Sale of land with construction started on the basis of VAT
Under VAT, the delivery of built-up land and the delivery of undeveloped land are treated differently. Therefore, doubts may arise in an intermediate case, when land is sold with construction started but not yet completed. It is this issue that will be the subject of this analysis. In this regard, we will focus on VAT regulations.
VAT rate for the delivery of buildings and land
At the outset, a very important distinction needs to be made.
If the subject of delivery is construction land itself, such sales are subject to VAT at 23%.
However, if the delivery concerns developed land, then first of all, attention should be paid to the content of Art. 29a paragraph. 8 of the VAT Act, which states that in the case of delivery of buildings or structures permanently connected with land or parts of such buildings or structures, the value of the land is not separated from the tax base. Such content of the provision means that the tax rate applicable to the building also applies to the land on which the building is erected.
Additionally, it should be indicated that the delivery of buildings covered by the social housing program benefits from a reduced 8% VAT rate.
Pursuant to Art. 41 sec. 12b of the VAT Act, construction covered by the social housing program does not include:
single-family residential buildings with a usable floor area of more than 300 m2;
residential premises with a usable area of more than 150 m2.
Therefore, the above leads to the conclusion that if the delivery of buildings or structures or their parts benefits from a preferential tax rate, then the delivery of the land on which the building is erected also benefits.
Depending on the actual circumstances, a different VAT rate may apply. This circumstance will be determined primarily by whether we are dealing with the supply of land itself or with the supply of land developed with a residential building covered by a social housing program.
Sale of land with construction started - determining the subject of sale
In the context of the above considerations, it becomes very important to determine what exactly is the subject of the sale.
In this respect, it becomes necessary to refer to the concepts contained in the Construction Law, because the VAT Act does not define the definition of buildings.
According to the wording of Art. 3 point 2 and point 2a of the Building Law Act by:
building - it should be understood as such a building object that is permanently connected to the ground, separated from the space by means of building partitions, and has foundations and a roof;
single-family residential building - it should be understood as a detached building or a semi-detached, terraced or group building, serving to meet housing needs, constituting an independent unit structurally, in which it is allowed to separate no more than two residential premises or one residential premises and commercial premises with a total area not exceeding 30% of the total area of the building.
However, in accordance with the Polish Classification of Construction Objects (PKOB), construction objects are structures permanently connected to the ground, made of building materials and components, as a result of construction works. Buildings are roofed construction objects with built-in installations and technical devices, used for permanent needs. They are adapted to the presence of people, animals or the protection of objects.
On the other hand, residential buildings are construction structures where at least half of the total usable area is used for residential purposes. In cases where less than half of the total usable area is used for residential purposes, such a building is classified as non-residential according to its intended use.
On the basis of the above definitions, it should be pointed out that a building is to be considered when it constitutes a structural whole permanently connected with the ground, which has foundations and a roof.
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As a result, if the construction started on the land does not meet the above-mentioned conditions, it cannot be considered that the subject of delivery is a building. In this case, the rate appropriate for the land will apply.
The VAT taxpayer decided to sell the land on which he started the construction of a residential building. As at the sale date, only the foundations and the first floor of the building had been erected. Due to the fact that the structure is not roofed, it does not meet the definition of a building. This means that for the purposes of tax classification, objects on land should be treated as undeveloped land intended for development. Therefore, the VAT rate of 8% will not apply to the supply of objects located on the land, but the rate of 23%.
The VAT taxpayer decided to sell the land on which there is a residential building with an area of 200 m2. It has foundations, walls and a roof. As a result, we are dealing with a structural whole that meets the definition of a building. In these circumstances, a taxpayer for the supply of both the building and the land may apply a reduced rate of 8% VAT.
The above position is also confirmed in judgments issued by administrative courts. For example, in the judgment of the Provincial Administrative Court in Warsaw of April 28, 2015 (reference number III SA / Wa 3006/14) we can read that in the case of an ongoing construction (construction process), only then the delivery of the result of this process (facility) will be exempt, if the effect this (object) can be considered a building, i.e. when it has the minimum foundation, walls and roof.
Only when there is a building object that is a building understood in this way, is it entitled to refer to the delivery of a part of the building. The delivery of 'land with the construction commenced on a multi-family residential building marked on it' is not the same as the delivery of built-up land.
If the subject of the delivery is a real estate developed with an unfinished construction project, which does not meet the definition of a building, structure or part thereof in accordance with the provisions of the construction law, such an object should be treated as an undeveloped construction area under VAT.
The preferential tax rate provided for in Art. 41 sec. 12 of the VAT Act for the supply of residential buildings will not apply in this case. The delivery of the plot along with the commenced construction of a residential building will be taxed on general terms with the basic VAT rate of 23%.
Therefore, if we are to summarize what we have established so far, first of all, it should be noted that the issue of determining the correct VAT rate in the case of sale of land with construction started will be determined by the structural condition of construction at the date of sale.
The regulations show that if the subject of sale is a building with foundations, walls and a roof, it will be possible to apply a reduced 8% VAT rate.