Bill to abolish VAT exemption in connection with delivery of real property

Date 18 maj. 2009
Download PDF version PDF

 

The Danish Government and Dansk Folkeparti (the Government’s cooperative partner) (hereinafter referred to as the Parties) have 1 March 2009 entered into an agreement on the package of measures to be implemented in the spring, version 2.0.  In that connection, a draft bill has been introduced to amend the Value Added Tax Act and the Payroll Tax Act.

 

According to the Parties, the reason for the draft bill is the existing special VAT rules. Different types of VAT exempt business activity entail a competitive advantage over related activities.

 

On this background, the Parties have agreed to abolish VAT exemption in connection with delivery of real property, travel agencies etc., and property management as from 1 January 2011.

 

Further, the Parties have agreed to increase payroll tax for companies in the financial sector. The amendment takes effect as from 1 January 2013.

 

Governing law on delivery of real property

According to the Value Added Tax Act Section 13(1) no. 9, delivery of real property is VAT exempt. This rule applies without exception meaning that under no circumstances is the selling of real property liable to VAT.

 

Contrary to the VAT exemption in connection with delivery of real property, the general VAT liability applies to construction services sold in relation to real property. Thus, the VAT exemption does not apply to construction work, including design/planning work and the like as well as delivery of any applied materials.

 

Furthermore, special rules apply to companies building at their own expense with the view to delivering e.g. real property. In such event, the company is liable to pay a so-called “VAT enforcement”, which is special in that it is not calculated on basis of the company’s turnover. VAT enforcement is calculated as 25% of the tax basis constituting the normal value of the construction service, including profit margin.

 

Content of the bill

The bill proposes to abolish VAT exemption in connection with delivery of new property with accompanying land and building sites, including separate delivery of developed sites. In other words, this means that it is suggested to impose VAT on commercial delivery of real property in the form of new buildings with accompanying land and building sites. Other types of delivery, such as delivery of real property with already erected buildings, remain VAT exempt.

 

The object of abolishing the VAT exemption is, in all instances, to impose VAT on the creation of value realised in connection with delivery of new building with accompanying land and building sites. This is intended to result in a more efficient allocation of resources in the property and construction industry.

 

As a consequence, this means that suppliers will be allowed to deduct VAT from expenses in connection with external construction services that can be ascribed to the delivery.

 

Further, a supplier of land, who has had expenses before the commencement of the amendment in connection with land development, attorney, accountant etc. in relation to the land, which is not sold until after the commencement of the amendment, can, in a period of 5 years after the commencement of the amendment, be granted reimbursement of VAT on expenses not already deducted. This provisional rule has been suggested to avoid seller being burdened with input VAT.

 

The bill does not include a provisional scheme for new property in that the amendment only affects new property where construction is initiated after commencement of the amendment.

 

Consequences of the bill

The governing rules on VAT exemption in connection with delivery of real property are more comprehensive than exemption in connection with delivery of real property according to the Council Directive 2006/112/EC of 28 November 2006 on the common VAT system (the “Directive”).

 

In accordance with the Directive, Denmark is authorised to maintain the exemption, which otherwise would fall within the amendment. In the event that delivery of real property is made liable to VAT, it will no longer be possible to reintroduce VAT exemption on a national basis in the future.

 

 

 

If you have any questions or require additional information on the package of measures to be implemented in the spring, version 2.0, please contact attorney Dan Moalem ( (dmo@mwblaw.dk) or attorney Henning Hedegaard Thomsen (hht@mwblaw.dk).

 

The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.