When planning to buy property as a developer, you typically look for a piece of land or a building to be knocked down, and you generally have fixed ideas. But have you ever thought about the tax implications of the purchase in Hungary, or the subsequent tax implications of property development that you should bear in mind?
As finance professionals we often see that developers know very well during the planning stage what they subsequently want to implement, but they don’t know whether they should buy the property itself, or the company that owns it, whether they will have to finance the VAT, or will it be a reverse charge transaction. Without aiming to give an exhaustive summary, in this article I want to draw the attention of property developers to the tax implications of property development in Hungary, which may play a key role in their decisions.
Tax implications of buying property in Hungary
First, it is worth investigating how the property to be purchased is classified in the land registry, and whether the tax department of the competent local authority based on the location of the given property recorded it with the same status: is it a building lot or it is a property classified as an undeveloped area. If it is a building lot as per the VAT Act, you can only buy it from the seller paying VAT of 27%. If you buy a used property (possibly including a structure to be knocked down) based on the definition of the VAT Act, the acquisition basically takes place without charging VAT.
However, it is important whether it really is a tax-free sale/acquisition, or whether you as the buyer need to report the tax (reverse charge) as tax payable and deductible because the seller of the property chose a tax liability for the transaction that is essentially tax exempt under the law. The situation is simpler if you don’t purchase the property itself but acquire a share in the company that owns the property. In this case you won’t face complex VAT issues in connection with the purchase, but you have to be aware of the company’s “history” and tax risks.
Tax reporting obligations of property development in Hungary
As a newly established project company, in order to avoid any problems with reclaiming the VAT on services used and acquisitions during later procurements or developments, attention should be paid to the reports filed with the NAV as early as during the establishment of the company in connection with the tax liability of the subsequent presumed utilisation (property sale and leasing).
As a developer, the most important issue is the deductibility or reclaim of the tax related to product purchases and services used during the development. To this end, it is worth choosing a tax liability for all types of subsequent utilisation, and in respect of leasing and sale this reporting might even have to be made during the establishment of the new company acting as the buyer.
Tax implications of property utilisation in Hungary
If following your project you want to sell the apartment(s) in a residential block, you can currently do so at a preferential 5% tax rate, where VAT is charged in each case. No other taxation method can be selected in this case. But, if you are selling storage facilities or garages, these are sold with a 27% VAT rate.
If you primarily want to rent out the property built, and as lessor you selected the taxable status, the residential property will be rented out with a 27% VAT rate. In light of the tax rules, the possibility of reverse charging is not an option here. The renting out of garages or car parks is taxable in each case.
It follows from the above that you have to pay attention to many things during property development: it pays off if you consider the tax implications of property development as early as sitting at the planning table.
If you are interested in the details of tax planning along with the most frequent, tried and tested professional proposals and solutions, please contact us.