How to transfer real estate to your own company without VAT

We sometimes have to deal with situations in which a transfer of real estate to a related legal entity needs to be structured correctly. Today we have prepared a practical note, because documenting such a transfer in the wrong way can have serious consequences: an additional assessment of VAT, penalties, and protracted tax disputes.

What the tax authorities look at

Where property is transferred between related parties, for example from a parent company to a subsidiary, the tax authority often treats the transfer as one made for no consideration. A transfer of that kind is, as a rule, subject to VAT.

The legislation, however, provides an important exception: if the transfer is in the nature of an investment, it is not treated as a supply and is not subject to VAT (subparagraph 1 of paragraph 2 of Article 146 of the Tax Code).

How to structure the transaction correctly

1. Document the transfer as a contribution to the assets of the company, and not as a sale or a gift. The law on limited liability companies allows this (Article 27 of Federal Law No. 14-FZ). The charter capital is not increased, and the participants' shares do not change.

2. Record the business purpose of the transfer. Examples are the development of a new production facility, an increase in net assets, or the carrying out of an investment project.

3. Conclude an investment agreement. The agreement should state that the property is transferred as part of an investment project, and should set out the terms on which profit is received, for example a share of future income.

4. Collect evidence that the transaction is in the nature of an investment:

• minutes of meetings of the participants;

• reports valuing the property;

• transfer and acceptance acts;

• a plan for carrying out the project;

• evidence that the property is being used (photographs, video, inspection reports, and contracts with contractors and with organisations that supply utilities).

5. Do not be afraid of the parties being related, but be ready to justify that relationship. The mere fact that the parties are affiliated does not mean that the transaction is a sham. It is important, however, to show that the transfer of the property has a reasonable economic purpose, and is not aimed at extracting assets or at obtaining an unjustified tax benefit.

In short: in order to avoid an additional assessment of VAT on a transfer of real estate between related legal entities, the investment character of the transaction must be recorded clearly, a corresponding agreement must be prepared, and every stage must be supported by documents.

If you are at the stage of planning such a transfer, it is better to discuss the structure of the transaction with professionals in advance. That costs less, and causes less trouble, than having to defend it in court afterwards.

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