case, the original rules for the exemption will continue to be applied. Also, the new legislation does not change the rules for transferring newly constructed buildings (e.g. flats and houses), for which value added tax shall be applied in the notoriously known manner (if the transfer of a flat occurs within three years of the occupancy permit issue, 21% VAT shall be applied; in the case of so-called social housing, 15% VAT).

Finally, there is no choice but to recommend investigating sufficiently and in a timely manner any planned transfer of real estate from the perspective of the possible application of the VAT exemption, since the amount of VAT is not negligible in these cases.