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 it is not the date of the transfer to the deposit account itself but the withdrawal of the money that 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.