Study on the application of Value Added Tax to the property sector Executive summary and Country overviews N XXI/96/CB-3021 Introduction This binder contains the Executive summary, conclusions and recommendations and 15 Country Overviews. These documents are part of the Study on the application of Value Added Tax to the property sector. This study was performed, following a public invitation, for the European Commission. The Executive summary, conclusions and recommendations is the concluding chapter of the Final Report of the above-mentioned study. The Country Overviews give a brief description of the national taxation systems applicable to the property sector in order to get an understanding of and a first insight into national situations. The country overviews therefore provide for brief explanations (headlines) of the background, (recent) changes, main principles, complexity, problems, distortions and possible changes to the VAT treatment of construction, land and property in each of the European Member States. We note that the Executive Summary and Country Overviews form an integral part of the report issued and must therefore be read in this context. The study is carried out by consultants of Arthur Andersen in the EU Member States, with the office in Amsterdam acting as the co-ordinating office. It is inevitable that this survey was only possible with a joint effort of members of the Indirect Tax Group and Real Estate Services Group located in the various EU Member States. The Study is based on the legislation in force in December 1997. 1 Table of Contents Introduction Table of Contents 2 Executive summary, conclusions and recommendations 3 1.1 Chapter I: Definition of Immovable Property 3 1.2 Chapter II: Taxable Person 4 1.3 Chapter III: Taxable Transactions 5 1.4 Chapter IV: Place of Taxable Transactions 8 1.5 Chapter V: The Supply Of Immovable Property 9 1.6 Chapter VI: Letting And Leasing Of Immovable Property 12 1.7 Chapter VII: Chargeable Event And Moment Of Chargeability 14 1.8 Chapter VIII: Taxable Amount 15 1.9 Chapter IX: VAT Rates 17 1.10 Chapter X: Deduction Of Input VAT 17 1.11 Chapter XI: Persons Liable For Payment Of VAT 21 1.12 Chapter XII: Other Taxes 22 Country Overviews 23 Austria 24 Belgium 35 Denmark 51 Finland 55 France 63 Germany 72 Greece 81 Ireland 85 Italy 94 Luxembourg 101 The Netherlands 109 Portugal 123 Spain 130 Sweden 144 United Kingdom 159 2 Executive summary, conclusions and recommendations 1 EXECUTIVE SUMMARY, CONCLUSIONS AND RECOMMENDATIONS Below we include an executive summary of the final report. Furthermore, we summarise the most important conclusions and recommendations of the final report chapter by chapter. In this respect we note the following. Any change to the VAT treatment of property transactions may affect a large number of different parties, commercial and private. As the introduction of a new regime will inevitably favour some businesses more than others, we feel that it is important to manage the switch as carefully to minimise disruption and to enable company budgets to be prepared with a degree of certainty. Furthermore, any changes to VAT on property need to show consideration for business planning. This means that an open approach with a long time frame for implementation is required. Moreover, we advice any new rules to accompany transitional provisions. While this may cause a rush of VAT planning measures, the effect of such steps cannot continue indefinitely. 1.1 Chapter I: Definition of Immovable Property 1.1.1 Executive summary Although the term immovable property is used in the Sixth Council Directive, it does not include a definition. However, from the Sixth Council Directive can be derived that certain items qualify as immovable property. In general, land and structures fixed to or in the ground qualify as immovable property in every Member State. 1.1.2 Conclusions and recommendations Immovable property transactions are in most Member States based on concepts employed in the national (civil) laws. The application of the origin principle causes (additional) difficulties because of the different concepts employed in the national laws. In order to achieve a more uniform approach, we prefer to draft legislation by means of regulations instead of directives. Moreover, inequalities between Member States will be reduced if terms used in the regulations are defined precisely. 3 With regard to immovable property transactions this means that terms as immovable property, accommodation in the hotel sector, permanently installed equipment, right in rem, lease, etc. may not longer be interpreted from a Civil Law perspective, but it is preferable to give a definition in the VAT regulation. In this respect we advice to develop a clear definition of the terms immovable property, building, land and building land into the VAT legislation. 