[Section 82 (2), Annex 3, Part I, Parts 50-51 of the VAT Act]

Pursuant to Section 82(2) and points 50-51 of Part I of Annex 3 to Act CXXVII of 2007 on Value Added Tax (hereinafter: VAT Act), in force from 1 January 2021 until 31 December 2022, the rate of VAT is 5 percent of the tax base

  • in the case of the sale of apartments to be constructed or developed in a multi-unit residential property, whose total net internal area does not exceed 150 square meters, and which is subject to subsection 86 (1) (j) or (jb) of Section 86 (1) of the VAT Act

(unless the apartment is located in a property developed on a brownfield land area as defined in the Act on Constructions[1]),   and

  • in the case of selling a single-family residential property whose total net internal area does not exceed 300 square metres, and which is subject to Section 86 (1) (j) (ja) or (jb) of the VAT Act.

The provision, which entered into force on 1 January 2021, reintroduces, with almost identical content, a previous rule that was in force from 1 January 2016 to 31 December 2019. The difference is the definition of the exception related to the brownfield area. According to this, if the apartment to be constructed or developed is in a multi-unit residential building located on a plot of land in a brownfield area as defined in the Act on Constructions, the total net internal area of which does not exceed 150 square metres and which falls under Section 86 (1) (j) (ja) or (jb) of the VAT Act, the 5% tax rate applies to the sale on the basis of Annex 3, Part I, point 59 of Part I of the VAT Act, and not on the basis of point 50. A Rust Belt Action Area is an area designated as such in the Government Decree on the delimitation of Rust Belt Action Areas, which is still under preparation at the time of publication of this information.

 

This information note describes the application of points 50-51 of Part I of Annex 3 to the VAT Act.

Based on the above, the 5% VAT rate applies to the sale of residential property if the property

  1. meets the definition of residential property under Section 259(12) of the VAT Act,
  2. is considered newly built real estate pursuant to Section 86 (1) (j) (ja)-jb) of the VAT Act,
  3. has a total net internal area not exceeding 150 square metres in the case of a dwelling in a multi-unit residential property or 300 square metres in the case of a single-unit residential property,
  4. its sale or the receipt or crediting of the advance paid for it falls on or after 1 January 2021 and before 1 January 2023. However, under certain conditions, the reduced rate will continue to apply after that date (under a transitional rule).

 

With regard to whether there is a sale of a residential property, the provisions of the VAT Act applicable to the supply of goods must be taken into account (Sections 9, 10 a), 10 d) of the VAT Act). According to Section 9 of the VAT Act, the residential property sales based on arm’s length transactions are deemed to be supplies of goods. In the case of residential property constructions, the reduced VAT rate applies to the transaction(s) which qualify as a supply of goods under Section 10 d) of the VAT Act. The essence of this legal status is that the taxable entity carrying out the transaction creates a new immovable property - to be registered in the Land Register - by means of construction and installation work on the basis of an order made by another person. The sale of goods with the above content can typically take place in the case of construction works if the construction works are carried out with the involvement of a general contractor or a main contractor and the content of the transaction carried out by him meets the above conditions.

  1. The concept of residential property

Pursuant to Section 259(12) of the VAT Act, a residential property is deemed to be any residential building if it is established for residential purposes and is registered or to be registered in the land register as a dwelling or apartment. Premises not necessary for the intended use of the dwelling are not considered residential properties, even if they are attached to the residential building, in particular: garages, workshops, shops, farm buildings. According to this definition, a room that is not necessary for the intended use of the dwelling is not considered a residential property even if such room is not specifically mentioned in the land register. According to Annex 3, Part I, points 50-51 of the VAT Act, the 5% tax rate applies only to the sale of residential properties/dwellings, even if other legal conditions are met. If the sale of a residential property and premises not considered as residential property (e.g. a garage) is part of the transaction for the sale of the newly built property, the taxable amount of the sales transaction must be split, and VAT at 27% is charged on the taxable amount of the premises not considered as residential property.

  1. Newly built property

For the purposes of the VAT system, newly built property is defined as any real estate which

  • has not yet been taken into occupancy in accordance with its intended use or
  • has been taken into occupancy in accordance with its intended use, but 2 years have not yet elapsed between the sales transaction and the date on which the official authorisation for this purpose became final or, in the case of the occupancy / acknowledgement procedure, the sales transaction and the acknowledgement of taking into occupancy, or
  • the construction was carried out on the basis of a simple notification under the Act on the Development and Protection of the Built Environment and less than 2 years have not yet elapsed between the issue of the official certificate certifying the construction and the sale.

Properties not put to its intended use includes properties under construction, properties in the course of construction, properties in a semi-finished state, properties with completed superstructure, and completed properties for which a permit or acknowledgement procedure for taking into occupation is in process or for which an official certificate certifying the fact of construction is being issued.

The first date of occupation for the intended use is not the date of actual occupation, but a date to be determined depending on the procedure to be followed for the occupation of the property. Where an occupancy permit procedure takes place for the property in accordance with the provisions of the applicable legislation, the date of the first occupancy in accordance with the intended use of the property in question shall be the date on which the authorisation to occupy the property in question becomes final. If the property is subject to an acknowledgement of occupation procedure, the date of first occupation in accordance with the intended use is the date on which the occupation was acknowledged by acknowledgement.

In the case of a property subject to a simple declaration, the relevant 2 years for the qualification as new are counted from the date of issue of the official certificate confirming the fact of construction.

In addition to taking into occupancy a newly built property, the occupancy of an already existing property already in possession of the occupancy permit shall also be considered as occupancy in accordance with the intended use, which results in a change of function/use compared to the previous use, and in connection with which a new procedure for obtaining the occupancy permit or an acknowledgement procedure or notification becomes necessary.

