The current legislative environment is fairly favourable for those buying a new apartment or detached house in Hungary. Only 5% VAT is applicable for such turnkey properties until the end of 2019. What can you do as a property developer, what should you look out for in ongoing construction projects and what is the solution if you already see that a delivery before 2020 is not feasible? How can an increase in the advance be helpful?
Legislative amendment from 2020
Customers and developers already know that instead of the current 5%, a VAT rate of 27% will be charged on new properties from the beginning of 2020, which is only eighteen months away. The main problems Hungarian property developers face are the following:
- How to sell as many properties as possible until this date?
- What to do with the properties not completed by this date?
- How to make properties deliverable in 2020 more attractive?
It is important to know that properties completed but not already used for their intended purpose and those already accepted for use but not sold within two years from the date of completion are also included in this category.
No problem arises for sales agreements based on a gross amount as in such cases there is only a reference to the VAT included in the purchase price, so it is not influenced by a change in the VAT rate. This solution, however, poses a high risk for property developers if the delivery is postponed until after 2019 when the higher VAT rate must be applied.
Delivery date and advance
From a VAT perspective, the VAT rate applied in the invoice is determined by the date of delivery. The problem is that determining the delivery date is a complex issue for property sales depending on the agreement of the parties (whether there is an option for a partial delivery, an advance, under what conditions do the parties consider the transaction completed, etc.) As a result, in relation to properties delivered after 2019 the question arises as to whether paying the greatest possible proportion of the purchase price with a lower VAT rate before the date of completion can be a solution for customers. The amount paid to the developer before the date of completion is considered an advance for VAT purposes, with a different delivery date. For amounts paid before 2020 developers have to issue an invoice including a 5% VAT rate: the advance paid will be a gross amount, i.e. the current VAT amount will be included.
Solution: paying a 100% advance?
Based on an opinion regarding taxation that has been known for years (and recently confirmed by the Ministry of Finance), no further VAT payment liability occurs on the date of completion if the total amount of the consideration has been paid as an advance. Here it means that if the property developer receives the total amount of the consideration as an advance before the date of delivery, the VAT charged on the total amount of the purchase price is determined based on the rate applicable when the amount is paid, which is 5% before 2020. This method is feasible related to any advance amount, and 27% VAT will only be charged on the remaining net amount (provided that the contract includes a net amount plus VAT arrangement). So upon payment of the total purchase price, no portion remains for which 27% VAT is applicable, thus the effect of the change of the VAT rate can be eliminated.
Practical issues
This method can make projects slightly more marketable where property developers cannot guarantee delivery before the end of 2019. However, you need to consider whether your potential customers are willing or able to pay such a large advance, taking into account that the property they wish to buy perhaps only exists on a drawing board. It is clear that the closer the project is to completion in December 2019, the easier it is to convince the parties involved – including financing banks – to “pre-finance”.
The opinion recently published by the Hungarian Ministry of Finance clarified another important practical question: what happens if the amount of the advance received from the bank is paid to an escrow account? According to legislation, since an amount is considered an advance if it is available to the seller of the product (received by or credited to the seller’s account), and this condition is not satisfied in the case of a blocked account, then according to VAT rules the amount paid is not considered an advance.
Should you have any questions, feel free to contact our tax experts, who will gladly help you in assessing tax options related to specific projects.
