For Sale: Real Estate in Enforcement, VAT Paid by the Buyer

Although they have been in effect for just over a year, the new rules for taxing real estate transactions still raise some doubts, primarily regarding who and in what cases pays VAT. This particularly applies to the sale of real estate in enforcement proceedings or bankruptcy.

In Croatia, after 17 years of applying the old system, the ‘new’ rules for taxing real estate transactions have been in effect since January 1, 2015. Although only a year and three months have passed since the implementation began, taxpayers and the Tax Administration have generally adapted to these changes.
The main differences between the old and new systems of taxing real estate transactions are that under the old rules (those before January 1, 2015), the transaction of land was not subject to VAT taxation in any case, but exclusively to the real estate transfer tax, regardless of whether it was ‘vacant’ land or land on which a building was located. The transaction of buildings was taxed either by VAT or by the real estate transfer tax, depending on whether the building was new or old in terms of VAT regulations and, of course, depending on who delivered it (only deliveries made by VAT taxpayers are subject to that tax).

Land or Building

According to the provisions of the regulations we apply after January 1, 2015, the transaction of undeveloped building land is subject to VAT taxation, while the transaction of all other lands (for example, agricultural) is taxed by the real estate transfer tax. The sale of developed land always divides the tax regime of the building located on it, as the transaction of buildings is taxed either by VAT or by the real estate transfer tax. In principle, if it is a building that has been inhabited/used for less than two years, its transaction is taxed by VAT (this also applies to the sale of buildings before the first habitation/use). If this condition is not met, the transaction is taxed by the real estate transfer tax. This is a very brief overview of the rules for taxing real estate transactions, so it is advisable to check the specific tax status of each individual property, as there are also a number of other elements and details that need to be taken into account. For example, whether a major reconstruction has been carried out on the inhabited building in the two years prior to the sale, with a value exceeding 50 percent of its selling price.  
In this text, I would like to point out some unfortunately still frequent doubts and misconceptions about the application of the new provisions of the regulations on taxing real estate transactions when it comes to sales in enforcement proceedings.

Only VAT Taxpayers

Namely, the provisions of Article 75, paragraph 3, point d) of the VAT Act stipulate that in the case of the delivery of real estate sold by the debtor in enforcement proceedings, the VAT on that transaction is paid by the buyer. Based on this (actually very clear) rule, misconceptions arise in practice in the sense that some believe that the transaction of every real estate in enforcement proceedings is subject to VAT. However, this is a completely incorrect understanding. Namely, Article 75 regulates the question of who pays VAT – the seller or the buyer, and not whether the transaction itself is subject to VAT taxation. For the sale of real estate in enforcement proceedings (as well as in ‘regular’ transactions) to be subject to VAT taxation, it is essential that both the seller (in this case, the debtor) and the buyer are VAT taxpayers and that the conditions are met for that real estate to be considered taxable by VAT based on the rules from Article 40, paragraph 1, points j) and k) of the VAT Act.

What Needs to be Distinguished

If, therefore, in enforcement proceedings, for example, a building that has been inhabited for less than two years (and the land on which it is located) is sold, and the debtor and the buyer are VAT taxpayers, that transaction is indeed subject to VAT, but the tax is paid by the buyer, not the seller (the so-called domestic transfer of tax liability). On the other hand, if, for example, agricultural land is sold, that transaction will not be subject to VAT despite the fact that the sale takes place within the framework of enforcement proceedings. Likewise, if building land is sold in enforcement proceedings, but the debtor (or buyer) is not a VAT taxpayer, VAT is also not paid on that transaction.
In addition to the described confusion, problems also arise with the sale of real estate in bankruptcy proceedings, which is not the same as enforcement proceedings, although some provisions of the Enforcement Act apply in it. It has not become an enforcement proceeding, and therefore the provision of Article 75, paragraph 3, point d) of the VAT Act does not apply to the sale of real estate in bankruptcy proceedings, but refers only to enforcement proceedings.