Unconditional recovery of VAT on construction expenses on third party real estate

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Unconditional recovery of VAT on construction expenses on third party real estate

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Supreme Administrative Court of Greece paves the way

Nikoletta Merkouri of EY in Greece explains how the Supreme Administrative Court of Greece has paved the way for businesses to secure VAT recovery on expenses incurred for construction expenses on third party real estate.

The Supreme Administrative Court of Greece upheld, in decision 1108/2021, that the right of businesses to deduct input VAT on expenses incurred for construction works, improvements, and additions performed on third party real estate remains, even if the taxable person is not entitled – at the time the expenses are realised – to use such property for a period of at least nine years. 

The right of the business to use and perform works on third party real estate may derive from a legal relationship with the property’s owner, like a concession or leasing agreement, or even on the basis of adverse possession rights. 

This judgment was issued by invoking predominantly the Court of Justice of the European Union’s (CJEU) decision in case C-98/07 (Nordania Finans A/S and BG Factoring A/S). In this case, the CJEU upheld the position that the right given to member states based on Article 20 paragraph 4 of the Sixth Directive (provision now found in Article 189 of Directive 2006/112/EC) to define the concept of capital goods, applies only for the purposes of applying Article 20 paragraphs 2 and 3 of the Sixth Directive (provisions now found in Articles 187 and 188 of Directive 2006/112/EC), which set out the rules relating to adjustments of deductions. 

These provisions of the Directive have been transposed into Article 33 of the Greek VAT Code (Law 2859/2000). More specifically, availing of the right granted by Article 189 of the Directive, Article 33 paragraph 4 of the Greek VAT Code includes a definition assimilating construction, improvement works and additions on third party real estate to capital goods, on the condition that the business may use the property based on a legal relationship, with a duration of at least nine years. 

However, contrary to the judgment, and according to the practice followed by the Greek VAT Administration to date invoking guidelines included in Circulars issued back in 1992, the taxable person is required to hold legal possession of the third party property for at least nine years at the time when the construction works, improvements, and additions are performed. Otherwise, the business is not entitled to validly deduct or request the refund of the corresponding input VAT. 

However, according to the judgment, based on this practice, the Greek VAT Administration has – in essence – set an inadmissible time condition to the exercise of the right to deduct VAT, in the context of Article 30 of the Greek VAT Code (in so far as transposing the provisions of Articles 167 and 168 of the Directive into the Greek VAT Code). 

The direct impact of this development is that there would appear to be now grounds for businesses that incur expenses for construction works, improvements, and additions on third party real estate held for a period of less than nine years, to support input VAT deduction, despite the interpretation and approach followed thus far by the Greek VAT Administration. 

Furthermore, businesses may also examine the possibilities of filing an interest-bearing refund request for relevant input VAT amounts previously not deducted or claimed for refund, considering the applicable statute of limitation provisions or other restrictions, depending on the case. 

 

 

 

Nikoletta Merkouri

Director, EY Greece

E: nikoleta.merkouri@gr.ey.com

 

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