According to the General Directorate for National Roads and Motorways, 200 km of expressways and 50 km of motorways were expected to be completed in 2023. For new roads to be built, the State Treasury must acquire ownership of the land for their construction. This is accomplished through an expropriation decision, which compensates the current landowner for the loss of ownership. This raises the question of what tax liabilities arise from receiving expropriation compensation.
If the landowner is an individual, compensation for expropriation will typically be tax exempt. This exemption will only apply if the land was acquired two years before the expropriation proceedings were initiated for a price lower than 50% of the compensation. If the acquisition occurred more than two years before the expropriation proceedings, but the price represented more than 50% of the compensation, or if it represented less than 50% of the compensation but was acquired more than two years ago, the compensation amount will be tax exempt.
Corporate income tax payers will not benefit from a similar preference. The remuneration received will be subject to income tax (except when compensation is paid pursuant to the provisions of the Act of August 11, 2001, on special rules for the reconstruction, renovation, and demolition of buildings destroyed or damaged by natural disasters – in which case it will be exempt from tax under the same rules as compensation for the expropriation of an individual).
But what about VAT?
The Court of Justice of the European Union issued a ruling on this matter on 11 July 2024 (reference number C-182/23).
The case involved a farmer who was an active VAT payer. In 2017, he was expropriated for compensation from part of his land (expropriation for the construction of a public road). He became unsure whether he was acting as an entrepreneur or as a non-VAT payer in the expropriation. In response to the inquiry, the Director of the National Tax Information Service issued a tax ruling in which he ruled that the entity acting as a VAT payer in the expropriation of agricultural property was acting as a VAT payer.
Following an appeal against the ruling, the Provincial Administrative Court overturned it. However, the tax authority filed a cassation appeal, arguing that since the owner, an active VAT payer, used the property for taxable activities, he was also a VAT payer in the expropriation of the property.
In order to resolve the case, the Supreme Administrative Court submitted a question for a preliminary ruling to the Court of Justice of the European Union.
The CJEU's previous case law indicates that, in a similar situation, in order to consider a farmer a VAT payer for the sale of agricultural real estate, it must be demonstrated that he engages in real estate transactions like a professional trader. However, he cannot be considered a VAT payer solely because of a change in the intended use of the land, which occurred independently of his will (see judgment of 15 September 2011 in joined cases C 180/10 and C 181/10).
In the case at hand, however, the Court found that since the expropriated property was part of the business's assets, the former owner should be considered a VAT payer in this regard, even if he does not conduct any real estate business and has not taken any steps to do so. At the same time, the Court noted that if the property in question was not used for business purposes, then VAT regulations would not apply to the consideration received.
In summary, when it comes to VAT on the expropriation of real estate, the use of the property by the expropriated entity is crucial. If the property was used for business purposes, then the compensation will be subject to VAT. However, if the expropriated entity is a non-business entity or the property was not used for such purposes, then they will not be considered a VAT payer.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of August 2, 2024
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