The applicability of the 5% VAT on the sale of new residential properties in Hungary was extended by two years, until 31 December 2024, by Government Decree 267/2022 published in the Hungarian Gazette on 29 July 2022. The deadline relates to the finalisation of the building permit or the simplified registration of the building.

Changing deadlines

Earlier, we reported that in Hungary the VAT rate applicable for new residential properties, first introduced in 2016 and originally effective until the end of 2019, had again been lowered to 5% from January 2021. In line with the amendment last year to the Act on Value Added Tax, the preferential tax rate for new residential properties would apply until the end of 2022, more precisely until the end of 2026, if the building permit is finalised by 31 December 2022, or the construction activity subject to simplified registration is reported no later than 31 December 2022. This 2026 deadline is contained in a transitional rule related to the rate discontinuation as of 31 December 2022; according to previous plans, the transitional rule would take effect on 1 January 2023.

This short government decree announced in July and also taking effect on 1 January 2023 has added two more years to the applicability of the 5% VAT rate for new residential properties. Accordingly, the amendment to the VAT act regarding the preferential VAT rate will stay in force from 1 January 2023 until 31 December 2024 in line with the previous conditions. UPDATE! The deadline of the applicability will be extended from 2026 until the end of 2028 according to a transitional rule included in Bill T/1614 submitted to the National Assembly in October.

Unchanged conditions

The conditions for the preferential VAT rate on new residential properties in Hungary will not change. As we explained in our article last April, the 5% is applicable for properties established for dwelling purposes and registered in the real estate register as a house or apartment, or designated for registration as such. Areas not required for the intended use as a dwelling shall not be construed as residential property, even if built adjacent to the residential building, such as a garage, workshop, shop or farm building. A property shall be regarded as new if it has not yet been used as intended, or if it has, then two years have not yet passed between the official completion certificate becoming final and its sale. The preferential VAT rate of 5% for new residential properties is only applicable if the total usable floor space does not exceed 150 square metres for a multi-occupational residential property, or 300 square metres for detached family homes.

The future of VAT on new residential properties

Extending the deadline on the 5% VAT rate for new residential properties slightly resembles that of the rule on reverse charging for agricultural products in Hungary. This latter rule took effect on 1 July 2012, temporarily for two years, i.e. until 31 June 2013 according to the original intention, then with multiple extensions the rule is still in force today.

Although the extension of the 5% VAT rate will certainly have a beneficial effect on the construction industry, stakeholders in the profession and the affected markets may rightfully sense a uncertainty. At this moment it is very difficult to say whether this rule will stay with us for a while, like the reverse charging for agricultural products, whether we can bid farewell to it forever at the end of 2024, or will it perhaps be transformed, bearing environmental and energy conservation considerations in mind. Understandably, the legislator’s intention may change in the medium and long-term under the current and anticipated future world economic situation.

If you need advice on the 5% VAT applied in connection to new residential properties, or on the tax refund support up to said amount, or on other tax issues related to real estate, then our VAT professionals are here to help!

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New residential property and the CSOK

This support may certainly sound enticing for many, and could prompt families eligible for the CSOK and wanting to purchase a home to move towards buying a new residential property. However, it is worth bearing in mind that the conditions relating to properties for claiming the CSOK are not the same as the conditions under the VAT Act for the 5% rate applicable in the case of a new residential property. If it transpires that the property identified does not meet these conditions, the application of the general rate of 27% could push the price of the new property skywards, and you could lose the tax refund support too. It is also worthwhile knowing that when buying a new property there is no guarantee that all parts of the property will be eligible for the lower tax rate: you can receive invoices with VAT of 5%, and invoices with VAT of 27%. This is why we have summarised the most important points below.

Before getting started, we would like to note that the preferential tax rate in Hungary is not a new rule. Between 2016 and 2019 the VAT rate was also 5% when buying a new residential property, and the new rule valid from 2021 is almost the same as the previous one. Accordingly, the previous guidelines on the NAV website regarding the applicability of the 5% tax rate are still relevant in our view – irrespective of the fact they have now been archived. Despite this, on 15 February 2021 the NAV published new information on this topic on its website.

What is residential property exactly? 

According to the VAT Act, residential property means a property established for dwelling purposes which is registered, or is in the process of being registered, in the real estate register as a house or apartment. Areas not required for the intended use as a dwelling shall not be construed as residential property, even if built adjacent to the residential building, such as: a garage, workshop, shop, farm building. Areas not required for the intended use as a dwelling also do not qualify as residential property if this was not stated separately in the real estate register. This is why the price of areas not used as a dwelling must be determined separately when concluding the contract, since the preferential VAT rate is not applicable in this case and the general rate of 27% applies. 

When is a residential property new?