1.2 Chapter II: Taxable Person 1.2.1 Executive summary In all Member States the general definition of "taxable person" is in principle in line with Article 4 Sixth Council Directive. Also, the exploitation (i.e. letting and leasing, exploitation of rights in rem) of immovable property for the purpose of obtaining income therefrom on a continuing basis qualifies the person as a taxable person in every Member States. Two Member States require the exploitation to result in taxable supplies. With regard to occasional transactions a distinction has been drawn. In all Member States a person qualifies in principle as a taxable person when he supplies immovable property which attributes to his business on an occasional basis in the course or furtherance of his business besides his regular activities. However, Article 4(3) Sixth Council Directive only refers to the situation where a person supplies immovable property on an occasional basis. From this perspective seven Member States (Belgium, Denmark, Finland, France, Luxembourg, Portugal and Spain) implemented Article 4(3) Sixth Council Directive. In seven Member States (Austria, Denmark, Finland, Germany, Ireland, Netherlands and the UK) two persons or more can be treated as a single taxable person for VAT purposes if these persons are closely bound to another by financial, economic and organisational links. Most of these Member States do not tax internal (immovable property) transactions from one member of the single taxable person to another. Public bodies may qualify as a taxable person for activities or transactions in which they do not engage as a public authority in all Member States excluding Ireland1. However, not in all Member States public bodies are considered to be a taxable person with regard to the letting and leasing of immovable property. 1 `We refer to paragraph II.5.2.2. Public bodies may be qualified as taxable person by order, however no order has been made to date. 4 In respect of the supply of immovable property a distinction has been drawn between the supply of "newly constructed" buildings, the supply of "old" buildings, the supply of building land and the supply of land other than building land. Between the Member States there is variety in considering public bodies as taxable person in respect of each of such supplies. 1.2.2 Conclusions and recommendations Occasional transactions To get a neutrality of VAT within the EU we prefer that Member States treat as a taxable person anyone who carries out on an occasional basis supplies of immovable property. However, only the following supplies will affect the neutrality of VAT. 1. The supply of residential buildings, or parts thereof, and the land on which they stand, before first occupation. 2. The supply of buildings, other than residential buildings, or parts thereof, and the land on which they stand, until the adjustment period for (immovable) capital goods has expired. 3. The supply of building land. Therefore, Member States may limit to treat as a taxable person any person who carries out on an occasional basis one of the above- mentioned transactions. To limit the persons who have to VAT register and file VAT returns occasionally, the notary for instance can act as a fiscal representative on behalf of any person who qualifies as a taxable person with respect to occasional transactions. 1.3 Chapter III: Taxable Transactions 1.3.1 Executive summary Article 5 and 6 Sixth Council Directive make a distinction between a supply of goods and a supply of services. In 13 Member States (with the exception of Ireland and the UK) a supply of goods means the transfer of the right to dispose of tangible property as owner. The transfer of a freehold interest and the transfer of economic ownership are the most important immovable property transactions. In several Member States other transactions (for example: the transfer of rights in rem, leasing) may qualify as a supply of goods. In Ireland and the UK certain interests in immovable property are 5 considered to be tangible property. In eight Member States rights in rem giving the holder thereof a right of user over immovable property are considered to be tangible property. In four Member States shares or interests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over immovable property are considered to be tangible property. In eight Member States the handing over of works of construction may qualify as a supply of goods. A great complexity arises when it is not entirely clear-cut whether what is being supplied is a service or a good. Differences in classification could give rise to discrepancies as regards the exemptions, the taxable amount, the time at which the charge to tax arises, the rate of tax and the rules for collection. 1.3.2 Conclusions and recommendations 1.3.2.1 Rights in rem We agree with the approach that transactions concerning rights in rem (giving the holder thereof a right of user over immovable property) involves the transfer of the right to dispose of the property as owner.