Sale of a Hotel and Land by a Company Jointly with Individuals – VAT, Corporate Tax and Personal Income Tax

1.      VAT on the sale.

Under Art. 45(3) of the VAT Act (ЗДДС) - an exempt supply is also the supply of buildings or of parts of them which are not new, the supply of the land adjoining them, as well as the creation and transfer of other rights in rem over them. "New buildings" are the buildings: a) which, as at the date on which the tax on their supply became chargeable, are at a "rough construction" stage of completion, or b) for which, as at the date on which the tax on their supply became chargeable, 60 months have not elapsed from the date on which a use permit or a certificate of commissioning was issued under the Spatial Development Act, or .....

The sale of the hotel, in the case under review, is an exempt supply and the company does not charge VAT on the transaction, because the building is old. The land is likewise an exempt supply, because it is "adjoining land" - the sum of the built-up area within the meaning of the Spatial Development Act and the area around the built-up area, determined on the basis of a distance of 3 m from the outer outlines of each of the enclosing walls of the first above-ground floor or of the semi-basement floor of the building, within the boundaries of the regulated land plot.

2.      Formation of the company's profit

For corporate taxation purposes what matters is the cost of the assets - their carrying amount (the book value of the hotel less its depreciation up to the moment of the sale, and the book value of the land). The amount above these values, up to the sale price, forms the accounting profit from the transaction. The taxable profit for the year may be reduced by accumulated tax losses from prior periods.

3.      Tax treatment for the individuals - Personal Income Taxes Act (ЗДДФЛ)

For the individuals the income from the sale is not taxable. The grounds are Art. 13(1)(1)(b) of the Personal Income Taxes Act (ЗДДФЛ) - not taxable are up to two immovable properties, as well as agricultural and forest properties irrespective of their number, if more than 5 years have elapsed between the date of acquisition and the date of the sale or exchange. Consequently the individuals owe no personal income tax on the income realised from the transaction.

4.      Effect on the individuals' VAT registration

A separate but important question is whether the turnover from this sale is taken into account when assessing mandatory VAT registration of the individuals. Under Art. 168v(2)(1) of the VAT Act (ЗДДС), turnover from exempt sales of this kind is not included in the taxable turnover for the purposes of VAT registration, in so far as the transaction is an "incidental supply". Within the meaning of Art. 168v(2) this is a supply which is not connected with the person's ordinary economic activity and is of a secondary or occasional character. In other words, if the sale of the property is incidental for the individual and outside their usual business activity, it is not taken into account when assessing whether the person must register for VAT.

This article is of an informative nature and does not constitute specific tax advice. For an individual assessment of a particular case, get in touch with me.