Having come into force on 1 October 2014, the new Construction Law significantly changes the construction process, including the procedure for obtaining a building permit.

Unintentionally, it has affected application of VAT to land by accelerating the term for land classification as construction land and thus subject to VAT.

Before 1 October 2014, a building permit could be obtained after

1) issue of planning and architecture task (PAT);
2) acceptance of construction design.

Correspondingly, a building permit was the last document issued by the construction board before launch of construction and guarantee of the right to start construction.

Under the new law, the institution does not issue a PAT, nor does it approve construction design; but it issues only one document – a building permit that includes conditions for design and start of construction. When each condition is met, the institution records a note on the building permit. Only after the building permit contains notes for meeting all conditions and has become non-challengeable may construction start.

The building permit is the first (and only) document received from the institution; it is obtained at a much earlier stage of the construction process (previously – issue of PAT) and as such it does not guarantee the right of immediate start of construction. The maximum term specified in the law for meeting both conditions is six years. Thus, in theory, six years may pass from issuing a construction permit to the actual start of construction. Schematically, it looks like this:

1) Construction under the old law (until 01.10.2014):

2) Construction under the new law (from 01.10.2014):

With the building permit now issued at a much earlier stage of the process, VAT might become applicable to the sale of building land much sooner than planned. In particular, receipt of a building permit for land will now result in VAT consequences on sale of a land plot, even if the reason was to determine the design conditions. Thus, when starting development of land, buying land, or even continuing projects already under way that are affected by the new procedure, it is worthwhile establishing whether planned transactions will become 21% more expensive.

Let us know if you would like to discuss your planned real estate project with SORAINEN tax or real estate team specialists in the light of the new construction process, tax application or other issues.

On 20 March, the International Conference: Real Estate and Construction in the Baltics 2015 will take place. SORAINEN associate Jorens Jaunozols will cover topic “Building permits: an understanding of building construction processes and challenging problems” in the event.

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Useful link: WTS International Taxation of Real Estate Investments, 2014 Survey on Europe, North America, Australia and BRIC countries.