VAT Taxation of sale of land plots for construction
On July 5th, 2012 the Supreme Administrative Court of Lithuania has established, that the transactions of the sale of land used for the purpose of construction, which do not yet have their detailed plans (or their equivalent) as well as specific plans establishing the construction conditions approved, are not considered as provision of the “land or the purpose of construction” under Article 32 paragraph 2 of the Law on the VAT and therefore should not be subjected to the VAT.
Unreasonably obliged to pay VAT
After the tax inspection of a natural person the tax administrator has found, that the person sold the land for the agricultural use, from which he received income, though he had not registered as a VAT payer and did not pay the tax. Whereas before the selling of the land the person had initiated the preparation of the territorial planning documents, has entered into agreements on cession of the planning agent’s rights and obligations, the tax administrator has considered, that the agreements were made for the plot of the land intended for the construction, and that during the sale transaction the person was aware that after the change of the purpose of the land these plots could possibly be used for construction and instructed him to pay the VAT , including interest and penalty.
The applicant disagreed with the tax administrator’s decision and appealed it to the court.
After the thorough analysis of the EU directives, case law of the Court of Justice as well as the Lithuanian legislation relevant to the issue, the Supreme Administrative Court has declared such a decision of the tax administrator unfounded.
Article 32 paragraph 2 of the Law on the VAT provides that exemption from the VAT shall be granted to the sale or any other transfer of land,.. “[…] with the exception of the land transferred together with a new buildings or structures or sections thereof as well as building land.“
In accordance with the EU directives, and the case law of the Court of Justice the Court has elaborated that for the sale of land to be subject to VAT, first it is necessary to determine, whether the offered land is considered “building land” and second, whether this kind of sale is made by a taxable person.
The court stated that a taxable person under the VAT Directive 2006/112/EC means any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Economic activity includes the exploitation of property for the purposes of obtaining income therefrom on a continuing basis. The court noted that the purchase or sale of property per se cannot be regarded as the exploitation of property for the purposes of obtaining income therefrom on a continuing basis, i.e. the transactions of such kind shall not be considered as economic activity per se. Neither the fact that the person has divided the plot before the transfer with the aim of acquiring the maximum aggregate price, neither the duration of transactions or the amount of the income obtained, can be considered as substantial criteria separating the activity of a private individual from that of a business entity whose transactions would be considered as the economic activity; it is because all these facts may be related to the individual’s personal asset management. However, if a person selling the land would at that time take specific actions by making use of the means similar to those of a manufacturer, trader or a service provider (e.g. plot preparation works, implementation of marketing measures, etc.), he should be considered as pursuing economic activity and therefore a VAT-taxable person.
Cases when a land plot should be assigned to the category of land plots for construction
The court has also found that a particular plot of land can be attributed to the category of construction plots (including the “building land” in terms of the Law on the VAT) when according to prepared and approved special documents of territorial planning and (or) detailed plans the purpose, type and nature of use of the land allows for the construction to take place. Only then, according to the court, there is an objective possibility, established in the law, to designate the plot of land for the construction.
Moreover, in the discussed decision the court has established that the term “building land” under the Law on the VAT cannot be construed broadly, as it would be inconsistent with the principles of legal certainty, clarity and proportion. Broad construction of this concept basically presupposes that the taxation is based on intentions, the actual implementation of which in the future is only presumptive, considering that the special territorial planning documents and detailed plans may be approved years after the land transfer, or disapproved altogether.
Cases when sale of a land plot shall be a subject to VAT
It should be noted that in this final ruling the Court explicated and harmonized the previous case law of the Supreme Administrative Court of Lithuania and gave clear guidelines on how the provisions of Article 32 paragraph 2 of the Law on the VAT should be construed and applied. Therefore, from now on the tax administrator deciding on the attribution of a particular plot of the land to the category of the building land being subject to the VAT, basically will have to determine whether the transfer transaction is made by a VAT taxable person and whether a detailed plan or its equivalent plan or special plan of the land establishing the construction options in specific land plots (or their groups) has been approved by that time.