The new VAT rules on the sale of property have been in force for over a year. However, these have yet to gain wide acknowledgement and mistakes are often made when applying the rules. The obligation to pay VAT should not be overlooked when buying or selling real estate. Moreover, all notifications should be timely submitted: mistakes may be costly. For these reasons we will point to some of the main aspects of the new rules.
In April 2012 amendments to the Value Added Tax Act came into force establishing a reverse charge mechanism on taxation of real estate for which inclusion of VAT is voluntary. VAT inclusion is voluntary when an immovable corresponds to the following three criteria:
it does not constitute a dwelling, it does not constitute an empty plot in sense of the Planning Act and it is being sold after first occupation or re-occupation.
Generally, it is an immovable occupied by a commercial building or a production building.
When including voluntary VAT a reverse charge mechanism is applied where:
the seller does not include VAT transferrable to the state in the purchase price but VAT is declared and immediately deducted as input VAT by the buyer.
VAT inclusion is necessary and reasonable in situations where costs have been incurred or investments have been made by the seller over the past decade as regards the immovable in respect of which the seller applies for a refund of VAT from the state. If VAT is not included in the purchase price on sale of an immovable, the seller will have to adjust the input VAT deducted during this period. Previously deducted input VAT which may not be deducted as a result of the adjustment will have to be refunded to the state.
When implementing the new rules, note that voluntary VAT inclusion requires prior written notification to the Tax Authority. The Tax Authority has not specified a separate format or set procedures for submitting notifications. Notification in a freely chosen format has to be sent to the Tax Authority by mail. In practice, the Tax Authority has accepted digitally signed and e-mailed notifications.
Often the seller is not aware of the obligation to notify and the issue only arises upon preparation of a VAT declaration. Typically real estate transactions are preceded by intense rounds of negotiations in the midst of which notifications may simply be overlooked. Therefore, it is not uncommon that notifications are submitted late.
The law does not indicate consequences for delays. In the worst case scenario the Tax Authority may assume that the prescribed conditions for VAT inclusion were not fulfilled and require adjustment of input VAT.