On 2 April 2019 the Tax Department released Circular no. 233 aiming to clarify the arising tax implications in relation to the supply of land located either in a residential or any other zone, other than agricultural / livestock / environmental protection zone, by physical or legal persons or formal or informal partnerships.
From the outset, it is noted that the imposition of VAT on undeveloped buildable land (hereinafter “u.b.l.”) in a residential area is subject to VAT only if the taxable supply takes place after 2/2/2018. However, as a point of reference in relation to previous sales, the date 1/1/15 has been set instead of the previous “..7 years…” referred to in the previous Circular no. 219 released on 29 December 2017. Therefore, any sale made before 1/1/15 is not taken into account for determining the tax treatment of land supplies made after 2/1/18.
Methodology to be followed by the Tax Department in order to determine whether a transfer of u.b.l. falls within an economic activity resulting in the imposition of VAT
The examining officer should perform the following checks
Checks as to the property itself
(a) In which geographical area is the property located (location)?
(b) In which building zone is the property located?
(c) What is the value of the property?
Checks as to previous sales and possession of other pieces of land owned by the seller as well as intention for future sales
(a) What other pieces of land were sold/transferred from 1/1/15 onwards?
(b) What other pieces of u.b.l. are owned by the seller and where are they?
(c) Has the seller expressed an intention of selling other pieces of u.b.l. in his possession?
Following the gathering of the above information and taking into account the following guidelines provided by the Commissioner of Taxation, the VAT officer determines whether or not the specific property is subject to VAT.
A. First Guideline: When the vendor is considered to be engaged in an economic activity.
A1. Irrespective of the reasons of the sale, value and location, when an individual sells or transfers land situated in an area other than a purely residential area, the sale/transfer is deemed to be in the course of an economic activity and is therefore subject to the normal VAT rate. The one exception is the case where the land is the last available piece in the zone.
Zones falling under this category include: Industrial and semi-industrial zones, economic zones, commercial zones, tourist zones, holiday zones, tourist and hotel zones, and zones combining one of the above zones e.g. mixed industry and economic activities zone.
In a case where a piece of land falls both in agricultural / stockbreeding / environmental protection zone and in one of the zones falling under A1 (e.g. commercial, tourism) and sold as a single item, the supply is taxed only to the extent of the value of the part falling under A1.
However, if the piece falls both in one of the zones under A1 and in a residential area, then the whole piece is considered to be commercial and subject to VAT.
A2. Supplies of more than one piece of u.b.l. by a physical person who either has taken possession of it by way of inheritance or purchased it for investment purposes or for the construction of a home for own private use.
This category includes u.b.l located in a purely residential area. If u.b.l is in a residential area, the first of such sale after 1/1/15 is not considered as an economic activity and therefore no VAT is accounted for in case is made after 2/1/18. But if the sale of the u.b.l is the second after 1/1/15, then the second sale is subject to VAT provided it takes place after 2/1/18. It should be noted, however, that in the case where the seller of the first sale expresses intention to sell other plots in his possession, the first sale is also subject to VAT.
A3. Supply of u.b.l. by the administrator of a deceased estate
In this case, irrespective of the number of plots under administration, when the administrator sells even one plot of u.b.l. is required to register and account for VAT.
A4. Supply of u.b.l which results from subdivision
The supply of u.b.l which results from the subdivision of land owned by a natural person, regardless of when the subdivision took place and the reason for the sale, is always considered to have occurred in the context of an economic activity.
A5. Delivery of u.b.l. by a self-employed registered person
It is considered to be an economic activity if the u.b.l sold is purchased within the scope of business activities (possibly from the funds generated by the business carried on by the self-employed person).
B. Second guideline: When a physical person is considered as not exercising an economic activity
The second guideline covers cases where the supply of u.b.l. is not considered an economic activity and therefore does not imply an obligation to register and/or account for VAT.
B1. Supply of a number of pieces of u.b.l. as a single transaction
No economic activity is exercised if a number of u.b.l. are adjacent and supplied as a single transaction to the same person. If one of the blocks falls into a non-residential zone, the exception does not apply.
It is also noted that if the supply of the adjoining plots is the second consecutive supply after 1/1/15, it is subject to VAT like the supply of non-adjoining pieces of land.
B2. Supply of land to the company undertaking the sub-division
If plots are supplied as a fee to cover exclusively the costs of a subdivision directly to the subdivision company, regardless of whether made before or after 2/1/18, the supply is not considered to be in the course of an economic activity.
