Why is value added tax a challenge?
When developers have to pay for municipal infrastructure, questions often arise about who is entitled to VAT deductions or compensation. As a rule, housing developers are not entitled to deduct input VAT, because the construction of homes for sale and rent is not subject to tax. Commercial developers may lose their right to deduction if they do not enter into the correct agreements with the municipality. Municipalities, on the other hand, are entitled to compensation for VAT on projects they are to take over and own, even when a private developer has paid for the project.
Three models for VAT handling
To avoid VAT becoming a final cost, there are three main models that developers can use:
- No VAT agreement: Here, the value added tax becomes a final cost for the developer. This is the least favorable solution.
- The construction contribution model: The municipality assumes the role of builder, and the developer pays a net construction contribution (excluding VAT) to the municipality. The municipality is compensated for VAT, and the developer avoids the VAT cost. The advantage is that the VAT cost is lifted immediately, and the developer gains better liquidity. The disadvantage is that the model requires active involvement from the municipality, which takes a certain risk.
- The adjustment model: The developer is the builder, but enters into an adjustment agreement with the municipality. The municipality is entitled to reclaim VAT over a period of 10 years, and the developer receives payment from the municipality, provided that a private law agreement has been entered into. The advantage is flexibility, especially for commercial developers with a right to deduction. The disadvantage is that payment is made over time, and there are strict formal requirements for the agreement.
What should you consider?
- Clarify early on which model the municipality offers.
- Simulate costs with and without a VAT agreement.
- Ensure that agreements meet all legal requirements.
- Involve a lawyer with expertise in real estate and value added tax.
Proper handling of value added tax can have a significant impact on the profitability of development projects. By choosing the right model and working closely with the municipality, developers can avoid VAT becoming a final cost. Would you like to learn more about how to ensure the profitability of your project? Watch our mini webinar with lawyer Sigve Braaten from Hjort, where you will find specific tips and examples of smart VAT management.
Button: Click here to watch the mini webinar
