VAT taxation of real estate in-kind - what is the tax base?

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When establishing a company, we often contribute not only cash, but also real estate and movables. Bringing in tangible assets is called an in-kind contribution. It should be clarified that an in-kind contribution is a contribution to the creation or increase of the company's assets, which gives the right to participate in its profits. The subject of an in-kind contribution may be money (in-kind contributions), things or rights (in-kind contributions) as well as skills, technical or professional competences. Making a contribution is associated with the transfer to the company of all rights to the subject of the contribution, and therefore also the ownership right, if it belongs to the shareholder. Thus, it is very important to correctly tax the real estate contribution.

VAT taxation of real estate in-kind

Pursuant to the provision of Art. 5 sec. 1 point 1 of the Act on tax on goods and services, hereinafter referred to as the VAT Act, taxation of the above-mentioned tax are subject to:

  • paid delivery of goods,
  • paid services in the territory of the country.

Pursuant to Art. 7 sec. 1 of the VAT Act, by the delivery of goods referred to in Art. 5 sec. 1 point 1 shall be understood as the transfer of the right to dispose of the goods as the owner.
By goods, under Art. 2 point 6 of the VAT Act, it is understood as things and their parts, as well as all forms of energy.
In the light of the above provisions, real estate, both land and built-up, meets the definition of goods under Art. 2 point 6 of the Act, and its sale constitutes a supply of goods referred to in Art. 7 sec. 1 of the VAT Act.
It should be emphasized that the activity performed, which is subject to tax on goods and services, may either be taxed at the appropriate tax rate or be exempt from this tax.
Considering the above, the in-kind contribution of real estate to the company constitutes an activity subject to VAT. The contribution in kind to the company constitutes, within the meaning of Art. 7 of the VAT Act, the supply of goods, because as a result of the contribution, the right to dispose of the goods is transferred as the owner. At this point, it should be noted that in the case of real estate, the legislator also provided for an exemption from taxation.

Tax exemption and VAT taxation of real estate in-kind

Let us recall that pursuant to Art. 43 sec. 1 point 10 of the VAT Act, the delivery of buildings, structures or parts thereof is exempt, except when:

  • the delivery is made at or before the first settlement;
  • a period of less than 2 years has elapsed between the first occupancy and the delivery of the building, structure or parts thereof.

It follows from the above regulation that the supply of buildings, structures or parts thereof is, in principle, exempt from tax on goods and services. Exclusion from this exemption occurs when the delivery is made within the framework of the first settlement or before it and in a situation where from the moment of the first settlement to the sale of the building, structure or part thereof - a period of less than 2 years has elapsed.
Thus, in order to determine the rules of taxation of the supply of buildings, structures or their parts, it is of key importance to determine when the first occupation took place and what period has elapsed since then.
By the first settlement according to Art. 2 point 14 of the Act is understood as putting into use, in the performance of taxable activities, to the first buyer or user of buildings, structures or parts thereof, after their:

  • construction,
  • improvement, if the expenses incurred for the improvement, within the meaning of the income tax regulations, constituted at least 30% of the initial value.

When a taxpayer cannot take advantage of the first option, he may take advantage of the second exemption title. Pursuant to Art. 43 sec. 1 point 10a of the VAT Act, the delivery of buildings, structures or their parts not covered by the exemption referred to in point 10 is exempt from tax, provided that:

  • in relation to these objects, the person delivering them was not entitled to reduce the amount of tax due by the amount of input tax;
  • the supplier did not incur expenses for improving them, for which he was entitled to reduce the amount of tax due by the amount of input tax, and if such expenses were incurred, they were lower than 30% of the initial value of these objects.

However, according to Art. 43 sec. 7a of the VAT Act, the condition referred to in sec. 1 point 10a. b, shall not apply if the buildings, structures or their parts in an improved state were used by the taxpayer for taxable activities for at least 5 years.
Thus, most often, in the case of an in-kind contribution of real estate, we will be able to take advantage of the tax exemption.

Tax settlement of real estate in-kind contributed by a natural person

Pursuant to Art. 15 sec. 1 of the VAT Act, taxpayers are legal persons, organizational units without legal personality and natural persons who independently carry out economic activity referred to in para. 2, regardless of the purpose or result of such activity.
Economic activity, in accordance with Art. 15 sec. 2 of the VAT Act, covers all activities of producers, traders or service providers, including entities acquiring natural resources and farmers, as well as the activities of freelancers. Economic activity includes, in particular, activities consisting in the use of goods or intangible assets on a continuous basis for commercial purposes.
In the context of the above, it should be stated that a taxpayer of value added tax is not a person who, as a natural person, carries out occasional transactions for which a strictly regular payment is not provided, or who does not conduct organized or registered business activity. Performing certain activities incidentally, outside the sphere of business activity, also does not allow for the recognition of a given entity as a taxpayer in the scope of these activities.
Considering the above, not always making a contribution in kind is an activity subject to VAT. VAT taxation of real estate in-kind, as a rule, will not take place when it is brought by a natural person.

Tangible asset as own contribution and VAT taxation of real estate in-kind

As we have already described above, the settlement of real estate in-kind contributed to the company may be subject to value added tax. Thus, we need to determine the value of this transaction for VAT purposes. Pursuant to Art. 29a paragraph. 6 of the VAT Act, the tax base includes:

  • taxes, duties, fees and other charges of a similar nature, except for the amount of tax;
  • ancillary costs, such as commission, packaging, transport and insurance costs, charged by the supplier or service provider to the buyer or recipient.

Thus, everything that constitutes a payment should be considered as the tax base (which, however - as indicated above - should not be equated with the market value of the object of the contribution in kind). So the value of the property will be the value of the shares or stocks.
If an in-kind contribution is made in the form of real estate, the company is entitled to deduct the input tax. The above is confirmed by the individual interpretation of the Tax Information Director of October 16, 2018 (No. 0112-KDIL2-1.4012.445.2018.1.MK):

"As it results from the above-mentioned legal provisions, the settlement of input tax on the principles set out in Article 86 (1) of the Act is conditional on the goods and services being purchased being used by a registered, active VAT payer as part of business activity to perform activities subject to tax on goods and services.
In the discussed case, the conditions authorizing the deduction will be met, because the company is a registered, active VAT taxpayer, and the goods and services acquired through the in-kind contribution will be used by the Applicant to perform activities subject to tax on goods and services.
To sum up, if the objects in kind will be used by the company for activities fully taxed with value added tax, the company is entitled to deduct 100% VAT from the invoice documenting this transaction, taking into account the provisions of Art. 88 of the Act. "