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The construction sector and construction services – definitions
For tax purposes, ‘construction’ covers a wide range of new-building construction, renovation-related construction and building, repair, and related installation and finishing. The sector’s business enterprises include construction companies, subcontractors, employee-leasing agencies, property developers and others.
Examples of ‘construction services’ include the following:
- To construct buildings and structures, to repair and renovate buildings and structures
- To perform earthworks and earthmoving
- To install various forms of technology-based services (including electricity, heating, plumbing, air conditioning)
- To perform interior and exterior finishing work
- To design, supervise and manage projects relating to construction
- To deliver materials for a building, to be installed during repairs or during construction
When linked with any kind of construction, all selling of goods and services is subject to VAT.
Value added tax in the construction sector
The VAT treatment of the construction sector is different from other sectors. Its particular characteristics include the purchaser’s liability to pay VAT, and the VAT that must be paid in conjunction with the builder’s own use of construction services.
From a VAT perspective, it is important to determine whether the construction service is being sold to an external buyer or being diverted to own use. This has an impact on the calculation of VAT and on the reportable periods for the VAT. Companies operating in the sector need to know how to apply the different VAT rules as appropriate.
Value added taxation on the supply of a construction service
To supply (= sell) a construction service means that the company sells construction work or a service related to management of construction to an external, outside customer. This selling is subject to VAT. VAT is normally paid by the seller – except in the case of reverse charge.
The VAT reverse charge mechanism in the construction sector
The reverse charge mechanism means that, in the sales of certain construction services, the party that must pay VAT is the buyer not the seller. This way, the buyer must file a VAT return and pay the value added tax. The seller is under a duty to examine whether the buyer meets the conditions for reverse charge, which are:
- The service has the characteristics of construction services (rakentamispalvelu; byggnadsservice), or the characteristics of employee leasing (työvoiman vuokraus; uthyrning av arbetskraft) for purposes of building.
- The buyer is a business operating — not on an occasional basis — at least one of the following:
o The selling of a construction service
o The leasing-out of employees for work furthering the production of construction services
o The selling of buildings located on a land the buyer owns or holds, and the buyer has constructed these buildings or commissioned the construction of them
o After having construction services performed on real property, the selling of that property before it is in occupancy
Read more about the VAT reverse charge mechanism
VAT on own use by companies providing construction services
VAT on the own use of construction services, often called self-supply, means that your company might have to pay VAT even when the construction service is not sold to an outsider but used by your company itself.
See examples of when the VAT rules on own use would apply:
The liability to pay VAT will arise after a company constructs a building or permanent structure, or pays another business for constructing it on a parcel of land owned or held by the company, for the purpose of selling the building or permanent structure later. VAT must be paid on the own use of construction services.
The land might be held under the control of your company because of a lease agreement, because your company owns it, or based on another type of contract.
Example starts
Example: Company A is the owner of a lot. Having made plans to sell it later, company A commissions and pays for the construction work to build a two-family house. Company A succeeds in selling both the house and the lot. However, company A must pay VAT because it had diverted a construction service to its own use.
Example ends
This form of business operation means that after a company has acquired control of a housing-company or real estate company, it sells a construction service, relating to new construction, to that housing-company or real estate company. The following markers are characteristic for property development:
- The price to be paid for the construction service is not VAT taxable.
- The selling price for the shares or the selling price of the land are not VAT taxable.
- Instead, VAT must be paid on the own use of the construction service.
The company issues an invoice to the housing company or real estate company, and the invoice contains no VAT. Instead, the VAT is calculated and paid on the basis of the costs of construction.
The rules on own-use VAT are applicable, if all the following conditions are fulfilled:
- The seller of the construction service is a business enterprise
- The construction work falls into the category of new-building construction
- A housing company or real estate company is the buyer of the construction service
- At the time when the contract with the housing company or real estate company is made, the seller has control of the housing company or real estate company.
Example starts
Example:
Construction company A first establishes a limited-liability company to own a residential house (asunto-osakeyhtiö; bostadsaktiebolag) and then writes itself up as the sole owner of the company’s entire stock of shares. Construction company A will now take the following steps:
- First, A enters into a contract with the newly founded housing company for constructing an apartment building.
- After that, A will execute the work to build a finished apartment building. The building’s owner is the housing company.
- Then A starts selling housing-company shares to buyers. One set of shares entitles the holder to have a new apartment.
As a result, A will be liable to pay VAT because of its ‘own use’ of a construction service.
Example ends
VAT is payable when a construction company uses a construction service for its own purposes, for which it no entitlement arises to deduct VAT. This would take place in circumstances where
- the company is an enterprise active in the construction sector,
- there is no outside party being billed for this work, and
- the end result will be used for a purpose that does not give rise to the right to deduct VAT.
