With effect from 1 January 2014, the amendment to the Value Added Tax Act adopted in connection with private law recodification will also amend the wording of Section 56. This section provides rules under which property is exempt from VAT. The explanatory report to the amendment briefly states that it is just a slight change in terminology related to the new Civil Code and that the application of VAT to real estate transfers will remain unaffected. Unfortunately, nothing is as easy as it seems. On closer examination of the context, a number of substantial changes and ambiguities can be found that were apparently not intended by the legislature.
Compared to the existing regulation, the range of land that is exempt from VAT upon transfer will be significantly limited. A fundamental change arising from the civil law recodification is the fact that, in most cases, structures will be considered part of the land from 2014, whereas plots of land as well as structures have so far been considered as separate immovables. Under the new rules, VAT will apply, for instance, to a transfer of land with a structure affixed to it if more than five years have passed from the issue of the first occupancy permit for the structure and from its first use, or to a transfer of a share in the land pertaining to a similarly “new” unit to be transferred. However, the taxation of such land that will only be transferred in 2014 may not be avoided under the Act even by paying a tax advance in 2013, as has been incorrectly stated in some media.
Moreover, in the case of social housing to which a reduced rate of VAT applies, it is not certain whether the same categories as now will be classified as social housing. Both under the existing and new wording of the VAT Act, the reduced rate applies to transfers of structures for social housing and appurtenances thereto. From 2014, in many cases, the object of the transfer will not be structures as such but the land to which the structure is affixed. Unfortunately, under the VAT Act, the reduced rate will only apply to transfers of structures and not to transfers of land that should probably be subject to the standard rate. This, most likely, was not the intention of the legislature.
These are some of the many changes and difficulties to be encountered by taxpayers with respect to the Vat Act next year brought about by the amendment to the VAT Act against all expectations of the legislature. Let’s hope that they will be addressed by the Ministry of Finance and the situation clarified as soon as possible.