VAT for demolished buildings could be recovered

A company appealed to the European Court of Justice the imposed VAT adjustment for demolished buildings, and the final decision could be in its favor

In a recent case referred to the European Court of Justice (ECJ), the Advocate General stated that the VAT adjustment for capital goods destroyed during the normal course of business activities is incompatible with the provisions of the EU legislation. A positive decision in this respect could help recover significant VAT amounts, since many real estate companies (including Romanian ones) were compelled to adjust the VAT for old buildings acquired and then demolished, even with the purpose of real-estate development. 

In Romania, a company that pays VAT when acquiring (old) buildings has to partially or entirely adjust VAT, according to VAT principles, when demolishing them. This rule applies irrespective of the buyer's purpose - to develop a real estate project on that field or to reconstruct or modernize the demolished building.

 The respective case has been referred to the European Court of Justice when a company in Bulgaria (where the VAT legislation is similar) appealed this VAT adjustment imposed by the local tax authorities. In fact, in 2010, the company decided to demolish a building in order to reconstruct and modernize it. 

The opinion of the General Advocate is favorable to the taxpayers, mentioning that if a building is demolished for future economic purposes, this intention is enough for them to exercise the right to deduct VAT. 

Moreover, the General Advocate states that the legislative provisions of a member state are incompatible with the Directive 2006/112/EC, if they stipulate VAT adjustment for destroyed capital goods, even with the purpose of making future taxable transactions.

"We expect that the ECJ will sustain these conclusions and will clarify questions related to adjustment of VAT for destroyed capital goods”, stated Adrian Teampau, Indirect Tax Manager, Deloitte Romania.

In Romania, many companies from real-estate industry were compelled to adjust VAT for old buildings acquired and subsequently demolished, even with the purpose was real-estate development. The Romanian VAT legislation is similar to the Bulgaria none and, hence, incompatible with the VAT Directive (2006/112/EC).

"A positive decision of the ECJ would mean that the Romanian VAT legislation and approach of tax authorities have seriously violated taxpayers' rights. Our strong recommendation for companies in this situation is to thoroughly analyze and evaluate the available legal means to recover the adjusted VAT,” added Adrian Teampau. 

Deloitte Tax had warned on this issue in 2010, underlining that the refusal of tax authorities to deduct VAT for demolished buildings was further affecting an already harmed industry, given the financial turmoil of previous years. 

"Tax inspectors' vision and approach are abusive and non-compliant with the VAT principles. For sure, the acquisition of old buildings has the purpose to carry out economic activities of the society. (…) Inspectors motivate their decision by stating that acquisitions have not been used for taxable operations. Therefore, developers lose significant amounts of money,” said Deloitte's tax consultants at that moment.