Understanding the Ownership Transfer and VAT Implications for KATA Entrepreneurs
Entrepreneurs operating under the KATA tax regime face important considerations when transferring real estate assets from their business to personal ownership. Specifically, the question arises whether changing the recorded owner from the sole proprietorship to the individual counts as a taxable sale and triggers VAT invoicing obligations, especially when the properties include business-use assets like a store and garage.
Why This Matters for Business Owners
Clarity on this issue is crucial for entrepreneurs because the way property ownership is transferred affects tax obligations and compliance. Incorrect handling can lead to unintended VAT liabilities or misapplication of tax rules, impacting the entrepreneur’s financial position and potentially resulting in penalties.
The Core Issue: Transfer vs. Sale
Legally, there is no concept of “re-recording” property ownership as a simple name change from the business entity to the private individual. The sole proprietor cannot just re-register the property under their personal name without a formal sale transaction taking place. Therefore, any transfer of real estate between the business and the individual must be treated as a sale, which is subject to relevant tax regulations.
Applicable KATA Law
Under the 2022 KATA Act (Act XIII of 2022, Section 2 § 8), small taxpayers’ revenues include transfers of fixed tangible assets used solely for business purposes. However, such assets (excluding passenger cars and agricultural land) must be clearly documented in business records as exclusively for business use.
VAT Considerations
VAT treatment depends on several factors. If the entrepreneur originally purchased the property with VAT included, as a VAT-exempt taxpayer under KATA, they could not deduct the VAT. Consequently, a VAT adjustment period does not apply to them.
When selling the property, as a VAT-exempt individual, the entrepreneur cannot apply VAT exemption simply by nature of their status because selling this fixed asset constitutes a taxable transaction under VAT law §193 (1), unless specific conditions exempt the sale.
Two-Year VAT Exemption Rule
The VAT liability on the sale depends on the ownership duration. If the property has been owned for more than two years, the sale is exempt from VAT per VAT Act (Act CXXVII of 2007) § 86 (1) j). This exemption applies if:
- The property’s first official use started over two years ago;
- The sale occurs more than two years after the usage certification was finalized;
- There was no significant change to the property’s designated use or structure within those two years.
If the two-year ownership threshold is not met, the sale triggers VAT obligations.
Practical Steps and Recommendations
Since a simple “change” of ownership recording is not possible without a sale, entrepreneurs must treat the transfer as a sale and consider its VAT implications carefully. They should:
- Determine the date of original acquisition and usage certification to establish the VAT exemption eligibility;
- Evaluate whether VAT was included and deductible at purchase;
- Consider obtaining an official property valuation before the sale to document the transaction value;
- Issue proper VAT invoices if the sale is within the two-year VAT liability period.
Understanding and following these rules ensures entrepreneurs comply with tax regulations and avoid unexpected liabilities when transferring business real estate to personal ownership.