How will your company’s VAT treatment be impacted by the new definition of real estate?

As we have reported on previously in Tax matters, the meaning of the term ”real estate” changed, in terms of VAT liability, at the end of 2016. The new regulations can imply that a company who, prior to the end of 2016, applied construction VAT rules and invoiced without VAT, cannot continue to so for services provided from the beginning of 2017. The reverse can also apply.

The new real estate term implies changes in the application by, amongst others, construction companies and other entities executing work on buildings or constructions or as regards machinery and equipment installed in such buildings and constructions. The Tax Agency has issued a number of position papers concerning these new regulations. In spite of this, companies will, in practice, have to deal with difficult issues when they decide if VAT is to be reported on sales.

The new real estate concept will, in fact, have major importance for the rules concerning construction VAT (reverse taxation in the construction sector when construction services are provided to a construction company). The rules imply that a seller cannot invoice VAT on the sale of construction services to an entity who in their operations provide construction services to a certain degree. By construction services is also meant services, such as the installation of objects and equipment and machinery which, after installation, is covered by the VAT rules applying to real estate as now defined.

Incorect assessment and handling of construction VAT can lead to tax surcharges

In order to determine if VAT is to be invoiced on a service, the seller must determine if the work refers to objects or to equipment installed in specially designed real estate or, if this is not the case, they must determine the changes that would incur as regards the building if the object in question would be taken away. An assessment of the design of the building and its use is required to determine if an object installed in a building comprises real estate.

This assessment will not be made easier by the fact that the installation of equipment in one type of building can comprise a construction service while the installation of the exact same equipment in another type of building does not necessarily need to comprise a construction service. If the seller makes an incorrect assignment and invoices without VAT when, in fact, VAT should be invoiced, then, the seller can be charged output VAT and a tax surcharge. In the opposite situation, a purchaser who deducts VAT for incorrectly invoiced VAT can be denied deduction and levied a tax surcharge.

We recommend that companies operating with the execution of work including the installation and maintenance of objects/equipment/machinery review their VAT treatment and ensure that there are routines to prevent incorrect handling of VAT.

As stated above, even a company purchasing objects/equipement/machinery can be impacted by the new real estate concept. A purchaser needs to determine if the seller has handled VAT in a correct manner, as only correctly charged VAT is deductible.

Do you have any questions regarding the new VAT concept impacting your company? If so, please feel free to contact one our our tax advisors. We can help you in analysing how the new regulations impact your company’s VAT treatment and assist with updating the company’s routines.