Establishing the right to build by landowners in exchange for an obligation to construct individual units in a residential building is a common practice that benefits both parties. At first glance, the transaction appears relatively simple. However, the tax treatment of the deal is a complex issue with significant practical implications, especially for large-scale projects.
General Characteristics of the Transaction
This type of transaction is treated under tax law as a barter deal. In other words, it is a supply (establishing the construction rights) in which the compensation is expressed not by a specific monetary sum but in goods or services. Specifically, in the present case, the established right to build is compensated in the form of services for the construction of individual units in the building as agreed upon by the parties.
Timing of the Transaction
The first factor to consider early on is the exact moment when the deal for the establishment of construction rights should be concluded. The determining event is the issuance of a building permit for the future building. The reason lies in Article 45, Para. 2 of the Value Added Tax Act (“VAT Act”), which provides that the granting or transfer of the right to build is exempt from taxation until the building permit is issued.
Consideration of the above provision is important because otherwise, the supply (the establishment of construction rights) will be taxable, and depending on the scale of the project, the taxable amount can reach a significant scale.
Regardless of the approach taken, the timing issue related to the issuance of the building permit concerns only one of the two parties. The reciprocal supply – namely, the service of constructing the individual units reserved for the grantors of the right to build – is a taxable supply in itself.
Taxation of the Service of Constructing the Individual Units
In exchange for the established right to construct the building, over which the builder will acquire ownership after its construction, the builder assumes the obligation to invest resources and construct the individual units reserved for the grantors of the right to build. This represents the “price” the builder “pays” for the established construction rights.
Determining the taxable amount remains unresolved by the applicable Article 26, Para. 7 of the VAT Act. The question is whether the taxable base should be the market value of the established construction rights or the value of the provided “goods”. In this scenario, the latter represents the expenses the developer incurs to construct the individual units construction rights.
This issue has also been addressed by the CJEU, which, in its ruling of December 19, 2012, in Case C-549/11, clarified that the taxable amount should align with the market value of the construction rights only in cases of connectedness between the parties as defined by Tax Law. Outside this scenario, the taxable amount is the actual (subjective) value received, rather than a value determined based on objective criteria (market price). In this case, the subjective value of established construction right is expressed in monetary terms as the amount the builder is willing to spend on the supply. In other words, the monetary value of the builder’s estimated costs for constructing the individual units reserved for the grantors of the construction right represents said subjective value and should thus be considered the taxable amount. At the time of signing the notary deed for establishment of the construction rights, this value is either determined or at least determinable. If it later turns out that the actual cost differs from the estimated cost, the invoice can be amended.
Obligation to Charge and Pay VAT
At the moment of signing the notary deed for the establishing of construction rights, two reciprocal obligations to charge and pay VAT may arise. As previously clarified, on the part of the grantor, a taxable supply occurs only if carried out after the building permit is issued. Of course, Article 45, Para. 7 of the VAT Act allows the supplier to opt to treat the transaction as taxable.
The established construction rights constitute an advance payment—specifically, an advance payment for the full value of the construction services. Consequently, VAT becomes due at the time the advance payment is received, i.e., when the transaction is formalized before a notary. The builder must issue an invoice to the grantors, taking as the taxable base the estimated costs the builder predicts will be incurred to construct the reserved units. VAT must then be charged and paid on this taxable amount at the statutory rate.
