Tax treatment of the sale of built-up land in Bulgaria
This article will introduce you to the great public importance of supplies related to land and buildings and the accompanying supply of construction products and construction services, which require special attention.
In order to properly understand the provisions of Art. 45 VATA and to correctly apply the VAT taxation, several terms and definitions should be considered.
"Regulated land estate" is land for which a detailed plan (DP) has defined certain limits of access to a street, road or alley, specific purpose and development mode.
"New buildings" under § 1, item 5 SP of VATA are any buildings which are in a state of completion "rough construction work" at the date on which the tax on the supply of the said buildings became chargeable, or in respect of which the tax on the supply thereof became chargeable before the lapse of 60 months from the date on which a permit of usage was granted.
"Adjacent site" is the amount of the built up area in the meaning of the Spatial Development Act (SDA) plus the area around the built up area, determined on the base of a distance of 3 m from the external outlines of each of the surrounding walls on the first over ground floor or the semi underground floor of the building, within the regulated land estate (RLE).
"Rough construction work" is a building, whose surrounding walls and roof with or without varying degrees of finishing works.
Supplies related to land
According to Art. 45 (1) VATA, the transfer of the right of ownership of land, the creation or transfer of limited rights in rem to land, as well as the letting or leasing of land, is an exempt supply. Creation or transfer of a right to build is considered an exempt supply under the above provision until the granting of permission for construction of the building, for which the transfer or creation of the right to build is established.
Art. 45 (7) VATA allows the supplier to choose those services to be taxable. If the purchaser is a trader registered under VATA, no problem arises - tax credit can be used under the general procedure. If the purchaser is a natural person, their supply is increased with the tax.
Supplies expressly provided for in Art. 45 (5) VATA are not exempt supplies, namely the transfer of ownership over SLEs under the SDA, with the exception of the adjacent site to buildings, which are not new; transfer of ownership of adjacent sites to new buildings, as well as the creation and transfer of rights in rem over the said sites.
Supplies related to the right to build
Creation or transfer of a right to build is considered an exempt supply until the granting of permission for construction of the building, for which the transfer or creation of the right to build is established.
Thereupon all property-transferring actions of the right to build are subject to VAT taxation. That is, the creation or transfer of a right to build is exempt only before the construction has begun. There is no need for the supplier to deem the supply as taxable.
Supplies of old buildings or parts thereof and land
'Buildings which are not new" is arguably best defined as the contrary to the definition in § 1, item 5 SP of VATA, namely, any buildings which are in a state of completion "rough construction work" at the date on which the tax on the supply of the said buildings became chargeable, or in respect of which the tax on the supply thereof became chargeable before the lapse of 60 months from the date on which a permit of usage was granted.
The supplies of buildings which are not new are exempt.
Another exempt supply is the supply of parts of buildings which are not new; the creation and transfer of property rights over the old buildings; supply of the adjacent sites to the old buildings.
If the supplier so wishes, these supplies may be taxable, as well.
According to Art. 45 (3) and Art. 45 (5), item 1 VATA, the transfer of ownership over the adjacent site to buildings, which are not new, is an exempt supply.
Supplies of new buildings or parts thereof and land
As taxable supplies are deemed: the transfer of ownership over a new building or parts thereof; the transfer of property rights relating to the new building; the transfer of an adjacent site to a new building, as well as the entire regulated land estate.
Rental relations are subject to tax treatment under Art. 45 VATA, as they relate to land and buildings, namely exempt supplies are the rental of a building or part thereof by a natural person who is not a trader within the meaning of the Commerce Act; taxable supplies are accommodation in hotels, motels and the like listed in Art. 45 (6) VATA, as well as the rental of campsites, caravan parks and the like.
At the discretion of the lessor-supplier, rental of a building or part thereof for the housing of a natural person, who is not a trader, may constitute a taxable supply.
The basis of taxation of taxable supplies related to land and buildings is formed under the procedure of Art. 26 VATA. The tax assessment acts as a basis for charging state taxes on the transfer of ownership.
The following two cases are related to the supplies of land and buildings. According to Art. 70 (1), item 6 VATA, the right to deduct tax credit is not exercisable where the building has been demolished as illegally built. In practice, if such action is to follow, a correction should be made and the tax - refunded, amounting to the tax credit used for the purchase or construction of the building. Art. 44 RAVATA stipulates the action for determining the basis of taxation for supplies of buildings and land where the building consists of old and new parts. A proportion of RLE follows the type of buildings. It could be either a taxable or an exempt supply.
Documenting the transactions of land
Documentation of land and buildings, respectively parts thereof, separate invoices are issued for the taxable and exempt supplies, or one general invoice - with individual bases of taxation for the taxable parts.
Supplies related to construction works performed by construction companies have numerous features, and are therefore subject to separate treatment.