VAT refund is a major issue for any business requiring investment in real estate 's e.g., for building own office or warehouse, developing premises for rent, etc. Quite often construction lasts many months, if not longer, and generates a stack of invoices with massive value-added taxes that cannot be set off against output VAT (VAT generated by sales of a particular business) since sales are significantly lower than investment volumes.
In such instances it is crucial that VAT is refunded in a timely manner since a business may experience cash flow problems, an increase in project financing costs, etc.
In our recent experience we have encountered several cases when Latvian tax authorities in fact do not share the view of many VAT-refund applicants that large investments in construction require prompt VAT refund. In several cases, in fact, tax authorities have denied VAT-refund applications.
Just a month ago our firm began assisting a company in appealing a denial of a VAT refund. Thankfully, the appeal was successful within the tax authorities' own appeal procedure, and we were not forced to take the issue to court.
Briefly we would like to outline the main lessons learned in this dispute, in which the company was erecting a warehouse to be rented out and requested a refund for VAT paid in the construction process.
A key rule says that VAT paid for services or goods that are purchased to create other VAT-taxable services or goods is deductible. What's more, the standard term for a refund is 30 days. It is possible that tax authorities can claim that VAT-taxable services or goods (e.g., rent) are not provided during the construction process, or that VAT-taxable service/goods that are to be created somewhere in the future are not good enough excuses for a prompt VAT refund.
First, the Latvian VAT regulatory framework does not provide grounds for denial of refund with input VAT paid for construction.
Second, Latvian laws are based on EU directives that do not discriminate among businesses that are investing and paying significant input VAT prior to actually producing VAT-taxable services/goods themselves.
Third, the European Court of Justice has held in the "classic" case of Rompelman that VAT as a business burden should be neutral and that adhering to the opinion that economic activity is not taking place prior to actual exploitation of the real estate would be contrary to VAT principles.
Edgars Koskins is senior associate at Sorainen.