However, if the plots are sold to third parties to raise funds to pay the subdivision company, these sales are subject to tax.
B3. Delivery of the last / single plot of u.b.l. owned by a physical person
Here cases are covered where
(a) a natural person sells the only piece of u.b.l. he owns after 2/1/18 or
(b) if he sold a number of plots before 1/1/15 this is the last one in his possession and he sells it after 1/1/18
B4. Supply of u.b.l. owned by a physical person exercising an economic activity which was not acquired for the purpose of the business
The supply of u.b.l. held by a person who carries on an economic activity, acquired either by inheritance or for the purposes of building his main residence, is not subject to VAT, provided that the plot in question is the only plot owned or the first to sell after 1/1/15.
C. Third guideline: Supply of u.b.l. by a legal person (holding entities)
This category refers only to legal entities that own and supply land with or without consideration. However, in some specific cases, supplies by legal persons are not taxable.
C1. Supplies of u.b.l. by a legal entity exercising an economic activity
Irrespective of the type of economic activity exercised by the legal person, when supplying u.b.l. the supply is subject to VAT. This always applies regardless of how the land was acquired or whether it was transferred for free (exception if the conditions of C3 below are met).
C2. Supply of u.b.l. by a legal person not exercising an economic activity
Where a legal person or a registered partnership which does not engage in any other economic activity but merely derives income on a continuing basis from investments in other companies (e.g. dividends) owns land which it has not used to engage in any activity, the supply of such u.b.l. does not create an obligation to account for VAT.
C3. Supply of u.b.l. by a legal person who has obtained it free of charge from the shareholder
In the event where a company’s shareholder contributes free of charge an u.b.l., the subsequent return of the land back to the shareholder is not considered a supply, provided the land was not used for carrying on any economic activity during the time it was owned by the company.
Α. First guideline – When an economic activity is exercised
Α1. Supply of u.b.l. which falls in zones other than purely residential zone
Α2. Supply of more than one plot of u.b.l. after 1/1/2015
Α3. Supply of u.b.l. by the administrator of a deceased estate
Α4. Supply of u.b.l. which results from subdivision (except in case B2)
Α5. Supply of u.b.l. by self-employed registered person (acquired from funds generated by the business)
Β. Second guideline – When economic activity is not exercised (for physical persons)
Β1. Supply of a number of consecutive plots of u.b.l. as a single transaction to the same buyer
Β2. Supply of land to the company undertaking the subdivision
Β3. Supply of last plot of u.b.l. owned by a physical person observing the time point of 1/1/15
Β4. Supply of u.b.l. by self-employed (not acquired through business’s funds) subject to the other conditions under A and B
C. Third guideline – Supply of u.b.l. by legal persons
C1. The supply of u.b.l. from legal person exercising economic activities is always taxable (except in cases C2 and C3)
C2. The supply of u.b.l. by holding companies is not taxable
C3. The supply back of u.b.l. from legal person who obtained it for free from a shareholder is not taxable
A physical person together with his brother is a co-owner of a piece of land located in an industrial zone at Latsia. The plot was inherited from their father about ten years ago and today's value is €1m. For health reasons faced by one of the brothers they mutually agreed to sell the plot. The transfer to the land register is scheduled to take place on April 30, 2019. Before the transfer, the two brothers asked to be informed whether they would have to charge VAT on the sale. This particular piece is not the last of the two brothers.
Since the piece is in an industrial area, its sale, irrespective of the reason cited by the two brothers, is considered to be within the scope of exercising an economic activity and therefore VAT should be accounted for on the sale value.
The physical owner of a piece of land enters into an agreement with a subdivision company to subdivide it. The company's fee is agreed at €200,000. The payment will be made with the transfer of two plots that will result from the subdivision plus € 50,000 in cash. The individual sells one of the plots to a friend for € 60,000 and gives € 50,000 to the company.
The supply of the two plots to the company is not considered as an economic activity and is therefore not subject to VAT. However, the sale of the other plot is subject to VAT unless is the last one.
A VAT registered painter, bought two plots of land from using funds of his business with the intention of reselling or erecting a building for accommodating his business. Both plots were purchased in 2014. The first of the plots was sold in April 2018 and the second will be sold in March 2020.
Both plots are subject to VAT because they have been acquired in the course of carrying on an economic activity and exclusively from the company's resources.
How can KPMG assist?
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