Such situations include the non-VAT-taxable renting out of residential apartments, and the non-VAT-taxable selling or renting out of real property after repair work.
In circumstances that match the above description, the construction company must pay VAT because it had diverted a construction service to own use. The sum of VAT is calculated on the basis of the costs of construction, including direct and indirect costs.
Example starts
Example: Offering real estate property for rent
A construction company repairs a property it owns and rents it out for residential use. The rental operation is not subject to VAT.
As a result, the company will be liable for paying VAT because of its own use of a construction service.
Example ends
Example starts
Example: Selling shares that entitle the buyer to get an apartment
The construction company first buys the shares that give the right to the apartment, and then renovates the apartment, and finally sells the shares to a buyer. The sale is not subject to VAT.
As a result, the company will be liable for paying VAT because of its own use of a construction service.
Example ends
VAT is payable when the owner or holder of the property produces services relating to the maintenance and upkeep of the building, structure or property itself and does not purchase them from an outside party.
For VAT purposes, this will be treated as a supply (= selling) and VAT needs to be paid on grounds of own use.
What does ‘property management’ mean?
Examples of services defined as property management:
- Improvement and construction work on a built structure, building or land and related design and supervision services
- Maintenance including the shared yard and lawn zones, cleaning and snowplowing
- Bookkeeping and other administrative services such as housing-company management (isännöitsijä; disponent)
When does VAT become payable on my company’s own use?
Whenever the property is used for a purpose that does not entitle the company to deduct VAT, VAT must be paid.
Such situations include:
- The non-VAT-taxable renting out of the property.
- After having your company’s employees carry out repairs and upgrades, the selling of the property (also: the selling of its shares).
- When the employees of the property owner (or shareholder) work on repairs and upgrades for the purpose of selling the property later.
When a finished or unfinished building is sold before its occupancy, the selling is not subject to VAT. Instead, the seller has to pay VAT on a construction service diverted to own use. The VAT is calculated on the basis of the costs of the construction project. The following paid-out costs are part of the VAT base, for purposes of an own-use calculation:
- The cost of the construction services bought.
- The direct and indirect costs linked with the construction project.
- The purchase price of the part of the property that had been purchased, as far as it contains input VAT, paid previously.
Read more in the detailed guidance:
“Supply and self-supply of building construction services” — Rakentamispalvelun myynti ja oma käyttö (detailed guidance available in Finnish and Swedish)
“VAT on investments in real estate property” — Kiinteistöinvestointien arvonlisäverotus (detailed guidance available in Finnish and Swedish)
Is property flipping (the purchase, renovation and fast resale of property) subject to VAT?
The activity called property-flipping is about buying an existing property and then re-selling it quickly for profit. It also involves modernising, upgrades and repairs before the resale. Typically, property flippers are private individuals. However, a construction company can also pursue the activity.
Example starts
Example: Once every year, a private individual buys an apartment in order to upgrade it and then re-sell it. His property-flipping involves that for the most part, he works on the repairs and upgrades himself, but he subcontracts the plumbing and electrical work to professionals. He does not conduct a construction operation as a business and does not pay out wages for any of the renovation services. In these circumstances, he does not need to pay VAT on own use. The selling price of the apartment is also not subject to VAT. The property flipper is not entitled to deduct VAT on the goods and services that he bought.
Example ends
Example starts
Example: A self-employed individual who sells construction services (for example a house painter who sells painting services) buys an apartment in a housing company, makes repairs and then resells it. VAT is not paid on the sale. However, the self-employed individual must pay VAT because he had diverted a construction service to own use.
Example ends
To account for own use, what is the VAT base?
The VAT-taxable amount serving as the base for own-use VAT is the cost of construction, not the selling price (of the shares, or of the unit of real estate as the case may be). The following are examples of construction costs:
- Materials or goods purchased for construction purposes
- Services bought from outside service providers
- Costs of the work conducted by you the VAT taxpayer, such as the paid wages.
Read more in the detailed guidance: Sections 8.2.1 and 8.2.2 of “Supply and self-supply of building construction services” — Rakentamispalvelun myynti ja oma käyttö arvonlisäverotuksessa (in Finnish and Swedish)
Include the own-use VAT in your VAT returns when the construction work is ongoing
You are required to declare VAT on your VAT returns when the construction work is ongoing, and give details on any diversions of the construction service to own use, as well. This means that you should not delay the VAT reporting until the job is done. Write your own-use VAT into the VAT return for the month when the construction work was carried out or the goods were installed.
