VAT on sale of building land to related party
The Supreme Administrative Court (SAC) dealt with a dispute over the tax liability arising from the sale of land between a company and its sole owner and director/statutory representative. The company regarded the sale as an exempt transaction. The tax administrator disagreed, and as the land was a building plot and the sale was between related parties, determined the tax base at the arm’s-length price and assessed additional VAT.
In the case, the company did not pay VAT on the sale of the land, as they considered the transaction to be exempt from tax under Section 56 of the Value Added Tax Act. According to this section, the supply of land not forming a functional unit with a building firmly attached to the ground nor being a building plot is exempt from tax. The VAT Act considers land on which a building firmly attached to the ground is to be or may be built a building plot.
Based on the evidence of the disposal of the land, the court concluded that it was a building plot and that the tax administrator was correct in assessing the tax. In addition to the conclusive evidence of the director's intention to use the land as a building plot (e.g., acts aimed at obtaining a building permit), engineering and utilities networks for new developments were being laid in the area surrounding the plot, which indicates the character of the area as building land. The tax authorities considered the municipality's zoning plan showing that the land was partly located in an area marked as residential and therefore developable to be an administrative act aimed at building. The company argued that the zoning plan did not provide for a specific building to be constructed. However, the courts concluded that the general possibility to develop the land under the zoning plan was sufficient to classify it as a building plot.
The company further argued that in their assessment of the land, the tax authorities had only considered the municipality's zoning plan and that all other circumstances leading to the designation of the land as a building plot had only occurred with a significant lapse of time after the sale of the land and should therefore be disregarded. Nonetheless, the tax authorities are obliged to base their decision on the facts as at the date of issuing an order to pay tax and, if an appeal is filed, as at the date of the decision on that appeal. Therefore, the tax administrator may consider all facts known on their decision’s issuance date even if they are assessing the factual and legal situation as at the date of the transfer of the land.
The final piece of evidence against the company was the fact that the purchaser of the land was its sole owner and director, leaving no doubt that the seller knew of the intention to build a house on the land.
The fact that the land is a building plot also significantly increases its value, which is rightly subject to VAT. Siding with the tax administrator, the SAC confirmed this assessment.