The VAT Act in Hungary is quite clear about the definition of a new residential property. Accordingly, a residential property is new if:

• its first occupancy has yet to take place, or

• the first occupancy has taken place, but two years have not elapsed between the official completion certificate becoming final and the sale, or in the event of an occupancy acknowledgement procedure, between the implied acknowledgement of occupancy and the sale, or the development took place based on simple notification in accordance with the Act on the Formation and Protection of the Built Environment, and two years have not yet elapsed between the issue of the official certificate on the development and the sale.

In line with the previous guidelines, the NAV information reveals important details on certain special cases (for example, expansion, extension, changes in function or purpose) as to when and with what procedure occupancy can take place, or in the case of land belonging to the property, when the preferential VAT rate can be applied and when not.

Floor space

As mentioned in our previous article, the preferential VAT rate of 5% for residential property is applicable if the total usable floor space does not exceed 150 square metres for a multi-occupational residential property, or 300 square metres for detached family homes. It is important to note here that based on previous information from the NAV, semi-detached houses must be considered detached houses, and not twin residential homes, i.e. the 300-square-metre threshold for detached houses must be taken into account.

But what does useful floor space mean? The NAV has published very detailed information on this. Accordingly, from the perspective of this threshold, the total usable floor space of the residential property in line with the VAT Act (hall, bedroom, living room, kitchen, bathroom, pantry, utility room, etc.) must be taken into consideration. The total usable floor space of the residential property does not include the floor space of the garage, shop and other areas not required for the intended use of the residential property. The definition of usable floor space as contained in Government Decree 253/1997 (XII.28) on the National Urban Planning and Building Requirements (OTÉK) must be applied when calculating usable floor space. In accordance with the decree, usable floor space is the area of the room or of the area calculated from the horizontal projection of a space fully or partially surrounded by a building structure where the ceiling height is at least 1.9 metres. When calculating the total usable floor space, the usable floor space of all the storeys must be taken into account. Storeys are all levels of the building that contain rooms. An attic is not a storey, neither is a roof area containing nothing but lifting machinery or the upper part of a stairway.

When is the preferential VAT rate applicable from, and for how long?

According to the rule currently in force, the preferential 5% rate for residential property is applicable in Hungary if the property sale (or payment of advance) falls between 1 January 2021 and 31 December 2022. Under a transitional rule, which will take effect as of 1 January 2023, the preferential VAT rate will remain applicable if the sale falls between 1 January 2023 and 31 December 2026 – provided that, in the case of construction work subject to a building permit, the building permit for the residential property becomes final by 31 December 2022, or the building activity subject to simple notification is reported by no later than 31 December 2022.

If you need advice on the 5% VAT applied in connection to a new residential property, or on the tax refund support up to said amount, or on other tax issues related to real estate, then our VAT professionals are here to help!

A New residential property: tax refund support now available bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

CSOK, but no duty

From 1 January 2021 the bill would ensure full duty exemption for families with children claiming family housing support (CSOK) when buying a new property, irrespective of whether the acquired property is new or used, or of how much its sales value is.

If someone was exempt from the duty based on an advanced award of the CSOK, but the agreed number of children were not born, and thus the support must be paid back, the Hungarian tax authority will subsequently charge the onerous property acquisition duty. In such cases, the duty is based on the sales value at the time the duty obligation arose, and at the rate effective on that date. The right to determine the duty elapses within five years of repaying the support, or on the last day of the calendar year in which an official resolution is issued regarding the repayment.

However, the duty does not need to be paid back if the conditions for having children are not fulfilled for health reasons.

Return of 5% VAT on homes

The bill modifies the Hungarian Act on Value Added Tax too. For a temporary period from 1 January 2021 until 31 December 2022, the sale of newly built property would again be subject to 5% VAT on homes. For transactions concluded this year, the tax rate should be defined based on the transitional rule related to the termination of the 5% VAT rate as of 31 December 2019. This transitional rule would be repealed by the bill from 1 January 2021.

The transitional rule terminating the 5% VAT rate as of 31 December 2022 will set forth the conditions under which the preferential 5% VAT on homes will be applicable until 31 December 2026. The preferential tax rate may be applied on this basis if the building permit is finalised no later than by 31 December 2022, or if the associated construction is registered by 31 December 2022 pursuant to the rules of simplified reporting.

The preferential 5% VAT on homes is applicable if the total usable floor space does not exceed 150 square metres for an apartment in a block, and 300 square metres for a single-unit detached house. Pursuant to the VAT rules, property shall be regarded as new if it has not yet been properly used, or if it has, then two years have not yet passed between its approval for use and its sale.

If you need advice on how to apply the 5% VAT on homes, or on other issues related to real estate, our tax experts are here to help.

A 5% VAT on homes – it’s back bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

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.

A 100% advance an option if residential property not completed by end of 2019 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.