How to correctly treat building land from VAT perspective
The issue of VAT on the sale of real estate, especially land, often causes confusion and leads to different interpretations. A recent ruling by the Supreme Administrative Court (SAC) provides guidance on how to determine whether the sale of land is a taxable supply or an exempt supply without the right to deduct VAT. Since the court ruled in accordance with the legislation in force until 30 June 2025, it is also necessary to look at the conclusions of the ruling from the perspective of the current VAT Act.
According to the VAT Act valid until the end of June 2025, land is considered building land if a structure permanently attached to the ground is to be built on it and:
- it is or has been the subject of construction modifications or administrative acts for the purpose of building such structure, or
- construction work is being or has been carried out in its vicinity for the purpose of building such structure.
If the land is not building land according to this definition, its sale is exempt from VAT, without the right to deduct the related input VAT.
In its judgment 4 Afs 121/2024-31, the Supreme Administrative Court dealt with the condition that a structure is to be built on the land, and examined whether certain work or administrative acts (e.g., zoning plan) were in fact directed toward this end.
The case in question concerned two adjacent plots of land. The VAT treatment of one of them was unclear. The tax administrator claimed that the classification of the land as building land in the zoning plan was sufficient to fulfil the condition that a structure permanently attached to the ground is to be built on the land. However, the SAC ruled that classification in the zoning plan alone was not sufficient, as it is also necessary to examine other circumstances, in particular the intention of the contracting parties, i.e., whether they really intend to build on the land. The key was the purchase agreement, which in this particular case did not confirm the intention to build. The SAC emphasised that even the fact that a single price was agreed in the purchase agreement for both plots of land had no influence on the assessment of the VAT treatment, since in this case the second plot of land could not be considered an ancillary supply to the building plot. The SAC thus ruled that the second plot of land was not building land and its supply should have been exempt from output VAT.
Thus, until the end of June 2025, if both conditions were met (a structure was to be built and there was an administrative act or construction work), the sale of land was subject to VAT. The formal classification of land in the zoning plan in itself was not decisive; the actual intention to build on the land, and the circumstances of the transaction, in particular the content of the purchase agreement, also had to be considered.
From 1 July 2025, these conditions have merged into a single provision: building land is also considered to be a plot on which a structure can be placed based on the zoning documentation, the definition of a built-up area, or a decision by the building authority to build a structure. It is now sufficient for the land to be specified in the zoning documentation as designated for building a structure permanently attached to the ground. In other words, if the land is "buildable," it meets the conditions for building land.
This case shows that when assessing the VAT treatment, not only of land, it is always necessary to proceed from current legal regulations and thoroughly examine all the circumstances of a specific transaction.