Although we are two months away from the moment when Government Ordinance no. 16/2022 became applicable, the question of the applicability of the reduced rate of 5% of VAT in the field of residential real estate transactions raises discussions among real estate developers, brokerage agencies and even notaries, mainly affecting buyers.
If the topic of pre-agreement concluded in 2022 is cut off by the normative act itself, that of the assignments of such pre-agreement is still shrouded in an apparent mystery.
In this way, we want to bring clarifications regarding the transactions that fall within the scope of applicability of the reduced VAT rate during 2023, with a focus on the assignment contracts concluded.
Preliminarily, we point out that the G.O. no. 16/20222 considers the year 2023 to have a transitional character in order to defend the principle of legal certainty and to protect people who have already made a contractual and especially financial commitment by concluding a pre-contract and whose financial expectations would be exceeded by changing the VAT rate from 5% to 19%.
Thus, starting from 1 January 2023, the provisions of Government Ordinance no. 16/2022 become applicable, the essential change brought by this normative act in the field of housing being that of lowering the cap for the application of the reduced VAT rate of 5% regarding the maximum price of social housing from 700,000 lei to 600,000 lei.
The law therefore provides for the general rule and two other categories of exceptional situations that fall under the scope of applicability of the reduced VAT rate, and on which we will focus our attention:
The rule is the purchase of a single home with a VAT rate of 5%, by a natural person individually or jointly with another natural person(s); the home must have a maximum usable area of 120 sqm, excluding the household annexes; the value of the house, the annexes and the land on which they are built must not exceed 600,000 lei, exclusive of VAT.
Exception 1 is the purchase of a house with a VAT rate of 5%, by a natural person if he concluded a legal deed between living before 1 January 2023 with the purpose of paying in advance for it; the home must have a maximum usable area of 120 sqm, excluding the household annexes; the value of the house, the annexes and the land on which they are built must not exceed 450,000 lei, exclusive of VAT.
Exception 2 s the purchase of a single home with a VAT rate of 5%, by a natural person if he concluded before 1 January 2023 a legal deed between living entities with the object of payment in advance for it; the home must have a maximum usable area of 120 sqm, excluding the household annexes; the value of the home, the annexes and the land on which they are built must be at least 600,000 lei and a maximum of 700,000 lei, exclusive of VAT.
The notion of “a legal act between living”
The interpretation of this notion is the source of all the discussions in these first two months of applicability of the new law, since no normative tax provision provide a legal definition to the legal acts between the living.
But, according to the civil doctrine, legal acts between the living are those concluded by the parties with the obvious intention to produce their effects during their lifetime. Such examples are: sales contracts, bilateral promises of sale and purchase, annuity contracts, usufruct contracts or donation contracts. On the other side there are the legal acts for the cause of death, these being instead provided for by the Civil Code, respectively those that are concluded in consideration of the death of a person: legacies, wills or death insurance.
Certainly, the pre-contract by which an deposit is paid, regardless of the amount of the deposit, represents a legal act between the parties. In this sphere are also included both pre-agreements concluded in authentic form and pre- agreements concluded under private signature, as long as the payment of the deposit was made through a bank transfer that can be correlated with it, since the text of the Fiscal Code does not make a distinction regarding the form in which the legal act on the basis of which deposits are paid must be concluded.
Therefore, although a deed concluded under a private signature is not opposable to third parties, in the absence of the publicity required by law (e.g. by noting the promise in the land register or authenticating the pre-contract), the payment of the deposit by bank transfer represents a legal fact with a certain date.
The same discussion is also valid in the case of concluding a reservation agreement based on which the future buyer pays the so-called “reservation fee”, under the conditions that it is stipulated that this will be part of the deposit.
In conclusion, the necessary conditions for the application of the reduced rate of VAT of 5% are considered to be met for transactions regarding housing residences that complies with the legal parameters and for which pre-contracts or reservation contracts that were concluded before 1 January 2023 and implied advanced payments of the contractual price.
Assignment of the pre-agreement. Applicable rate
The question that awaits an answer at this moment is – under the current legislative conditions, in the case of the assignment of a pre-agreement, concluded in 2022 for a residence which, in relation to its value, according to the legal provisions in force in 2022, fell under the application of the reduced VAT rate of 5%, and according to the current legal provisions no longer does, and for which the deposit was paid, how does the VAT rate applies and in what amount?
