Company formation and accounting in Latvia
Last updated: 2017-01-07
Meaning of unused immovable property is important for correct application of the value added tax in transactions with immovable property.

What is an unused immovable property?

According to Latvian Value Added Tax law unused immovable property is:
  • The newly constructed building or structure (also installed stationary equipment in the building or structure) or part of it, if the building or structure is not used after put into operation.
  • The newly constructed building or structure (also installed stationary equipment in the building or structure) or part of it, if the building or structure is used and first time sold during a year after put into operation.
  • Building or structure or part of it, if the building or structure is not used after completed renovation, reconstruction or restoration.
  • Building or structure or part of it, if the building or structure is used and first time sold during a year after completed renovation, reconstruction or restoration.
  • An object of unfinished construction or part of such object - building or structure or part of it, if the building or structure is not put into operation.
  • A building or structure or part of it, if the building or structure is in process of renovation, reconstruction or restoration and the building or structure is not put into operation.
    According to explanations of the Finance minister, if a VAT payer started renovation, reconstruction or restoration of a building or structure and before put into operation the VAT payer has sold the immovable property, then such sale is subject to VAT. In such case it is not important how much time passed after start of renovation / reconstruction / restoration.
Land or part of land that is connected with an unused building or structure, also is deemed an unused immovable property and subject to VAT.

Renovation, reconstruction, restoration.

According to point 4., 9. and 10 of article 1 of the Construction law:
  • Renovation of a building is a construction process to change worn bearing elements of a building or makes functional and technical improvements, without changing the volume of the building or the carrying capacity of bearing elements.
  • Reconstruction of a building is a construction process to change the volume of the building (part of building) or strengthened bearing elements or constructions, with or without change of a type of use.
  • Restoration of a building is is a construction process that is performed for a science-based recovery (rebuilding) of the building or part of it, using materials, methods or techniques relevant to original.

Value added tax in transactions with unused immovable property.

Sale of unused immovable property is subject to value added tax at the rate of 21%.
Sale of immovable property is a transaction where property owner transfers ownership of the property to another person, so that the another person can use the property.
Click here to read more information about application of VAT in transactions with immovable property.

Calculation of proportion.

There may be cases where only a part of the sold property is considered as unused immovable property.
For example taxpayer purchased a land, on which is located small building, that needs minor cosmetic repairs. The taxpayer repaired the old building and also on the land has build a new, large building. In case of sale of the both buildings and the land only part of the price for the property is subject to VAT.

According to part 4 of article 37 of the Value added tax law, to determine the taxable amount, must calculate the proportion of unused real estate against the whole real estate.
The law does not specify the criteria by which must calculate the proportion.
Therefore, the taxpayer must calculate the proportion so that the calculation could be logically justified, explained (rationalized) for the State Revenue Service. The proportion can be calculated, for example, on the basis of area or cadastral value.

Independent object of immovable property and cadastral object.

According to article 968 of the Civil Law, a building, built on land and closely connected with the land, is considered part of the land.
But there are some exceptions. For example, a building is deemed as independent object of immovable property, if:
  • the building is built on leased land and
  • term of a lease agreement of not less than 10 years, and
  • according to the agreement the lessee has the right to build a building as independent immovable property.
According to article 6 of the National Real Estate Cadastre Law, an object of immovable property is land, building or set of land and buildings, for which in the land register is opened (exists) independent (separate) compartment.

According to point 6 of article 1 of the National Real Estate Cadastre Law, independent cadastral object is in the information system of national register of immovable properties registered:
  • an immovable property as set of property objects, as well as
  • unit of a land,
  • a building,
  • group of premises (rooms),
  • part of unit of a land (territory of a land, that is not and independent object of an immovable property).

Reports to the tax authority.

After the purchase of an immovable property a VAT payer, according to part 7 and 8. of article 99 of the VAT law, must submit the annex to the VAT declaration - the report about the use of the property. The report must specify the cadastral number and cadastral designation of the property, the purchase date, the total amount of VAT and the VAT amount that the taxpayer has deducted as input tax (decreased payable VAT or increased overpaid VAT).

According with part 1 of article 102 of the VAT law, VAT payer within 10 years after the purchase of an immovable property, every year until 01 May submits to the tax authority the annual declaration, where the tax payer calculates the proportion of input VAT according to the use of the immovable property.

If during 10 years after purchase of an immovable property, VAT payer sells the property and at the time of sale it is not deemed as unused immovable property, then the VAT payer also submits a special report to the State Revenue Service.



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