Subjection of financial leasing of real estate to VAT following a tax election request
According to Article 22 par. 1 case (kst’) of Law 2859/2000 (VAT Code), real estate leases are exempt from VAT, except for those under case (d’) of paragraph 2 of Article 8, which include i) the lease of industrial premises and safe deposit boxes and ii) the lease of premises for the exercise of a business activity (commercial leases) under certain conditions.
In particular, Article 8 par. 2 case (d) subcase (ii) of the VAT Code provides that the lease of premises for the exercise of a business activity to a taxable lessee, either independently or under a mixed contract, is considered a supply of services (and therefore subject to VAT) if the lessor so elects and for this purpose submits an application for a tax election to the Tax Administration.
Until recently, such request for a tax election could be submitted either before the first use of the property or within thirty (30) days from the beginning of the fiscal period, in case the election was made at a later time, and was effective from the beginning of the fiscal period.
However, pursuant to a recent amendment to the relevant provision of Article 8 para. 2 case (d) subcase (ii) of the VAT Code, which came into effect by virtue of Article 30 of Law 5024/2023 and is effective from the publication of the law in the Government Gazette, i.e. from 24/02/2023, the application for a tax election can now be submitted either before the commencement of the use of the property or after the commencement, at any time. However, if the application is submitted after the commencement of the use of the property, the tax election will apply from the next tax period.
The tax election may relate to all or part of the property and the application shall specify the premises for which the tax election is made.
The tax election may be revoked by submitting an application to the Tax Administration. Similarly to above, under the new provision, the revocation may be submitted at any time and is effective from the next tax period.
Circular POL. 1180/2013 clarified the possibility to opt for taxation of all commercial leases.
A “commercial lease” is considered to be any lease of real estate for the exercise of an economic activity by a lessee subject to VAT. The tax election is made by a taxable person subject to the standard VAT regime. Consequently, the tax election request must be accompanied by a declaration of commencement of a taxable business activity or a declaration of change, as the case may be, in order to meet this condition, if it is not already met.
Operators of real estate property who lease it to other businesses for the purpose of carrying out their economic activity of supplying goods or services are entitled to opt for taxation. An “operator” of real estate is considered to be both the person who has ownership of the real estate and any person who has a right to exploit it in any way (e.g. under a subleasing, usufruct right, etc.). Where the owner or operator of the property grants the right of exploitation to another person, both of them may have the right to opt for taxation, one independently from the other.
It should be noted that the law gives the tax election right for transactions which are classified as ‘lease of immovable property’ and does not affect cases of transactions which are compulsorily taxable.
In the event that a tax election request is submitted, the taxable person is entitled to deduct the VAT on the inputs (expenses) with which he has been charged, e.g. for the construction or maintenance of the property for which the tax election has been exercised, as well as any input VAT related to the property in question, provided of course that the general conditions for the deduction of input VAT under Articles 30, 31, 32 and 33 of the VAT Code are met.
It should be noted that, according to Article 33 par. 2 of the VAT Code, for properties for which a tax election is made, the tax deducted is monitored/settled for a period of 10 years starting from the year of use (i.e. the beginning of the lease), for 1/10 each year.
Based on the above legal framework, the financial leasing of real estate, as any lease of real estate (except for the lease of industrial premises and safe deposit boxes), is in principle exempt from VAT, as follows from the law and has been further clarified by Circular POL 1160/1999.
However, according to the provisions on the tax election for commercial leases, the financial leasing of real estate may be subject to VAT upon a tax election request in accordance with the relevant VAT provisions, since, on the one hand, the law does not exclude the case of financial leasing from the application of the tax election rules for commercial leases and, on the other hand, the specific conditions set for all commercial leases may be equally fulfilled in the case of financial leasing. In particular:
- The law allows the tax election for all commercial leases of real estate, i.e. leases for the exercise of economic activity by a lessee subject to VAT. Therefore, as long as the lessee of a financial leasing is subject to VAT and further uses the property to carry out aneconomic activity subject to VAT (such as, but not limited to, the supply of goods or services subject to VAT, including the subleasing of the property with VAT following a relevant tax election request), he may be subject to the tax election regime. The lessor of the financial leasing has the right to opt for the taxation of the lease as he is the operator of the property and provided he is a taxable person subject to the standard VAT regime. If this condition is not already fulfilled, the tax election request must be accompanied by a declaration of change in order to declare the inclusion in the standard VAT regime.
Once the lessor submits a tax election request, he will be entitled to a deduction or refund of any input VAT charged on the purchase/construction of the property for which the tax election has been exercised, as well as any input VAT related to the property. The input VAT on the purchase/construction etc. that has been deducted or refunded must be monitored for 10 years (settlement period) from the date the property is put into use (i.e., from the date the financial lease commences), for 1/10th each year.
* The information is accurate to the best of our knowledge as at the time of writing. We have no obligation to update it. We accept no responsibility against any third party who is not a client of the firm and has not signed the terms of our engagement.