The reduced 5% VAT
rate on residential properties undeniably played an important role in
strengthening the real estate industry. Although from the outset the reduction was
incorporated for a fixed period of four years, between 2016-2019, many expected
the long-term continuation of the rule. The Minister of Finance’s summer
announcement cut an end for these hopes. The return of 27% VAT on such real
estate will significantly affect the overall market; the consequence may be the
further increase of property prices, but also the reduction of investors’
profits. Certain prepayment constructions may help to extend the validity of
the reduced VAT period, but these require due care and attention from developers,
buyers and financing banks.
Supply of new and
unused residential property, including the land on which it stands, falls under
a reduced 5% VAT rate according to the actual legislation. Although the
advantage covers only residential properties within certain terms, it had an
impact on the whole sector. The synergy of the reduced VAT and the increase of
state support for buying homes (the so-called CSOK program) accelerated growth
in the real estate industry, and spurred the quality replacement of residential
buildings. According to the Hungarian central bank’s analyses, the takeover of
new flats increased 44% from last year, while bank financing for residential
purposes also rose by about 40%. These trends will likely slow from 2020. In
recent years, increasing demand for new flats and houses, combined with
capacity problems in workforce and materials, resulted in increasing market
prices. Therefore, the financial impact of the VAT rate reduction was divided
between sellers and buyers. Considering the high square meter prices, property
investors and foreigners play a significant role on the purchaser side of the
market, which was not the original intention of legislators when they introduced
the advantageous taxation.
Based on the
announcement of the Ministry of Finance, the 5% reduced VAT will come to an end
on December 31, 2019, in line with the original plans. Therefore, many building
projects will need to speed-up to finish and sell the properties within the
deadline. Increased VAT will burden real estate unfinished by that time, and
also the supply of finished buildings that are not older than two years. VAT
treatment of partial or advanced payments will depend on certain legal and
tax-related circumstances. The financial impact of the VAT rate amendment will
again be shared between seller and buyer, the proportion of which will highly
depend on the agreement and the gross-net calculation between the parties.
Certain prepayment
constructions may help to extend the validity of the reduced VAT period. Practically,
it is the discretion of the contracting parties to agree on prepayment before
the supply takes place, with the VAT rate determined at the time of the money
transfer. However, the tax authority will consider the overall circumstances of
the case and will decide about the transaction according to substance over
form, for example, it will be considered as unrealistic to pay almost the full
amount for real estate when only the land is available without any significant
building elements. Payment to a deposit account may also not provide sufficient
solution, as not the date of the transfer to the deposit account itself but the
withdrawal of the money will create the tax point date. Therefore, these
special contractual constructions require high degree of care from developers,
buyers and financing banks alike; it is worth involving a tax advisor to check
the planned deal from the aspect of VAT compliance.
This is especially so,
since penalties arising from mistakes in value-added tax may have an adverse
effect on the budget of corporations, particularly in a member state that
applies the European Union’s highest VAT rate. It is therefore, important to
properly assess transactions and review the VAT treatment of the businesses
regularly. In LeitnerLeitner’s staff you will find an excellent partner in
addressing all your VAT issues. With the help of our EU-wide VAT network, we
open a window to Europe as a whole through one single contact person.
LeitnerLeitner is a member of the VAT Expert Group set up by the European
Commission, which is a further guarantee of our expertise.