The conversion of an existing property which results in a change in the number of commonhold units of the property is also considered to be the first occupancy in accordance with the intended use, provided of course that the occupancy after the conversion affecting the commonhold units is subject to an occupancy permit, and acknowledgement procedure or a notification.

In the case of a conversion following an authorised or acknowledged occupancy or notification, which is not accompanied by a change in the "number of units" (number of commonhold units) of the property or in the use of the property, the authorisation or acknowledgement or notification following the conversion does not constitute the first occupancy in accordance with the intended use. Regardless of the procedure to be followed, the first occupancy in accordance with the intended use will not take place even in the case of an extension of the property, as no new property (new commonhold unit) will be created.

A sales transaction of a newly built property takes place in the case of a sale of a property that meets the above conditions, regardless of whether the transaction involves the sale of the land on which the property is built or only the building without the land. If the land containing the building or structure and the owner of the building or structure are different persons, the tax liability on the sale of the land is determined on the basis of the rules applicable to the built-up property. In the latter case, the sale of the land is therefore taxable if there is a new property on it that meets the above conditions. It should be noted that if the transaction is a separate piece of land belonging to a residential property takes place, and it is taxable, the 27% rate applies, as in this case the property sold does not comply with the provisions of Annex 3, Part I, points 50-51 of the VAT Act, as it is not a residential property.

If the immovable property being sold does not qualify as new immovable property under the foregoing, its sale [not including cases covered by Section 11 (1) to (2) of the VAT Act] is tax exempt, unless the selling taxable entity has exercised the option to make it taxable under Section 88 of the VAT Act. If the taxable entity person selling such built-in immovable property has elected to pay tax under Section 88 of the VAT Act, the sale is subject to VAT at the rate of 27%, subject to the provisions of Section 88(2) of the VAT Act [and if the conditions set out in Section 142(3) of the VAT Act are also met, the transaction is subject to reverse charge under Section 142(1)(e) of the VAT Act].

  1. Total net internal area

For the purpose of complying with the size limit, the total net internal area of the residential property as defined in Section 259(12) of the VAT Act (hallway, bedroom, living room, kitchen, bathroom, pantry, boiler room, etc.) must be taken into account. That is, the total net internal area of the residential property does not include the floor area of the garage, shop and other premises not necessary for the intended use of the residential property. When calculating the net internal area, the definition of net internal area in accordance with Government Decree 253/1997 (XII. 28.) on the national requirements of building and town planning (hereinafter: OTÉK) shall be taken into account (Section 259, Article 13/A of the VAT Act). Taking into account points 46 and 88 of Annex 1 to the OTÉK, the net internal area of a room or space enclosed wholly or partly by a building structure is the area calculated on a horizontal projection where the internal height is equal to or greater than 1.9 metres. When calculating the total net internal area, the net internal area of all building levels must be taken into account (Annex 1, point 46a of the OTÉK). Building level means the occupied level of a building on which there is a room. The attic and the roof level on which there are no rooms other than the lift machine room or the upper level of the staircase are not considered to be building levels (Annex 1, point 34 of the OTÉK).

 

The 150 m2 threshold for multi-unit residential buildings must also be taken into account, inter alia, if the newly built dwelling is created by means of an attic conversion (see Annex 1, point 127 of the OTÉK).

  1. Date of sale of the residential property

The transitional rule contained in Section 347 of the VAT Act stipulates that points 50-51 of Part I of Annex 3 of the VAT Act, effective from 1 January 2021, shall be applied for the first time in cases where the sale of the dwelling or the receipt or crediting of the advance payment for the dwelling takes place on or after 1 January 2021. In line with this, Section 327 of the VAT Act expired on 1 January 2021, and in the case of financial performances and advance payments made after this date, the applicability of the 5% tax rate is not affected by the date on which the building permit became final or the date on which the construction activity subject to simple notification was declared.

The transitional rules related to the phasing out of the 5% tax rate are set out in Section 348 of the VAT Act, effective from 1 January 2023, which provides that the 5% tax rate will also apply to advances received and credited and sales made after 31 December 2022 but until 31 December 2026, if

  • in the case of building work subject to a building permit, the building permit for the construction of a residential property has become final by 31 December 2022, or
  • the construction activity subject to a simple notification under the Act on the Development and Protection of the Built Environment has been notified by 31 December 2022 at the latest.

If the sale of the dwelling and the receipt or crediting of the advance payment for it took place before 1 January 2021, a tax rate of 5% was applicable under the transitional provision of Section 327 of the VAT Act in force until 31 December 2020 if

  • in the case of construction work subject to a building permit, the construction of the dwelling had a final building permit on 1 November 2018, or
  • the construction activity subject to a simple notification under the Act on the Development and Protection of the Built Environment was notified no later than 1 November 2018.

Consequently, if the final building permit or notification is later, (partial) performances and advance payments made in 2020 are taxed at a VAT rate of 27%. For construction works carried forward to 2021, a 5% VAT rate will apply to (partial) deliveries and advance payments made after 31 December 2020 under the rules in force from 1 January 2021, but the 5% rate will only apply to the part of the purchase price (the difference between the purchase price and the amount paid as partial performance or advance payment) remaining after 31 December 2020 in the final invoice.

[Ministry of Finance, Department of Indirect Taxes PM/2760-1/2021. - NTCA, Department for Customer Services and Information 2507379415/2021.]

 

[1] Act LXXVIII of 1997 on the Development and Protection of the Built Environment