VAT tax implications of Act 15 and Act 16 (in respect of the price of buildings)

LEGAL FRAME:
- VAT Act,
- Spatial Development Act

ANALYSIS:
1. General Bulgarian VAT Regime with respect to immovable property

- Good: Immovable property is a “good” in the meaning of VAT Act (Art.7)
- Supply: Transfer of ownership of goods or other rights in rem over the goods is a “supply” in the meaning of VAT Act (Art.6)
- Exempted supplies: Transactions of land ownership is an exempted supply (Art.33 in connection with Art.34 )
- Specific Case of Determining VAT Rate: Where the title to a building or part thereof (actual or common) is transferred, the tax base shall be the one agreed by the parties as increased with the taxes and fees due for the transfer or the tax base determined in pursuance of Art. 46 of the Local Taxes and Fees Act, (the assessed value of the property for tax purposes ) whichever is the higher.
- Tax Credit: the amount of the tax charged under the VAT Act on goods obtained by a registered person (registered under VAT Act) under taxable supplies during the tax period, which the person has the right to deduct.

2. Implications of Act 15 and Act 16 on the obligation of the Purchaser to pay VAT

2.1. Overview of administrative acts issued upon completion of construction (Act 15 and Act 16 in comparison):
a) Purposes:
Act 15 – to ascertain that a construction or building is fit for acceptance (it meets the construction technical requirements)
Act 16 – to permit the use (putting into operation) of the building (it meets the specific use requirements, including utilities etc)
b) Interrelation: Act 15 is a prerequisite for Act 16
c) Difference in their legal effect with respect to the ownership of the Building – none;
As soon as there is an object, firmly fixed to the land and capable of general individualization (borders, area), real property could be transferred. In the real property transfer practice, first notary acts for purchases could be executed as soon as the construction is in the phase of “rough construction” .
d) Liability for usage of flat without Act 16 (Usage Permission)
q Fine between BGN 100 and BGN 500 (general Administrative liability under the Spatial Development Act for any violations of the Act, Art.233).
Practically, the authorities do not impose such sanctions on the users of flats in buildings that do not have Act 16.

2.2. Difference in the assessed value of the property for tax purposes – such value is lower upon Act 15.

Actually the tax base for VAT may be different between Act 15 and Act 16, provided that the parties in the transfer insert in the notary act for purchase of real estate not the purchase price but the lower value assessment for tax purposes.

Conclusion: VAT will not be excluded if the real property is purchased after Act 15 and before Act 16. The only tax implications refer to the tax base, which might be lower in the case of Act 15. Construction companies need to impose VAT on their projects whenever they sell the real estate, unless a scheme that avoids VAT is elaborated. For such scheme the following option could be considered:
ß Purchasers to be persons registered under VAT Act and thus entitled to obtain tax credit
ß Investment construction project that avoids classic purchase: For example, 10 persons decide to finance the construction of a building, in which each of them will get an apartment. The Investor creates a company (LLC or JSC) that will buy the land on which the construction works will be carried out. As soon as the rough construction of the building is ready the 10 persons purchase shares in the company in proportion with the area of their apartments. As soon as the Usage Permit (Act 16) is issued, the shareholder in the company that owns the building take a decision for company winding-up and distribution of the assets of the company in the form of obtaining the respective apartments. Of course such scheme will be workable only upon execution of preliminary contracts that will ensure the real property transfers.

(Article by Deyana Marcheva)