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Accommodation service versus lease of an immovable property. How to distinguish them?

So far, the tax authorities and the Ministry of Finance have taken the stand that voluntary taxation of the dwellings with value added tax is not possible under any circumstances; even if an apartment is used as an office. This is due to the fact that according to the Value Added Tax Act (VAT Act) § 16 subsection 2 of section 2 the leasing or letting of immovable is exempt from tax. Voluntarily may be taxed only business premises. This is a general requirement, which is supposed to protect natural persons from additional tax obligation if they are using apartment for living. However, tax-free outcome causes problems to the property developers – in case of exempt from tax, is prohibited deduction of input tax and as a result for example building of the tenement houses will cost 20% more. However, if the output of the company is taxable sales, deduction of the input tax is permitted.

Instead of leasing a real estate developer may provide accommodation service with 9% VAT rate. Here is the problem how to distinguish lease and accommodation service. According to VAT Act section 15 subsection 2 clause 4 VAT rate of 9% imposes for accommodation or accommodation with breakfast. But here a question arises - how to distinguish these two services. What is the difference between lease/letting of an apartment and accommodation service? There are, after all, known cases of persons living in the hotel for many years because it is convenient and sometimes favorable.

By Tourism Act § 17 subsection 2 accommodation service means the offer for sale or sale of sleeping accommodation and goods or services supplementary thereto.

Accommodation service is not deemed to be:

  1. accommodation provided by an undertaking to persons who are in an employment or service relationship with the undertaking, on account of the assets of the undertaking;
  2. accommodation for which a residential lease contract is entered into, except in the cases specified in clause 272 (4) 1) of the Law of Obligations Act;
  3. accommodation, by an educational institution, of persons enrolled or employed at the educational institution;
  4. accommodation in a means of transport used for the provision of transport services for passengers;
  5. accommodation in extraordinary conditions in order to gain an experience (in the wild, in a hut, on a raft, etc.).

Therefore, accommodation which is awarded a contract of tenancy is not considered as accommodation service. However, the same subsection indicates that accommodation service applies to a lease contract of premises of accommodation establishments and premises intended for holidays with a term not exceeding three months. It could be concluded that as long as there is no awarded a contract of tenancy and hosting does not take more than three months, a taxpayer may add 9% VAT on bill for accommodation of quests. However, the tax authorities underline that they are reviewing the nature of the transaction. It is not enough, as accommodation establishments are renewing rental contracts every three months and are making nontaxable rental bills, the tax authorities proceed from the actual economic substance of a transaction.


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