Buying or reorganizing a company is always a complicated transaction, especially if it includes real estate. When purchasing such a company, it is often necessary to solve several problematic issues, for example, commissioning, registration in the land register, real estate registration with the State Revenue Service (SRS). When agreeing on the purchase price of the company, it should be taken into account that such circumstances may lead to further consequences of the application of value added tax (VAT), so it is necessary to assess possible VAT risks or potential future expenses related to compliance with VAT norms. There are several norms of the VAT Law, which provide for special conditions for the application of VAT in transactions with real estate.
Content will continue after the ad
Advertising
When building, restoring or purchasing real estate, as well as when buying construction land, input tax arises, which the taxpayer has the right to deduct to the extent that the real estate is intended to be used for transactions subject to VAT. The VAT law stipulates the obligation to correct the input tax deducted for ten years in cases where real estate is purchased, built, rebuilt, renovated or restored (but not simply repaired), that is, it must be monitored for ten years or part of the input tax deducted in advance does not have to be repaid to the state budget. In addition, the real estate put into operation must be registered with the SRS by submitting a special VAT declaration appendix intended for it.
For the following nine years, the company must continue to provide once a year the section of the appendix to this declaration, indicating the proportion of real estate use for economic activity and activity that is not of the nature of economic activity, as well as for VAT taxable and non-taxable transactions. If necessary, the input tax deducted must be corrected. This provision of the law is important to remember for companies that use real estate not only for VAT taxable transactions, but, for example, rent this real estate or part of it to residents as residential premises, which is a VAT-exempt transaction, or the real estate is partially used for other purposes as well. , which are not related to economic activity.
Input tax accounting for each real estate should be done separately, so that when declaring real estate to the SRS, both the total and the deducted value added tax for the specific property can be indicated, as well as the necessary input tax corrections can be made in the future for ten years.
If the real estate or its part is still not put into operation, the ten-year input tax correction obligation has not yet started. In practice, situations have been observed when the building permit for the renovation of real estate is extended several times, although in fact the real estate has been used for business for some time.
If the real estate has not yet been put into operation, the obligation to register it with the SRS has not come into effect, and therefore the obligation to correct the deducted input tax is moved forward – to the relevant year when the structure, building or engineering structure (part) will be put into operation, and accordingly from this moment the obligation comes into effect for the next 10 years to follow whether the amount of the deductible input tax has not changed and the obligation to adjust has come into effect. In order to avoid the consequences of unplanned VAT application, it is important to make sure that the issues related to the registration of real estate in the SRS and land register are sorted out.
On the other hand, if you plan to expropriate such immovable property, for which the ten-year correction obligation has not yet ended or has not yet begun, it is necessary to assess whether it is still, in accordance with the norms of the VAT Law, unused immovable property, the sale of which is subject to VAT (immovable property unused for VAT purposes can be only in a part – a part in which reconstruction is carried out, but it is not completed), or it is already used real estate, the sale of which is not subject to VAT. If VAT is not applicable to the transaction, the obligation to refund the previously deducted VAT arises.
However, it should be remembered that there is a possibility to choose to apply VAT to the sale of used real estate as well, so that the input tax deducted does not have to be adjusted. This is possible only if this real estate is sold to a registered VAT payer.
In practice, situations have been observed when a building permit has been received for the development of real estate, but construction work has not started. In such a situation, it should be remembered that the land is considered to be building land, if a building permit has been issued for its construction or the construction of utilities in it, or a road, street, or utility is connected to it, VAT is applicable to the sale of construction land. In such a situation, the solution is to cancel the issued construction permit.
Special provisions of the VAT Law regulate the application of VAT in cases where real estate is invested in the share capital of another company. Investing real estate in the share capital of the company, as long as the newly established company is a registered VAT payer, is VAT neutral, ie there is no need to make input tax adjustments for the invested real estate. The investment in share capital is not considered as a transaction for consideration for VAT purposes, it means a transaction outside the application of VAT.
The VAT law requires the acquiring company to take over the obligation to adjust the deducted input tax, if the ten-year input tax adjustment period for the real estate has not expired. If the acquiring company does not fulfill the conditions set by the law, then the company that transferred this real estate will have to make adjustments to the deducted input tax.
It should be remembered that if the real estate owned by the company is used for the provision of transactions subject to VAT, correctly complying with the provisions of the VAT Law, no expenses should arise as a result of the application of VAT. Therefore, before the transaction of purchasing a company, it is important to make sure that the previous owner of the company has complied with the conditions regarding input tax deduction and/or real estate registration with the SRS. In such situations, in practice, teams of lawyers and tax advisors work closely together to assess the tax implications of a real estate transaction.
