About liability to VAT of residential rooms leased as commercial areas

The ministry harasses entrepreneurs

The changes made in the comments of the VAT Act on the website of the Ministry of Finance from 1 January 2015 have caught attention among the lessors of residential premises as commercial areas. This is aggressive interpretation as to the entrepreneur, attorney-at-law Rait Kaarma states ((Kaarma & Partnerid).

The comments also include that adding of voluntary VAT to the lease of residential rooms is no more possible even in case these residential rooms are leased out and also used as commercial area. The impact of comments of the ministry lies in that by presuming their correctness the lessor cannot ask the VAT paid on the acquisition of the residential rooms and expenses incurred as to them back from the state and VAT cannot be added to the lease of such areas any more. This means that the VAT expenses should be practically covered by the companies.

Such viewpoint of the ministry is in contradiction with VAT as the nature of the consumer tax. The incorrect viewpoint of the ministry is also in contradiction with the objectives of the VAT directive (to avoid maximum VAT accumulation) as well as with so-called content-over-form principle valid in taxation (the residential rooms are practically used as commercial area for the intended purpose). Even more, in case of obscurity tax law standards are not as a rule allowed to be interpreted to the prejudice of the taxpayer resulting from the principles of rule of law. In the given case the Ministry of Finance has turned a blind eye to the current practice and provided impracticable and casuistic interpretation to the prejudice of the taxpayer.

According to understanding of the current tax authority and also lower instances of court practice it was meaningful whether the residential rooms are actually also used as commercial areas. The comment of the ministry ignores this principle. The companies, who have acquired residential premises for taking these into use as commercial areas before the new comments of the VAT act of the Ministry of Finance, i.e. before 2015 and who proceeded from the practice of tax authority and practice, are in an especially difficult situation.

Although the comments of the Ministry of Finance have no force of legal act, the tax authority has started to proceed from these comments. Thus the comments could have negative retroactive impact on the taxpayers which could not be reasonably considered by the companies before 2015.

As the VAT Act has not been changed from 1 January 2015 and the categorically negative comment on the VAT of the lease of residential premises has no legal force, I recommend to remain firm, i.e. to proceed from the dominantly accepted principle in the lower instances of court practice. According to the latter VAT can be added to the lease of the residential rooms if these residential rooms are used as commercial areas.

The Ministry of Finance should explain its activities, as this is a question regarding many companies and activity in contradiction with current practice. Such radical about-turn in interpretation should reach taxpayers not as the comments of the Ministry of Finance, but only through changing the VAT Act.

The article was published in Äripäev on 17 March 2015