Developers to Get VAT Exemption

VedomostiDevelopers using УgrayФ schemes to sell homes currently donТt pay VAT.

Developers operating under a law regulating shared-equity construction will be exempt from value-added tax, the State Duma has decided. But the construction industry doubts that this will boost legal real estate sales.

A law implemented in 2005 defined the rights of investors in shared-equity construction projects — building projects in which future apartment owners finance the complex's construction. But many companies have developed alternative “gray” schemes that still limit the investors' rights. Developer bankruptcies have caused a number of prospective homebuyers involved in such schemes to lose their money without obtaining housing.

Legislation defining which developers may attract private capital for shared-equity construction has passed a second reading in the Duma. All housing deals that use private capital and create property rights must now be made under the law on shared equity. And as an incentive for developers to operate under the law, they will be exempted from VAT.

Developers selling apartments under “gray” schemes are already exempt from VAT. “VAT is not imposed on housing purchase and sale agreements according to tax legislation,” said Andrei Pankovsky, first deputy general director of DSK-1, a developer.

But companies that sell apartments under the law on shared-equity construction do have to pay VAT. Sistema-Hals pays VAT on the difference between the funds it raises from future homebuyers and its construction costs, said Dmitry Zikanov, the company's vice president. VAT is imposed quarterly on the developer's services, as listed in the shared-equity contract.

“Developers selling apartments under gray schemes are in a better position, because they have direct VAT relief,” said Maxim Kuznechenkov, a partner with Baker & McKenzie. The new legislation will not solve the problem, he said: “VAT relief doesn't cover all money received under the [shared-equity] contract, only the developer's services. But the services are often hard to estimate, and contracts with investors usually don't specify the developer's costs and services.”

The legislation will only allow developers to save on VAT on the margin, said Galina Akchurina of FBK-Pravo. Suppliers will continue to include VAT in the prices for work and materials. Making all costs exempt from VAT would be more fair, Kuznechenkov said, because the taxpayer must have a choice: “Sometimes it's more profitable to get a budget compensation on the 'incoming' VAT on materials and construction work than to use the VAT relief. The proposed relief does not allow us to present incoming VAT for deduction.” Zikanov said the legislation will decrease the total taxation.

No VAT means that developers will be able to cut the real estate prices somewhat, said Alexei Shepel, chairman of the board of directors of S. Holding. “Production costs will decrease for more than just the taxed sum because developers will save on credits, for example,” he said. “Canceling VAT will give the developers an impetus to sell housing on shared-equity contracts,” Pankovsky said.

A bigger boost to legal housing sales is more likely to be provided by the high fees proposed by the bill, said Vasily Sharapov, a deputy department head at developer City-XXI Century. Canceling VAT will lower expenses of private investors, not developers, motivating them to participate in shared-equity construction, he said.

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