After much delay, the General Financial Directorate (“GFD”) has finally published its long-awaited information on the application of the VAT Act to real estate after 1 January 2015 (“Information”). Given its unsystematic (hopefully temporarily) regulation, this area of VAT has been full of ambiguities and contradictory interpretations. Therefore the GFD’s representatives promised to issue explanatory information on these issues. The Information explains the interpretation given by the GFD that should also be observed by tax administrators. The details are presented below.
The Information specifies the GFD’s interpretation regarding the following contentious issues or issues subject to no regulation.
The Information distinguishes between the term “a structure permanently attached to the ground” (a broader term) and “a structure attached to the ground with a firm foundation” (a narrower term, such as with concrete foundations). The use of the terms in relevant provisions (Sections 48, 49, 56 and 56a of the VAT Act) is not uniform. Therefore, attention must be paid as to which term is suitable for a particular situation.
There is no change in the definition of residential structures that came into effect from 1 January 2015. The term “residential unit” (byt in Czech) has been replaced by the term “residential space”, whose technical arrangement and fixtures and fittings meet the requirements for permanent housing (what was considered a residential unit by the end of 2014 continues to be a residential space in 2015).
Floor area of residential premises for social housing
According to the GFD, since 1 January 2015 the method of calculating the floor area of residential premises has been based on Government Decree No. 366/2013 Sb. The floor area includes:
- the area within the inside perimeter of the exterior walls of the residential unit, including
- the floor area covered with fixtures (wardrobes, bathtubs and other fixtures), including
- the ground area of all vertical load-bearing and non-load bearing structures inside the residential unit (walls, columns, piers and chimneys).
Nevertheless, the floor area does not include:
- the floor area of balconies, terraces, loggias, and
- the area of rooms used along with the residential premises located in the same building (cellar, storeroom, garage outside the residential premises but inside the same house)
Floor area of a family house for social housing
The floor area of family houses is determined in the same manner as in the previous years as Government Decree No. 366/2013 Sb. can be applied to residential units only, according to the GFD. The floor area of a family house includes:
- the sum of the floor areas (inside wear layer) of all rooms in the family house (including hallway, study, and garage located in the house).
The floor area of a family house does not include:
- the sum of the floor areas of premises that are not a room (balconies, terraces, loggias, and lofts) and
- the sum of the floor areas of rooms that comprise “outbuildings” of the family house (a garage outside the house).
The Information defines the application of the principle of functional unit, a new term introduced with effect from 1 January 2015 in Section 48 (3) of the VAT Act. The application involves both the reduced tax rate and the definition of land related to the structure. In fact, the principle replaces the principle of division applied based on the GFD’s previous information in this respect, which was effective in 2014. According to the GFD, the key terminological element of a functional unit is the economic purpose (housing, business and the like).
With effect from 1 January 2015, the principle of functional unit can be used to determine land adjacent to a structure as well as in the application of tax-exemption under Section 56 (3) of the VAT Act (tax-exemption of a selected real estate after five years from the first occupancy or use).
If a structure attached to the ground with a fixed foundation is located on a plot of land, it is built-on land, the transfer of which is not VAT-exempt (see Section 56 (2) (a) of the VAT Act). Under the Information, it is decisive whether the objective pursued by the parties is the structure or the land itself. Land can be considered unbuilt if there is a “minor” structure located on it that has no decisive importance in the supply of the land (such as a bench embedded in concrete, antenna, swing, fence and retaining wall). This means that the structures are not the motivation for the purchase of the land – the purchase is made because of the land itself.
According to the Information, the supply of a non-built-on plot of land without a building permit (or a building notification) where utilities are only provided to the plot boundary is not subject to taxation under current laws.
Please do not hesitate to contact the author if you have any questions.