Guidance on VAT deduction rights
When you are a VAT taxpayer (= having the VAT registration) and you operate a business for which VAT must be paid, you may deduct the input VAT, included in the prices of any goods and services you buy from other VAT-registered VAT taxpayers. You can claim VAT deductions on the condition that the product or service had been purchased for a business purpose that entitles your business enterprise to VAT deductions, and on the condition that you the buyer had received an invoice, issued by the seller, for the purchased goods or services. However, there are several restrictions to VAT deduction rights applicable to certain goods and services that you might buy.
There is generally a right to deduct the input VAT, which is included in the purchase prices of goods and services, when your company is paying VAT and the goods and services had been acquired for the selling of a construction service, or for diverting a construction service into own use. In contrast, to sell a property is not subject to VAT. From this, it follows that there is no right to deduct VAT on purchases relating to the sale of a property. The selling of apartments by the property-developer is not subject to VAT either and, therefore, there is no right to deduct VAT on the purchases made for it. Your company’s pursuit of non-VAT-taxable activities will have to accounted for when you prepare a calculation of general and overhead business expenses.
The month when you can claim a VAT deduction is the calendar month when:
- Receival of the purchased goods or services took place.
- The purchase price or part of the price was paid in advance, before your company received the goods or services.
- The goods or services were placed into a use, which entitles your company to VAT deductions.
- In the case of imports – the calendar month when the customs decision on the goods imported was issued.
The law sets out restrictions to businesses’ rights to deduct VAT when motor vehicles are concerned. The right to claim deductions depends on the purpose of use and category of your vehicle – whether it is a passenger car, van, other vehicle.
Read more: Buying and operating a motor vehicle: your right to claim VAT deductions
Companies can deduct the VAT included in their investment costs in real estate property, if the property is used for a purpose that entitles the company to VAT deductions. If the purpose of use would change at a later stage or if the property were sold to a new owner, etc., the company might have the right – or sometimes: an obligation – to adjust the VAT deductions that it had made.
Read more about how your company can deduct value-added taxes (in Finnish and Swedish)
Reports on construction work
You need to file a report on construction work for construction, renovation or maintenance work done on a construction site. The “reports on construction work” are special filings, which construction companies need to use for informing the public authorities on existing contracts and the workers performing work. Whenever a contract’s value is more than €15,000 you must file a report. In the same way, whenever there are more than one companies working on the site and the total value of the contracts on the site exceeds €15,000 you must file a report.
The tax credit for household expenses
When your customer is a private consumer, and you are selling construction services to that consumer, the invoice you send should have a detailed itemisation of the labour, materials, and other items. Also include the VAT-inclusive price of the labour or work, the full details of your company, and the due date. This information on the invoice will help your customer to claim a tax credit for household expenses.
Read more about the tax credit for household expenses
Income tax rules relating to property development
On the books of the developer company, special accounting rules apply to income and expense recognition (requiring partial income entries based on percentages-of-completion).
Read more: “The tax treatment of companies in the property-development business” – Perustajaurakointiliiketoiminta verotuksessa (in Finnish and Swedish)
Being an employer
As an industry that hires workers and employees, the construction sector is no different from other sectors from the perspective of employer obligations. However, a number of special rules are in effect relating to expense reimbursement to workers. Other special rules require that all workers on Finnish construction sites, assembly sites and shipyards have a tax number.
Paying reimbursement for travel expenses to a construction worker
Construction is a “special sector” because the tax-exempt reimbursement practices are different from the usual.
This is because the work sites change frequently and the workers and employees may have no permanent workplace. If a worker is paid no coverage by the employer for work-related trips (to a “special” location where work is done), the worker can claim the expenses and receive deductions. From the standpoint of tax-exempt reimbursements, it is important to distinguish between the special and the mobile types of work because they are subject to different tax rules.
Read more: Travelling within special sectors of work
Being an employer on construction sites
Everyone who works at a construction site, a worksite of an installation project or at a shipyard must carry a photo ID that shows the worker’s personal tax number. It is required that the worker have a Finnish identity code before the number can be issued. For all workers on the company’s payroll, the tax number of every individual must be entered into the register of tax numbers. The Tax Administration’s online information service allows users to verify the validity of anyone’s registration.
Find out how you can help a construction worker with tax issues
Individual tax numbers and the public tax number register
Taking on workers from other countries – being a customer of employee-leasing services
Your company can employ foreign workers either directly or under leasing contracts. You can also have foreign workers on your payroll at your places of business abroad. Please note that taxes and employer obligations will vary from country to country.
Foreign companies doing business in Finland
Guidance for foreign construction companies:
Direction and guidance for people coming to Finland to work: