Tax authorities have changed their mind again! This time concerning VAT on sale of the commercial real estate.
06-12-2016
In June this year tax authorities have surprised the catering industry with a dramatic change in position with regard to the VAT rate for meals served eg. in fast food restaurants or in so called fast trucks.
By the official decision the VAT rates have been fundamentally changed to the disadvantage of the fast food chain. We can now observe a similar process in the assessment of tax consequences of sale of the commercial real estate. Also in this case with the decision of the tax officials they are to change the VAT rate on such transactions. Certain is only that the changes are going in the direction unfavourable for taxpayers and that they can cause temporary freeze of asset deal transactions.
Until now, the sale of commercial property has been treated as a supply of goods within the meaning of (Art. 7) of the VAT Act, even when the subject was the most important or even the only important asset, on the basis of which the vendor has been running its business. As a result, the transaction has been accounted as activity subjected to VAT. To the agreed price seller was adding tax which he was paying to the tax office, and the buyer could settle this tax (as the input tax) with “his own” output tax, or apply for a tax refund in a timely manner.
But currently, fiscal officials are starting to see it differently. In abovementioned commercial real estate, which is the primary or sole asset of the seller, now they see an organised part of the enterprise. As a result, this type of transaction – which is not subjected to VAT - will be realised by the "net price", ie. without adding the tax amount to the agreed price. The buyers will be the most affected. This is connected with the need to tax the sale transactions of the building with the tax on civil law transactions, which in the case of transactions with VAT would not occur.
It is difficult to imagine a process of "reversing" the tax consequences of the finalised transaction, on which the tax authorities have considered late, that the shopping centre is, however, an organised part of the enterprise and not a commodity. Especially, there is a growing uncertainty about the tax interpretations obtained by the parties of such transaction prior to making it. And recently, here are very disturbing tendencies in the procedures of the administration offices. They consist in finding ways to deny the legal bindings of individual interpretations. To do this, fiscal officials once again in detail analyse the facts and seek such circumstances or facts which the taxpayer did not give in the application of the interpretation, and which in theory may affect the classification of the tax assessed transaction. They are checking for example, who manages the property, what happens with the security of tenants, who signs contracts for the supply of media, how the marketing activities of the centre are carried out, etc. At high complexity of the asset deal transactions, finding ways to challenge the binding interpretation does not seem to be a special problem for the tax authorities.
What else awaits for the commercial real estate market? It is not known. Analysing the last actions of the tax administration we come to the conclusion that the real estate trade is getting less sure, and yet the property has always been treated as a reliable and stable capital investment.
By the official decision the VAT rates have been fundamentally changed to the disadvantage of the fast food chain. We can now observe a similar process in the assessment of tax consequences of sale of the commercial real estate. Also in this case with the decision of the tax officials they are to change the VAT rate on such transactions. Certain is only that the changes are going in the direction unfavourable for taxpayers and that they can cause temporary freeze of asset deal transactions.
Until now, the sale of commercial property has been treated as a supply of goods within the meaning of (Art. 7) of the VAT Act, even when the subject was the most important or even the only important asset, on the basis of which the vendor has been running its business. As a result, the transaction has been accounted as activity subjected to VAT. To the agreed price seller was adding tax which he was paying to the tax office, and the buyer could settle this tax (as the input tax) with “his own” output tax, or apply for a tax refund in a timely manner.
But currently, fiscal officials are starting to see it differently. In abovementioned commercial real estate, which is the primary or sole asset of the seller, now they see an organised part of the enterprise. As a result, this type of transaction – which is not subjected to VAT - will be realised by the "net price", ie. without adding the tax amount to the agreed price. The buyers will be the most affected. This is connected with the need to tax the sale transactions of the building with the tax on civil law transactions, which in the case of transactions with VAT would not occur.
It is difficult to imagine a process of "reversing" the tax consequences of the finalised transaction, on which the tax authorities have considered late, that the shopping centre is, however, an organised part of the enterprise and not a commodity. Especially, there is a growing uncertainty about the tax interpretations obtained by the parties of such transaction prior to making it. And recently, here are very disturbing tendencies in the procedures of the administration offices. They consist in finding ways to deny the legal bindings of individual interpretations. To do this, fiscal officials once again in detail analyse the facts and seek such circumstances or facts which the taxpayer did not give in the application of the interpretation, and which in theory may affect the classification of the tax assessed transaction. They are checking for example, who manages the property, what happens with the security of tenants, who signs contracts for the supply of media, how the marketing activities of the centre are carried out, etc. At high complexity of the asset deal transactions, finding ways to challenge the binding interpretation does not seem to be a special problem for the tax authorities.
What else awaits for the commercial real estate market? It is not known. Analysing the last actions of the tax administration we come to the conclusion that the real estate trade is getting less sure, and yet the property has always been treated as a reliable and stable capital investment.