A limited liability company (Kft.) purchased a residential house through a sale and
purchase agreement and intends to use the property for its revenue-generating activities by
operating a business there. The company converted the house into a commercial space,
but the property is still registered as a residential building in the official land registry.
The following questions arise:
Must the company register for VAT on real estate sales to reclaim the VAT on renovation costs? If so, when? Can it be done later, or was the VAT reclaim invalid?
General Rule:
If a company converts a residential property for business use and wants to reclaim VAT on renovation costs, it may need to register for VAT on real estate transactions under specific conditions.
When should the company register?
- If the company intends to sell or rent out the property with VAT, it must register
for VAT on real estate transactions before starting the renovation. - If the company has already deducted VAT on renovation costs without being VAT-
registered, the VAT reclaim is not legally valid, and the tax authority may impose
penalties.
Can the company register later?
- VAT registration is not retroactive, meaning that the company cannot legally
reclaim VAT on past renovations if it was not VAT-registered at the time. - If the company opts for VAT taxation later, it will only be able to deduct VAT on
future transactions, but previously deducted VAT may have to be repaid.
Conclusion:
- If the company intends to use the property for VAT-taxed business activities (e.g.,
leasing or selling it with VAT), it must register for VAT beforehand to reclaim
VAT on renovations. - Late registration does not allow for past VAT reclaims.
Deductibility of Costs Related to the Conversion of a Residential Property
The deductibility of VAT on expenses incurred during the conversion of a residential
property into a commercial space is not influenced by the future taxation of the
property’s sale. The tax treatment of a future sale is relevant only in the context of Section
136 of the VAT Act.
Key Considerations:
- According to Section 259, point 12 of the VAT Act, what matters is not the actual
use of the property as a business, but how the property is classified in the official
land registry. - Since the property remains registered as a residential property, VAT on
renovation-related purchases cannot be deducted, based on:
o Section 124 (1) (h) of the VAT Act, and
o Section 124 (2) (c) of the VAT Act.
Recommended Action:
- It is strongly advised to request an official position from the National Tax and
Customs Administration (NAV). - The situation is not explicitly regulated by the VAT Act, making it uncertain how
tax authorities will interpret it. - The lack of clear legal provisions means that NAV’s stance could be crucial in
determining whether VAT on renovation costs can be deducted.
Conclusion:
Unless the property’s classification is changed in the land registry, VAT on renovation
expenses is not deductible. A NAV ruling is recommended due to the legal uncertainty
surrounding this specific case.
Must a construction company register for VAT on real estate sales to sell the properties it builds?
Yes, a construction company must register for VAT if it sells properties it has built.
Reasoning:
- Newly built properties (sold within two years of obtaining the building
permit) must always be sold with VAT, regardless of whether the company is
otherwise VAT-registered. - If the company does not register for VAT on real estate sales, it cannot issue VAT-
included invoices for the properties it builds and sells. - VAT registration is essential for reclaiming input VAT on construction costs.
Conclusion:
A construction company must register for VAT on real estate transactions to legally sell
properties it builds and reclaim input VAT on construction costs.
VAT Treatment of Real Estate Sales by a Construction Company
The response is based on the assumption that the “construction company” refers to a
business that, under Section 10(d) of the VAT Act, commits to constructing and delivering a
property to the developer.
Key VAT Considerations:
- Under Section 10(d) of the VAT Act, this type of transaction is treated as a
supply of goods for VAT purposes. - The VAT rate depends on the tax classification of the property:
o If the property is new, the seller is obligated to charge VAT.
o If it qualifies as a new residential property and meets size requirements, the
sale is subject to a reduced 5% VAT rate (valid until January 1, 2027, after
which conditions for applying this rate will change). - What qualifies as a new property?
o If the company transfers a property with an occupancy permit, it is
considered new under Section 86(1)(j) jb) of the VAT Act.
o If the company transfers a half-finished property without an occupancy
permit, it is still classified as newunder Section 86(1)(j) ja) of the VAT Act.
Obligations for the Company:
- The company must register the appropriate business activity in its corporate profile.
- It must comply with relevant laws and regulations governing this activity.
Exemption from VAT (Section 86(1)(j) of the VAT Act):
- The VAT exemption only applies to certain transactions, such as the sale of used properties.
- However, sales under Section 10(d) do not qualify for VAT exemption and must be taxed accordingly.
- The option to make an otherwise exempt transaction taxable (Section 88 of the VAT Act) is only relevant for transactions that would otherwise be VAT-exempt under Section 86(1)(j).
Conclusion:
- A construction company selling a newly built property must charge VAT.
- If the property is a new residential unit and meets the size criteria, the sale is subject to 5% VAT.
- VAT exemption does not apply to such transactions under Section 86(1)(j) of the VAT Act.
