As from 1 January 2016, several notable changes were introduced to construction and VAT regulations, and significant social support was made available to private individuals seeking to acquire, build or refurbish homes. These changes are likely to have an effect on almost everyone on the real estate construction and development sector, from private individuals building family houses to real estate developers planning major investments. In our newsletter, we summarise the rules which are effective on 21 January 2016 and address certain issues arising in practice.
Simplified construction procedure
As of 1 January 2016, the Hungarian Government introduced a new simplified procedure for the construction of new residential buildings with a total useful floor area of up to 300 m2. During the so-called “simplified notification” procedure, the law allows to start the construction with a notification to the competent notary instead of requiring a construction permit in advance. In addition to the basic data of the real property, it is sufficient to submit the data of the architect and specialist engineers (electricity, structural and building engineer), submit the construction value calculated under the applicable statute, and attach the plans set out in the relevant law.
The construction may commence 15 days following such submission, and the construction log must be kept during the works according to the applicable rules. In the case of an incomplete notification, the notary informs the building contractor within 8 days that due to deficiencies, the notification has failed to meet the statutory requirements and informs of the legal consequences of continuing the construction without filing a proper notification.
Although the legislation does not expressly address this issue, during procedures subject to permit such as installation, extension or alteration, the rules of the former authorization procedure apply given that no new residential building is constructed in such cases.
During the simplified procedure, there is no need to apply for an occupancy permit and acknowledgement procedure in the case of a completed building and it is sufficient to file an application for an authority certificate with the notary of the relevant local government.
Changes in the rules of value added tax and tax refund aid
In order to foster some of its social policy objectives, the legislator substantially decreased the VAT for the sale of new residential property from 27 % to 5 %, as from 1 January 2016 until 31 December 2019. The discounted VAT rate applies to apartments with a useful floor area of up to 150 m2 in the case of multi-apartment residential properties, and to one-apartment family houses with a useful floor area of up to 300 m2. Under the VAT regulation, a real property is considered new if it has not yet been properly occupied, or if it has been occupied, but less than 2 years have lapsed between the occupation and the sale. This definition seems clear, but in practice, it is often difficult to establish the date of the first occupancy. It is also unclear whether the 5 % discount VAT or the 27 % VAT applies to garage or storage rooms sold together with the apartment.
A further condition of applying the discounted VAT rate is that the date of determining the payable tax must be on or after 1 January 2016. The 27 % VAT rate (in accordance with the former rules) applies to advance payments paid before 1 January 2016 in relation to real estate transactions, while the discounted VAT rate applies to instalments paid on or after 1 January 2016. Accordingly, if the purchaser paid the advance for the real property before 1 January 2016, the tax base and the calculation of the VAT depends on whether the parties set out the net price plus VAT or the gross price in the contract. In the absence of such express contractual provision, judicial practice considers that the price is inclusive of VAT.
Changes in the rules of value added tax and tax refund aid
Typically, two types of VAT relief have become available in the case of single-apartment residential buildings (family homes). The agreement will set out which relief applies, subject to meeting further conditions. The 5 % VAT rate may be applied in case of real property sale and purchase agreements. In other cases, a builder who is a natural person may be eligible for a VAT refund. Accordingly, an owner of the building plot who is a natural person can apply for a tax refund only once, no later than 31 December 2019, for the purpose of building a flat with a useful floor area of up to 150 m2, or a one-apartment building with a useful floor area of up to 300 m2, also including the purchase price of the building plot serving as a place of construction. The amount of the tax refund is equal to the VAT amounts specified and paid according to the invoices issued for the building plot as a place of construction, the materials bought and services received for the construction of the flat or the building; however, the maximum amount of the refund may not exceed HUF 5,000,000.
Housing construction grant and state subsidized loans to families
As another social policy incentive, the scope of non-reimbursable grants (“CSOK”) and state subsidized loans available for housing acquisition and construction were significantly extended as of 1 January 2016. Under the amendments, housing construction grants are available for the construction of new housing if the building permit was issued on or after 1 July 2008, or for the purchase of new housing if the occupancy permit is available at the time of filing the application. The grant amount in case of newly built housing was also raised. The amount increases according to the number of children the applicant family has (or undertakes to have in the upcoming 10 years), with HUF 600,000 obtainable for one child, HUF 2,600,000 for two children, and HUF 10 million for three or more children. Single parents and adoptive parents are also eligible for the grant.
In addition to the CSOK grant, families that have or will have at least three children are eligible for a loan with interest subsidized by the state to buy newly built homes or to finance their construction. In such cases though, the total construction cost or purchase price of the property, less VAT and land cost, must be under HUF 30,000,000. Recently the government announced that it repeals such threshold.
Although the legislator attempted to put some safeguards into place (e.g. clean criminal record, no other loans, proof that the applicant was not ordered to repay previous grants), in its present form, the regulation still leaves the possibility open for abuse. Among others, it is not clear how the authorities will monitor whether the applicants have indeed moved into the home, or whether the actual housing construction costs correspond to the costs disclosed in the notification. The statute is likely to be amended in view of later developments, which will be worthwhile to monitor.