Immovables taxed with VAT

TALLINN - As part of efforts to align Estonia with the European Union, land sales will for the first time be subject to 18 percent value added tax from next year.

Under a new VAT act real estate developers will be able to deduct the cost of their investments from their tax bill but for the first time will have to pay VAT on property they sell. The overall effect will be for property prices to rise, say analysts.

The law, which was enacted on July 13 and comes into force on Jan. 1, 2002, for the first time makes real estate sales, like sales of other goods, subject to VAT.

It is one of a number of ways in which Estonia is watering down liberal fiscal policies to make itself acceptable to the EU.

Houses and apartments constructed in order to sell, as well as land under such houses when they are sold to a first buyer and plots of land on which no structure stands will be subject to VAT.

Jurgen Ligi, member of the Parliament's finance committee, said the act would rationalize the imposition of VAT, an area which has been clouded with uncertainty, for example on whether VAT should be levied on rent payments.

The new act was not drawn up with a view to increasing the state budget, he said. Neither Ligi nor officials from the Ministry of Finance could give an estimate of how much additional revenue the new taxation would bring the state.

Tonis Ruutel, managing director of the Association of Real Estate Companies of Estonia, was skeptical whether the new VAT law would be any more rational than the old one. "This is a big uncooked thing," he said. "The act is very badly prepared. It is hard for lawyers to understand it."

The changes would particularly hit Estonia's newly emerged middle class, which had taken advantage of low loan rates to improve their living conditions, he said.

The biggest flaw in the new law is that developers who built a house prior to its introduction will have to pay VAT both on their investment in their property up to the end of 2001 and then on the money they get for selling the house.

Ulmre called for a transition period to be introduced for those who started construction work before the act came into force.

Urmas Laur, head of the real estate company Kodumajagrupp, said he was at a loss as to how to understand the new law. Imposing 18 percent VAT on land sales would be a blow for the real estate market, he added.

"These kind of changes should be published at least a year before they come into force," he said.

Veljo Kuusk, member of the board of real estate developer Arco Vara, said that the announcement should have been made at least three to five years ago, before developers had got established. The average developers' profit margin of 5 percent is too low for some of the tax no to be passed on to clients, he said. He echoed the complaints of others that much remains unclear about the act.