Tax pitfalls of contributions in non-cash assets
When a property is transferred to a non-taxpayer, the transferee does not automatically become a VAT payer, as it would, for example, with the transfer of a business enterprise or the spin-off of a property. On the contrary, the contribution may be a taxable transaction that can substantially distort the group's finances when the property is contributed to a non-taxpayer, either by paying output tax or by partially recovering deductions already claimed. Early voluntary registration of the transferee may be a solution.
When deciding on a non-cash contribution, it is necessary to think about value added tax whenever a deduction has been claimed for the non-cash assets being contributed. In the case of immovable property, this happens not only at the time of construction but also for subsequent technical improvements. Particularly in the case of buildings built many decades ago, it is often forgotten at the time of the contribution that the transferor has also claimed a deduction in the past, even if only for technical improvements. Even their contribution is subject to tax and is described in the VAT Act as a supply of goods.
There are a number of options for the tax treatment of real estate in particular. In a situation where the contribution will be subject to tax because the transferor has claimed a deduction on the acquisition in the past, it is necessary to determine whether the 10-year period for adjusting the deduction has expired. This period essentially overrides the five-year period from the date of completion after which the supply of the property, and therefore the contribution, can be exempted. Only properties for which more than 10 years have elapsed since the deduction was claimed can be contributed by the owner to the non-payer without any financial detriment, since the contribution is exempt and nothing is refunded from the deductions claimed so far. For all other contributions of property, it is preferable to first voluntarily register the purchaser as a taxpayer, if possible, and only then transfer the property. This is because the voluntary reverse charge provision can also be used for the contribution, which means that the transferor does not have to make adjustments to the input deduction. The tax is then only declared when the transferee reports it in the tax return if it is fully entitled to the deduction, which means that it does not pay any VAT to the tax office.
In some cases, the property is transferred within five years of its completion. There, the reverse charge scheme cannot be used, and VAT must be paid to the tax office on the contribution. As stated by the General Financial Directorate (GFD) in its opinion in one of the coordination committees, although according to the law the transferor and the transferee are jointly and severally liable for this obligation, the transferee also pays the tax to the transferor's personal tax account. Therefore, according to the GFD, it is not possible under normal taxation outside the reverse charge regime for the transferee to declare the tax liability and claim a deduction on the contribution in the same tax return. The tax liability under the normal regime is always reported by the transferor, even if it is physically borne by the transferee.
Obviously non-cash contributions should also be thoroughly evaluated from the VAT point of view. Besides the author of this article, other experts from the VAT team – Igor Pantůček and Petr Linx – can help you find the optimal solution.