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Details of 2025 amendment to VAT Act - Part II

Below, we continue with an overview of the most important changes brought by the draft amendment to the Value Added Tax Act, this time focusing on the construction sector, in particular on changes in definitions, alterations in conditions for the exemption of real property supplies, and the abolition of the concept of internally produced fixed assets and related changes in claiming VAT deductions.

Definition of buildings designated for housing purposes

The amendment clarifies the definitions of buildings for housing and social housing purposes. The new VAT Act will no longer refer to the Construction Act but directly to the information entered in the real estate register, which will now have to be used when assessing specific real property. The same applies to buildings intended for social housing. For them, the method of calculating the floor area will change and be determined by a decree of the Ministry of Finance.

Internally produced fixed assets

The concept of internally produced fixed assets where taxpayers claimed full VAT deduction during construction and reduced it only at the time the fixed assets were put into use has been abolished by the amendment. A VAT payer who self-manufactures fixed assets (or carries out technical improvement to these assets by their own activity) while purchasing goods and services for this purpose shall reduce the VAT deduction on these received supplies already at the time of claiming the VAT deduction.

In this context, the amendment introduces further changes. Where the taxpayer applies one of the coefficients to claim VAT deduction in a proportionate or reduced amount when acquiring fixed assets over a longer period of time (e.g., construction lasting more than one year), it will be necessary to adjust that coefficient to the coefficient applicable in the year in which the fixed assets are put into use. The sum total of input tax on the individual taxable supplies comprising the given fixed assets shall then be used to subsequently adjust the VAT deduction.

Supply of real property exempt from VAT

The amendment abolishes the five-year time test for VAT exemption of the supply of selected real property. Only the first supply after the completion of a construction or its substantial change, before the end of the second year after completion, will be taxed. Each subsequent supply will be exempt from VAT while the possibility of taxation remains in application.

The amendment to the VAT Act also provides a new definition of a ‘substantial change’, which slightly differs from its definition in the GFD’s Information on Application of VAT Act on Real Property. A change that seeks to modify the use or conditions of occupancy of a building shall be considered substantial if the price after the change increases by 30% compared to the price of the selected real property before the change (the current threshold is 50% of the ascertained price or reference value).  If this condition is not met, the taxpayer may decide that the change is substantial in the case of an addition of at least one storey or an extension of the floor area by more than 50%.

Other selected changes related to real property

It will be newly stipulated directly in the VAT Act that if as a result of construction or assembly work, the purpose of a building which is a building for housing or social housing changes, and the character of the building changes so that it can no longer be considered a building for (social) housing, the standard VAT rate shall apply to that work.

The right to deduct VAT when registering for VAT will also change: under the amendment, it will be possible to claim a deduction even if the fixed assets being acquired are only put into use after the person has become a VAT payer. In the case of company conversions, it will also be possible to claim a deduction on supplies received by a person who was not a VAT payer on the day preceding the date of registration (for the period to which the registration date falls).

We shall continue to monitor the legislative process of the amendment to the VAT Act. The comment procedure has just ended, and the Ministry of Finance as the proposer is processing the submitted comments.