Value-added tax on construction services
Construction services are characterized by their special accounting coverage and their legal interpretation because they are prolonged over time and have a number of features regarding their implementation.
Construction services include the following: construction of buildings, roads, bridges, dams, tunnels, vessels and other sophisticated equipment and facilities; demolition or restoration of assets, and restoration of the environment following the demolition of assets, and others.
Taxable and exempt supplies
The Value Added Tax Act (VATA) regulates the taxation of supplies related to land an buildings in Art. 45 thereunder. Paragraph 7 of this article presents individuals with the option to choose whether these supplies would be subject to VAT or exempt from taxation. The only provision where no such option is given is Art. 45 (2) VATA - the creation or transfer of the right to build is considered an exempt supply until the granting of permission for the construction of the building.
Creation/transfer of the right to build
Common commercial practice is the conclusion of a contract for construction services whereby landowners create a right to build in favor of the construction company, and the latter is obliged to indemnify the owners with parts of the constructed building. The deed contains the creation of the right to build and its value, as well as the characteristics of the parts of the future building to be transferred to the landowners after the construction thereof.
According to Art. 45 (2) VATA, the creation or transfer of a building right are considered an exempt supply until the time of issuance of the building permit for the building for which the building right is created and/or transferred. Once a building permit is issued, the granting of the right to build is a taxable supply - by virtue of the Act itself, without the need for the supplier to choose to turn the supply into a taxable such.
Art. 45 (2) VATA reserves the exemption necessary to alleviate the burden on landowners while restricting the possibility of selling of parts of the building without taxing the value added - it is suggested that the end users will be less likely to buy a future building/part of the building, if even a permit is not inplace for the construction of the building in which they want to buy real estate.
Supplies related to land
The cases in which the supplies are taxable are detailed in Art. 45 (5) VATA. They concern the transfer of ownership and other property rights, the rental of machinery, equipment and various types of land.
Supplies related to buildings
Those supplies of buildings, which the supplier can choose to deem as taxable or not under Art. 45 (7), are as follows:
- 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.
- The supply of buildings or parts thereof, which are not new, the supply of building land, as well as the creation and transfer of other rights in rem thereto (Art. 45 (3)).
Under this scenario there is a choice of whether or not to deem a supply as a taxable supply.
The supply of new buildings is a taxable supply.
According to Art. 44 RAVATA, taxable supplies are furthermore the supplies of parts of a building which meet the definition of the supplementary provisions of the Act.
A chargeable event occurs on the date stipulated under the general procedure of the Act (Art. 25). Chargeable event within the meaning given by VATA is the supply of goods or services effected by taxable persons under this Act and occurs on the date on which ownership of the goods passes or on which the services are performed. It is noteworthy that no taxable event occurs on the date of the advance payment. However, pursuant to Art. 25 (7), the tax becomes chargeable also upon receipt of advance payments. In certain cases, the chargeable event arises even without a transfer of ownership of property - on the date of actual delivery of the goods. One of these cases is when the goods are made available under a leasing agreement, which explicitly provides for the transfer of ownership of the goods and this provision should be considered when it comes to the construction of buildings sold under such leasing agreement.
Basis of taxation and determination of tax
First of all, it should be noted that VATA contains no specific rules for determining the basis of taxation for the supply of buildings.
The basis of taxation for supplies transferring ownership over buildings, regardless of whether they are new or old, is determined under the general procedure of VATA, applying Art. 26 thereunder.
According to Art. 26 (2), the basis of taxation is determined on the basis of everything which constitutes the consideration which has been obtained by or is due to the supplier from the recipient or another person in connection with the supply, expressed in leva and stotinki exclusive of the tax under this Act. Any payment of damages and interest of a compensatory nature is not considered a consideration for a supply.
As far as a performance guarantee is used in the context of construction services, an important observation is that under the Act the basis of taxation also includes the value retained by the recipient as a performance guarantee - Art. 26 (4), item 2 VATA.
Tax credit is exercisable for all purchased goods and services received in relation to the construction site, provided that the requirements of the Act on the right of deduction are met.
As regards the right to deduct tax credit for available assets prior to the date of registration, Art. 74 (2), item 4 applies, according to which, in order to exercise this right, the real property must have been acquired within 20 years before the date of registration under this Act.
One special feature is the conclusion of a preliminary contract concerning the future performance of the construction service and the transfer of a building or a part thereof. The preliminary contract itself, without any advance payments, which would be grounds for charging the tax, does not create a tax event.