When is it possible for an entrepreneur to sell agricultural land?

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In economic turnover, agricultural land transactions are very frequent. This is mainly due to the popularity of real estate investments, and an additional attribute of agricultural land is their lower price compared to building plots. Therefore, it is worth considering what tax consequences will arise from the sale of agricultural land, if it is carried out by an entity conducting economic activity.

Determining the right source of income

The sale of real estate against payment by a private person within 5 years from the end of the calendar year in which the acquisition took place constitutes a separate source of income taxed at the 19% rate. However, if the sale of real estate is carried out by an entrepreneur, such activity is classified as income from economic activity.

Exemption for the sale of agricultural land

The Personal Income Tax Act provides in Art. 21 sec. 1 point 28 an exemption for the sale of agricultural land. Pursuant to the provision cited, the revenues obtained from the sale of all or part of the real estate included in a farm are exempt from income tax. The exemption does not apply to income obtained from the sale of land which, due to this sale, lost its agricultural or forest character.

Therefore, as can be seen, the possibility of taking advantage of the exemption depends on the fulfillment of several conditions. Land for sale:

  • must be agricultural land or as wooded and bushy land on agricultural land;

  • they must be an agricultural holding or a component thereof;

  • as a result of the sale, the land cannot lose its agricultural character.

Definition of an agricultural holding and agricultural land

The act on personal income tax does not contain its own definition of a farm. In this regard, the provisions refer directly to the Act on Agricultural Tax. Pursuant to Art. 2 clause 1 of the Agricultural Tax Act, a farm is considered to be the area of ​​land classified in the land and building register as agricultural land or as wooded and bushy land on agricultural land, with the exception of land used for business activity other than agricultural, with a total area exceeding 1 ha or 1 conversion ha, owned or held by a natural person, legal person or organizational unit.

It should be emphasized here that a farm does not have to constitute a single whole. Individual plots may be separated from each other, as it is important that their total area exceeds 1 ha.

What is the loss of agricultural character?

Another condition that must be met in order to take advantage of the exemption described is that the agricultural nature of the land sold is preserved. In this context, the purpose of the land acquisition and the actual intention of the acquirer as to the further destination of the property are verified.

The loss of agricultural character occurs when these lands are excluded from agricultural production, which may be manifested by a change in their intended use. The position of the buyer is therefore important. For if the purchasing entity is a person who is not a farmer and has not purchased land to expand the farm, the sales revenue obtained cannot benefit from the exemption. Also, if the buyer intends to conduct business activity on the acquired land, the seller will also not be able to benefit from the exemption. As indicated by the Supreme Administrative Court in the judgment of December 11, 1996, III SA 1025/95:

Loss of agricultural or forest character of land within the meaning of art. 21 sec. 1 point 28 u.p.d.o.f. takes place by excluding these lands from agricultural or forestry production, consisting in the actual transformation of the manner of their use, resulting in a change in their current use.

Sale of agricultural land by an entrepreneur

Referring to the above considerations, it should be noted that only an entrepreneur running a farm may sell agricultural land without tax. Income obtained from the sale of agricultural real estate included in an enterprise run as part of non-agricultural business activity (and not being part of a farm) may not benefit from the exemption from personal income tax.

A farm is a special type of enterprise, the income of which is not subject to income tax.Therefore, if agricultural real estate is included in the assets of an enterprise conducting non-agricultural economic activity, it ceases to be land forming part of an agricultural holding. In summary, the income obtained from the sale of agricultural land, made as part of non-agricultural business activity, will not benefit from the tax exemption referred to in Art. 21 sec. 1 point 28 of the Personal Income Tax Act.

Example 1.

An entrepreneur running a farm sells agricultural land to a farmer. Such a sale is not subject to personal income tax.

Example 2.

An entrepreneur running a non-agricultural business activity sells agricultural land to a farmer. Such sale will be subject to personal income tax and will be classified as business income.