Let us share
some thoughts about the VAT-related questions in case of real estate
First of all,
we must define the term ‘real estate’.
As there is
no definition given to this term in the VAT Act, we should consider the
interpretation of the Civil Code, pursuant to which a plot (a parcel of land)
that is suitable to be entered into the land register as an independent
property shall be construed as a real estate. (This definition also includes
any building that belongs to a specific land parcel, provided that these are
registered under the same plot number, superstructures registered as
independent properties, condominium units in private ownership and a cellar the
entrance of which is located on public property.)
Another important term is ‘residential property’,
meaning a property constructed for the purpose of dwelling, to be reflected in
the use permit and by the respective land register record as well. Important
note! The garage shall not be construed as a property constructed for dwelling
purposes, even if it’s in the same building with the residential areas of the
In respect of real estate transactions, the very first
question to clarify is whether such transaction qualifies as a supply of goods
or supply of services.
When the issuer of the invoice (the taxable entity)
sells a finished and completed residential property or concludes a contract of
undertaking concerning the construction and the supply on a turnkey basis of a
property, the correct legal classification of the transaction is a supply of
goods. If the buyer orders the construction of a property from the seller,
the legal classification of the transaction is a supply of goods, even if the
construction materials are actually supplied by the buyer. If the subject of
the transaction is a real estate, the only applicable legal classification is
the supply of goods.
Any other activities provided for the buyer, as other
construction and installation work, works related to the designing and
implementing of a property or the supervision thereof classify as a supply
of services. This category shall include the real estate agency activities,
expert services and the transfer of rights related to the property.
The sale of a real estate:
basically, the sale of a real estate is exempt from VAT, unless the first final
and binding use permit wasn’t issued yet prior to, or was issued within 2 years
before the date of the sale and purchase transaction, or if the subject of sale
is a building plot – in the latter cases, the standard VAT payment rules shall
If according to the applicable rules, the sale of the
real estate is exempt from VAT, the taxable entity still has the right to opt
for selling it under VAT payment obligation; however, this choice may not be
modified or withdrawn until the end of the 5
th year thereafter. The
sale of residential properties and the sale of other properties may be
submitted to VAT payment obligation separately.
If the taxable entity opted for the application of VAT
payment obligation, the standard or the reversed VAT rules are to apply?
In usual cases, the rules of reverse taxation shall
apply. ‘Usual case’ shall mean the transfer of a property on the basis of a
construction contract, the sale of a property that is not legally classified as
‘new construction’ under sale and purchase agreement, the sale of a land parcel
that is not legally classified as a building plot.
However, if the property falls under the rules of
reverse taxation but any further criteria related to this taxation form are not
met (for example, if the buyer is not a VAT entity or the buyer has personal
exemption from VAT), the VAT on the transaction shall be paid according to the
regular taxation rules.
We should not forget the tax rate either!
As a matter of principle, in case of supply of goods,
the tax shall be paid by the seller. But, in the case of reverse taxation, the
payer of the tax will be the buyer; however, this form of taxation is
applicable to Hungarian taxable entities (entities who have a Hungarian VAT
number) only. Hence, if the buyer is not a taxable entity or is a foreign
taxable entity without a Hungarian VAT number, the seller shall issue the
invoice in line with the rules of standard taxation (provided that the seller
opted for selling under VAT payment obligation, instead of being exempt from
VAT, as discussed above).
The place of settlement:
Regardless whether the legal classification of a property-related transaction
is a supply of goods or supply of services, the place of settlement shall be
the location of the concerned property (instead of the parties’ economic
residence or nationality). Hence, the transaction shall be classified from VAT
aspect, the applicable tax rate shall be determined, the taxable entity shall
be defined, and the required reporting obligation shall be performed under the
jurisdiction of the location of the property.
The date of settlement
shall mean the date of completion of the transaction when the possession of the
tangible property is conveyed, and the receiver may dispose over the property
as its own. The date of transfer of the right of disposal shall qualify as the
settlement date even if the purchase price is paid in several instalments.
Serial nature: If the sale
of properties, parts of properties and the related land parcels by a
non-taxable entity has a serial nature, provided that the properties are not
yet in use or the final and binding use permit was issued (the take in use was
acknowledged) within 2 years before the date of the sale and purchase
transaction, the seller shall qualify as a taxable entity in this respect.
‘Serial nature’ shall mean the sale of the fourth (or any subsequent) building
plot or newly constructed property within 2 calendar years and the sale of any
additional real estate in the upcoming 3
rd calendar year by the same
seller. The sale of inherited or expropriated properties shall count into the
above quantity limit; however, the sale of such properties solely gives not
rise to the classification of the related transactions of having a ‘serial
These thoughts are aimed at the support of the
elaboration of the entrepreneur’s future activity’s correct classification.
What should be done with an incorrectly issued invoice, how such an invoice
should be amended, what titles are to be corrected, when can the amended item
be settled, what should be done in case of defective performance or if
performance is rendered impossible?
There is no general answer to the above questions; the situation shall
be thoroughly investigated in each case separately.