The answer, although disputed, is a simple one and based on the corroboration of the legal provisions that expressly regulate the assignment of the contract and those regarding the exceptional situations in the scope of the applicability of the reduced rate contained in OG no. 16/2022.
Doctrinally, agreement assignment has been defined as that by which a party to a contract substitutes a third party in that contract, with the consent of the assigned co-contractor.
This synthetic definition captures its essential features: (i) that it is itself a contract; (ii) which has as its object the substitution of a third party in the contractual position of the assignor; (iii) with the effect of transferring all rights and obligations related to this position; (iv) with the consent of the transferred co-contractor.
Under these conditions, in which even the contractual position of the assignor is transferred, not only the rights and obligations arising from the contract, the answer to the raised question is obviously favorable to the third party assignee.
So, in the concrete situation, if through an assignment contract, accepted by the seller, the third party assignee replaces the original buyer in the pre-contract concluded in 2022, for a residence that fell under the old law within the applicability of the reduced VAT rate and according to the new law no longer fall under it, all the rights provided by the legislation in force will be applied to the original buyer – respectively the reduced rate of VAT in the amount of 5% will be applicable.
We eliminate the opinions according to which the applicable VAT rate would be of 19% based on the argument that the assignment of the pre-agreement produces effects only from the moment of acceptance by the co-contractor so that the deposit would be considered paid only at this moment by the third party assignee who takes over the pre-contract. Interpreting the legal provisions regarding the assignment of the agreement in this way is totally erroneous. In reality, the moment of the co-contractor’s acceptance generates the moment when the effects of the contract are really produced, but the effect consists in taking over the position of the assignor by the third party assignee, together with all his rights and obligations. Under no circumstances is the time at which the advance payment was made artificially altered.
If we were to continue with this flawed reasoning, we would end up in a situation where we would be wondering if the third party assignee will owe late payment penalties for the late payment of the advance? Or if the co-contractor can decide to terminate the contract, given this delay?
Obviously, such a theory cannot be accepted, being far from the purpose and rationale of the regulation.
The more our conclusion is supported, as the transitional provisions of OG 16/2022 regarding the exceptional situations that are within the scope of applicability of the reduced VAT rate of 5% come for the purpose of protecting people who have contracted in consideration of this rate, including investors , who paid the respective advances in order to resell the house in question under the same foreseeable market conditions.
By applying any other theory, a serious violation of the principle of legal security would be reached, an aspect that wanted to be eliminated precisely by regulating exceptional situations.
Other legislative provisions of interest
Another series of issues regarding the interdiction to benefit from the application of the reduced VAT rate for several homes, applicable since the previous legislative amendment in the same field, were also clarified, by doctrine.
A person can only benefit once from the application of the reduced VAT rate of 5%, thus, if, during the marriage, the spouses benefited from the reduced VAT rate of 5%, and they divorce, neither of the spouses has the right to benefit from this facility again.
There are also changes regarding the taxe for the transfer of real estate from the personal patrimony. Thus, natural persons who sell a property from their personal patrimony will have to pay the tax, regardless of the value of the property. According to the legislative changes in force from 1 January 2023, the non-taxable cap of 450,000 lei is removed and the tax rate is changed as follows: 3% for properties owned for a period of up to 3 years (inclusive) and 1% for properties owned for a period of more than 3 years.
Definition of terms used
Residence is, according to Law no. 114/1996 “the building consisting of one or more living rooms, with the necessary dependencies, facilities and utilities, which satisfies the living requirements of a person or family”.
Useful surface of a home is defined by Law 114/1996 as “Living room, bedrooms, bathrooms, WC, shower, kitchen, storage and circulation spaces inside the home. It does not include: the surface of loggias and balconies, the thresholds of door openings, passages with openings up to 1.00 m, radiator niches, as well as the surfaces occupied by stoves and bathroom boilers (0.50 sq m for each stove and bath boiler), if the heating is done with stoves; in the case of duplex homes, the ramp, minus the landings, is not included in the usable area of the home”.
Household annexes, according to Law 50/1991, are buildings of a definitive or temporary nature, intended to house specific activities, complementary to the living function, which, by being located in the vicinity of the home, together with it make up a distinct functional unit (including summer kitchens , sheds, warehouses and the like are similarly assimilated the notion of outbuildings and garages, greenhouses, swimming pools and the like).
This article was prepared, for Costaș, Negru & Asociații, by Ms. Clara Dohotar (Bucharest Bar Association).
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