Investments in real estate are taking off in Hungary, and although acquisitions are exempt from the value-added tax (VAT) according to the general rule, in reality most transactions – for example those targeting new real properties – have important VAT implications that should not be neglected.
The growth of the commercial and residential real estate markets has been a hot topic in Hungary for a while. With new investors coming in, it should not be forgotten that acquiring a real property in Hungary may require the purchaser to pay value-added tax (VAT) based on the specific circumstances of the transaction. It is therefore important to explore the VAT implications before the acquisition takes place, taking into account the VAT status of the parties and the target property.
The general rule: tax exemption
As a general rule, the transfer of real estate is exempt from VAT. That said, in most cases, one of the exceptions to the general rule applies, and the transaction qualifies as taxable supply under the Hungarian VAT Act.
There are two statutory exceptions that make any transaction subject to VAT:
- the sale of a building site; and
- the sale of a new property.
For the purposes of the Hungarian VAT Act, a new property is a property that has not yet been put into operation, but a property is also considered new under the two-year rule, i.e. if less than two years have passed since either the date the occupancy permit of the property became final and enforceable or the date the official certificate confirming completion of the property was issued.
Option to tax
When a property is not a building site or is no longer considered new, the sale of the property is by default exempt from VAT, unless the seller chooses to apply VAT to its sale of the real property. This is a discretional option and needs to be duly reported to the National Tax and Customs Administration prior to the relevant transaction.
Sellers may opt to charge VAT for multiple reasons. For instance, opting for VAT may make the input VAT charged by other suppliers on their services related to the real property (which would otherwise be non-deductible for VAT purposes) deductible by the seller. The VAT payable on the completion of the purchase may be reclaimed by the purchaser in accordance with the provisions of the VAT Act. Under the general rule, input VAT is deductible from output VAT charged in the same VAT period. In case the amount of input VAT exceeds the amount of output VAT within the same period, the excess can be carried forward to the next filing period or reimbursed to the taxpayer’s bank account through a VAT reclaim procedure. In certain cases, a seller may decide to opt to have its property sales subject to VAT at the purchaser’s specific request prior to the transaction as this would better suit the latter for VAT purposes.
In Hungary, there are three VAT rates. The standard rate is 27%, whilst there are two reduced rates (5% and 18%). In most B2B transactions, the general 27% rate applies. Typically in B2C transactions a reduced 5% rate applies to the sale of new residential buildings and apartments having a usable floor area not exceeding 300 sqm and 150 sqm, respectively.
In case the transaction is subject to VAT and this is based on the statutory exceptions (i.e., the property is a building site or is considered new), the seller will be liable for the VAT, and the invoice will be issued for the gross amount of the purchase price. If the transaction is taxable as a result of the seller’s choice to make its otherwise non-taxable property sales taxable, the reverse charge mechanism will apply, and the purchaser will be liable for the VAT. In such a case, the seller’s invoice will not include VAT, instead a reference to the reverse charge will be made. As the reverse charge is subject to a couple of further requirements, these need to be fulfilled as well, otherwise the seller will be required to issue its invoice as normal (VAT included).
As can be seen, real estate transactions in Hungary can have various VAT implications depending on the status of the contracting parties, the target property or both. Any prudent investor should therefore pay particular attention to the potential VAT issues. For most foreign investors, the tax structuring services also cover property VAT, although in more intricate cases (e.g. if the status of the property is controversial, or when it is unclear whether or not VAT should be taken into consideration when determining the transfer tax base, etc.) VAT might need to be addressed as a standalone item.