How to adjust and file VAT on real property
Businesses can deduct VAT on their real property investments if the property is used for a purpose that is subject to VAT. The use of the real property affects the deduction, so if the purpose changes later or the property is sold, for example, businesses have the right and obligation to adjust VAT deductions with respect to their real property investments.
Adjustments must be made for a period of 10 years from the year in which the building or its renovation was completed. No adjustment is made if the adjustment right and obligation is transferred to the buyer.
The definition of real property
Real property refers to land areas, buildings, fixed constructions and parts thereof.
From the beginning of 2017, any machinery, equipment or part thereof that is used for a particular activity pursued on the real property is also regarded as real property if it fulfils the following conditions:
- it is used for a particular activity pursued on the real property
- it is permanently installed in a building or construction
- it cannot be moved without destroying or altering the building or construction.
Example: Fixtures for an institutional kitchen are installed in the kitchen of a city hospital. If the fixtures can only be removed by destroying or significantly altering the building, they are regarded as part of the real property.
Amendment of the definition of real property will affect the scope of application of the adjustment procedure for real property investments. It will also apply to the machinery, equipment or parts thereof that are regarded as real property, as referred to above, if they have been purchased in 2016 or later.
What are real property investments?
Real property investments refer to the purchase or performance of a construction service related to new building in, or the renovation of, real property. The purchase of a new building is also regarded as a real property investment if the buyer has paid taxes on the buyer's own use of the construction service. If a business has acquired the real property as an asset, it has an obligation and right to adjust deductions made on the real property during the adjustment period.
When should deductions be adjusted?
You should adjust the VAT deduction on real property investments in the following situations:
- your business uses the real property for a purpose that entitles it to a deduction more or less than previously
- your business sells the real property
- your business’ liability to pay VAT ends
- your business removes the real property from its assets
The adjustment period is the period during which changes made to the use of the real property entitle or oblige a business to adjust the original deduction.
The length of the adjustment period is 10 years from the beginning of the calendar year in which the construction services for a new building or renovation were completed. If the real property was purchased, the 10-year period starts at the beginning of the year in which the completed real property was accepted.
Changes to the use of the real property are reviewed over a calendar year (adjustment year). Adjustments are made if the use of the real property has changed during the calendar year included in the adjustment period. Each year, 1/10 of the VAT included in the purchase of the real property investment is adjusted. This refers to the tax included in the price of the construction service that was paid by the seller.
You should calculate the amount of the tax to be adjusted using the following formula:
1/10 x (portion of the use that entitled to the original deduction of the entire use – portion of the use that entitled to a deduction in the adjustment year of the entire use) x tax included in the purchase
How to file an adjustment on a VAT return
When the deductible amount of tax on a purchase concerning a real property investment changes after the adjustment, you should report the amount of the change on a VAT return. Enter the changed amounts in the section ”Tax deductible for the tax period” either as an increase or decrease in the deductible taxes. If the corrected amount is negative, it will increase the tax deducted for the tax period. If the corrected amount is positive, it will decrease the tax deducted.
If the purpose of use has changed, you should attribute the adjustment to December in each adjustment year.
If the real property has been sold, tax liability has ceased or the real property has been removed from assets, you should attribute the adjustment to the calendar month in which the change occurred.
Example: If the amount of tax deducted increases
The commercial property of a business that engages in retail was completed on 1 January 2013. Twenty percent of the premises have been leased, exempt from VAT, to another business under a two-year agreement. After the termination of the lease agreement, the business takes possession of the entire premises for its own VAT activities as of 1 January 2016. The real property’s building costs included EUR 100,000 VAT. The deduction was made from the portion corresponding to the VAT use (80%).
In 2013–2015, the portion of VAT use of the real property does not change, so no adjustment is made.
In 2016, the amount to be adjusted is calculated as follows:
1/10 x (80−100%) x EUR 100,000 = EUR −2,000
The sales taxes reported for other activities on the VAT return amount to EUR 50,000, and the tax deductible before the adjustment is EUR 30,000. The amount to be adjusted in 2016 is EUR −2,000. The adjusted amount will increase the tax deducted by EUR 2,000. As this is a case of a change in the purpose of use, the adjustment is filed on the last VAT return of the calendar year.
+ sales taxes EUR 50,000
− deducted taxes EUR 32,000
= payable tax EUR 18,000
Example: If the amount of tax deducted decreases
A company sells sports services in its own real property, which was completed on 1 January 2010. The activity is subject to VAT. The company expands its operations and begins to offer VAT-exempt massage services alongside its sports services. On 1 January 2016, the company starts using 15% of the premises that were previously in VAT use for its VAT-exempt activities. The investment originally included EUR 40,000 VAT.
In 2010–2015, the portion of VAT use of the real property does not change, so no adjustment is made.
In 2016, the amount to be adjusted is calculated as follows:
1/10 x (100−85%) x EUR 40,000 = EUR 600
The sales taxes reported for other activities on the VAT return amount to EUR 10,000, and the tax deductible before the adjustment is EUR 4,000. The amount to be adjusted in 2016 is EUR 600. The adjusted amount will decrease the tax deducted by EUR 600. As this is a case of a change in the purpose of use, the adjustment is filed on the last VAT return of the calendar year.
+ sales taxes EUR 10,000
− deducted taxes EUR 3,400
= payable tax EUR 6,600