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Ivan Fučík | May 31, 2018

Would you like to donate real estate that you use for business to your children? Continuation, this time from the perspective of VAT.

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In the previous article, we tried to point out possible risks when donating real estate you use for business to your children. In this article, we will focus on this issue from the perspective of VAT. In our story, we will assume that the donor is a VAT payer and entitlement to deduction has been applied when acquiring this real estate item.

From the perspective of the value added tax act (VATA), supply of goods against payment by a person liable to tax as part of performing economic activity with a place of performance in the Czech Republic is subject to the tax. According to the civil code, the principle of donation is gratuitous transfer of the right of ownership. Based on this interpretation, it would seem that donating real estate is not subject to value added tax, but be careful! According to article 13 paragraph 4 of the ITA (income tax act), it is possible to see the use of tangible assets not related to performing economic activities of the payer as supply of goods against payment as well. This use is understood to mean: “permanent use of business assets by the payer for his own private use or that of his employees, permanent use for purposes other than those relating to performing his economic activities, and gratuitous provision of business assets, if tax deduction has been applied for these assets or their part.”

Based on the established previous assumption, the definition of use of tangible assets for purposes not relating to the performance of economic activities of the taxpayer will be fulfilled and it will thus be a transaction, which is subject to the value added tax. It remains an open question, if this will be a taxable transaction or an exempted transaction. The answer to this question depends on the stipulation of article 56 of VATA, which specifies, when supply of real estate is a taxable transaction and under what conditions it can be exempted. With its content, this stipulation is fit for a separate article, but for the purposes of this article, it can be said in a simplified way that exempted supply of real estate will be the case of plots, on which there is no structure and which do not form any functional whole with a structure and at the same time these are not plots that could be defined a building land, and further in case of supply of structures or plots, which form a functional whole with them, if a period of 5 years has elapsed since the first occupancy permit (approval) or since the issuing of the occupancy permit after a significant change of a completed structure (for assets acquired by 31 December 2012, this period is 3 years). Even after the period, which stipulates the limit for exemption of the supply of real estate from tax, the taxpayer can decide that the supply of real estate will be a taxable transaction. If the acquirer is a payer of the tax, such a decision can only be made based on previous consent from the acquirer.

As this would be a supply of goods between kin, the usual price would be the tax base.

Another issue, which is related to the donation outlined above, is opened by the stipulation of article 78 of VATA and subsequent, which lay down a duty of monitoring changes in the scope of use for a statutory period (in case of structures and plots it is 10 years), for the purposes, which establish entitlement to tax deduction. If such a change occurs, it is necessary to correct the originally applied entitlement to deduction. If supply of goods occurs (assets change owners) within the statutory period, adjustment of tax deduction is performed in a single step, in the taxable period, in which the transaction took place.

In case of supply of real estate, in a period up to ten years from applying tax deduction from its acquisition, a situation may occur, when this will be an exempted transaction without entitlement to tax deduction, the duty to return and declare output tax will not arise, but at the same time, a duty will arise to perform an adjustment in a single step of the originally applied entitlement to deduction. If the donor decides to burden the supply of real estate with output tax, a duty will arise for him to declare and return this tax, and he will also be obliged to adjust the applied entitlement to deduction in a single step, but this adjustment will be zero. This follows from the procedure for calculation of this adjustment laid down by law.

In case you get into the described situation and are not sure, what tax effects the transaction you are planning will have, we recommend turning to a tax consultant.

Ivan Fučík in cooperation with Jan Dyškant