Construction Projects in Exchange for Land
1.8.1. VAT Implementation on Construction Projects in Exchange for Land
Necessary explanations regarding the VAT implementation on construction projects in exchange for land are provided in Section D of the VAT General Communiqué No. 30.
In construction projects in exchange for land, there are two separate transactions. The first is the delivery of land from the landowner to the contractor; the second is the contractor’s delivery of independent units (residences or workplaces) to the landowner in exchange for the land.
In these projects, the taxable event occurs when the contractor delivers independent units such as residences or workplaces to the landowner in exchange for the land. As of this date, the taxable event also occurs for the land. Although the delivery of real estate generally takes place upon registration in the land registry, the taxable event also occurs if the independent units are made available to the buyer before the registration.
Therefore, if the landowner’s land delivery is of a commercial nature, both the landowner and the contractor must issue invoices simultaneously on the date the taxable event occurs for the land and the independent units delivered by the contractor to the landowner.
Accordingly:
- If the land is part of an economic enterprise or if the landowner engages in the buying and selling of land as a regular and continuous activity, VAT at the standard rate must be calculated on the equivalent value (including the land share) of the independent units received in exchange for the land and reflected on the invoice issued for the delivery of the land to the contractor when the taxable event occurs.
- If the landowner delivers the land to the contractor in exchange for independent units as an incidental activity that does not require real taxation, VAT will not be applied.
- When the independent units are delivered by the contractor to the landowner, the contractor must issue an invoice, and VAT at either 1% or 18% must be calculated based on the equivalent value (including the land share) according to the nature of the independent unit.
Additionally, if the transaction price is significantly lower than the equivalent value in both deliveries, the provisions of Article 27/3 of the VAT Law will apply.
1.8.2. Revenue Sharing Arrangements
In practice, under contracts arranged as “revenue sharing” or “income sharing,” the revenue from the independent units constructed is shared instead of the units themselves. These types of contracts should also be considered as “construction in exchange for land” according to the VAT General Communiqué No. 30.
In this context:
- In the sale of independent units to third parties, only the contractor will issue invoices to the third parties on the date the taxable event occurs, and VAT at either 1% or 18% will be calculated and declared based on the total amount shown on the invoice according to the nature of the independent unit.
- If the land is part of an economic enterprise or if the landowner engages in the buying and selling of land as a regular and continuous activity, the landowner must issue a land sales invoice to the contractor for their share of the revenue on the date the taxable event occurs and calculate and declare VAT according to general principles based on the invoice amount. If the land delivery is not subject to VAT or is exempt from VAT, VAT will not be calculated on this delivery.
Source: VALUE ADDED TAX CIRCULAR/60
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