Taxation rules relating to immovable property are with many nuances. Therefore, companies using dwellings for business purposes have often questions in what way one or another transaction should be charged. In order to help you to take your bearings in the taxation landscape full of nuances, we provide here a short survey about the rules laid down in different acts what to bear in mind in accounting related to dwellings used for business purposes.
Value added tax rates
Whereas dwellings can be used in various ways for business purposes, it is useful to know for a company planning to obtain dwelling belonging to an enterprise (apartment ownership, residential building, etc.) that various services relating to immovable property are taxable in different ways according to the Value-Added Tax Act.
So, for example, the rate of value added tax on provision of accommodation services (visitor’s apartment or holiday home) shall be 9 per cent of the taxable supply (clause 15 (2) 4) of the Value-Added Tax Act (hereinafter the ‘VAT Act’), the leasing or letting of immovable property, or establishment of a usufruct on immovable property is, as a rule, the supply exempt from tax (clause 16 (2) 2) of the VAT Act), however, transactions of leasing or letting immovable property or of establishment of a usufruct thereon may be voluntarily charged with the 20 per cent value added tax rate, having prior notified the tax authority of it, except in the case a dwelling is the object of transaction (clause 16 (3) 1) of the VAT Act). A dwelling is a residential building or apartment which is used for permanent habitation (subsection 272 (1) of the Law of Obligations Act). Thus, in order to make a distinction between dwellings and business premises, it is important to assess whether the rooms afford to live there permanently or not and how these are actually used.
Therefore, even if business premises are concerned, according to the permit of use, but actually the rooms are used for living in, then these rooms are treated as dwellings and, also vice versa – if according to the permit of use it is a dwelling but actually used as business premises, then it shall be charged on the basis of the provisions meant for business premises (look more particularly sub item 2 of item 9.2 "Tax-exempt supply in business as usual, including services related to immovable property" of the instructions "Explanations for the Value-Added Tax Act").
The accommodation service is concerned if the lease contract is entered into for the temporary use of the premises and for a term not exceeding three months (clause 272 (4) 1) of the Law of Obligations Act). Therefore, if you give a dwelling for use to different persons for short periods, an accommodation service charged with the 9 per cent value added tax rate is in question, but if you find a client who wishes to use the dwelling more than three months, you shall conclude a residential lease contract with the client and supply exempt from tax is created from the provision of the service.
We will note in addition that on providing accommodation services, persons using accommodation services shall be registered on the basis of visitor’s cards (subsection 24 (1) of the Tourism Act). Visitor’s cards shall be preserved for two years as of the date they were filled in (subsection 24 (6) of the Tourism Act).
It should also be borne in mind, if the assets belonging to a company are given for use to an associated person, the associated person as well shall pay to the company according to a general price list and the company has to declare the grant of use of the dwelling as supply. We will note that the grant of use of the assets of a company to an associated person free of charge or at a price lower than the market price is regarded as a fringe benefit on which the income and social taxes shall be declared and paid (subsection 48 (1) and clause 48 (4) 2) of the Income Tax Act, and clause 2 (1) 7) of the Social Tax Act) (look more particularly "Explanations for filling in Annex 4 to tax return of fringe benefits TSD", more particularly about the grant for use of other property of the employer in item 3.5.2).
Upon the sale of dwellings as well, different taxation may be applied depending from whether a dwelling taken into use or a new one is concerned. If upon the resale of a new dwelling prior to the commencement of its use the 20 per cent value added tax is added to the selling price (clause 16 (2) 3) of the Value-Added Tax Act), then upon the transfer of a used dwelling the supply exempt from tax is concerned (clause 16 (3) 2) of the Value-Added Tax Act) (look more particularly sub item 3 of item 9.2 "Tax-exempt supply in business as usual, including services related to immovable property" of the instructions "Explanations for the Value-Added Tax Act").
Deduction of input value added tax
We find it necessary to explain also that value added tax on dwellings, and on goods and services acquired for it is allowed to declare as input value added tax in the case only when the rooms shall be taken for use for the purposes of taxable supply (subsection 29 (1) of the Value-Added Tax Act) (look more particularly item 14.3 "Deduction of Input Value Added Tax" of the instructions "Explanations for the Value Added tax Act").
Thus, upon the acquisition of dwellings for the purpose to use it, for example, as an office, the right of deduction of input value added tax depends upon the fact whether:
the rooms are used for an office fully or partially,
the supply to be created as a result of activities of an undertaking shall be taxable or exempt from tax.
If an undertaking uses dwellings for an office partially only, or the undertaking creates in the course of its activities both taxable and tax-exempt supply, the deduction of input value added tax shall be justified partially only on dwellings used for an office and on goods and services related to it, the deduction shall be based on the estimated proportion in which the immovable property were to be used for the purposes of taxable supply during the year of the acquisition of the immovable property (subsection 32 (3) and subsection 29 (4) of the Value-Added Tax Act) (look more particularly item 14.3.6 "Partial deduction of input value added tax" of the instructions "Explanations for the Value-Added Tax Act").
But if an undertaking acquires a dwelling for the purpose of letting it out for a long term, the assets acquired for the purposes of tax-exempt supply are concerned wherefrom input value added tax cannot be deducted.
At the same time, whereas this taxation sphere is full of many nuances, one can make different transactions with one immovable during years, as a result of what the taxation of services provided by the same movable may change depending from the changes in use of the immovable.
In the case you have deducted input value added tax upon the acquisition of immovable property, provided that you shall start to use it for the purposes of taxable supply, but as time passes, it turns out that the market situation has changed or you do not succeed in realisation of your initial plans for some reasons and the apartment shall be taken into use for the purposes of tax-exempt supply, it is essential to know that the value added tax deducted from the acquisition of the apartment, as well as from the other fixed assets related to the apartment ownership, shall be adjusted according to the real use (subsection 32 (4) of the Value-Added Tax Act).
Input value added tax shall be adjusted within the period for adjustment of input value added tax starting from the year of the acquisition of the fixed assets according to the actual proportion in which the fixed assets are used for the purposes of taxable supply. The period for adjustment of input value added tax shall be ten calendar years in the case of immovable and five years in the case of other fixed assets. Input value added tax shall be adjusted at the end of each calendar year taking into account the actual proportion in which the fixed assets are used for the purposes of taxable supply during the given calendar year (subsections 32 (41 and 42) of the Value-Added Tax Act).
Upon the acquisition of a dwelling, the deducted input value added tax is subject to adjustment on the tax return of the month in which the assets are transferred, if the dwelling taken into use already is transferred within the period for adjustment of input value added tax (subsection 32 (5) of the Value-Added Tax Act) (look more particularly item 9.3 "Adjustment of deducted input value added tax upon use of the immovable for the purposes of supply exempt from tax" of the instructions "Explanations for the Value Added Tax Act").