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The sale of immovable property in Malta is treated as exempt (without credit), meaning no VAT becomes chargeable on the supply thereof and consequently no input VAT may be recovered on expenses connected therewith.

Below, is a classical scenario prepared for the purposes of highlighting pertinent VAT considerations applicable to the property sector.

Background Information

Mr. X has identified a plot of land in Malta with a view to developing it (through his limited liability company “Malta Co”), into residential apartments, offices, and other commercial establishments for rental purposes.

VAT Analysis on the intended Supplies/Supplies made by Malta Co

In the scenario under review, given that Malta Co will be leasing out immovable property, reference has to be made to the Item 1 of Part Two to the Fifth Schedule of the Malta VAT Act. As a general rule, the letting of immovable property is treated as exempt without credit. Therefore, in principle, any taxable person renting out immovable property will not charge Malta VAT and will not have a right to recover input VAT.

However, there are instances where the letting of immovable property will be treated as taxable, meaning that Malta VAT will be chargeable on the lease which in principle gives the lessor an entitlement to recover input VAT incurred in the provision of such supplies (to the extent not blocked in terms of the 10th Schedule to the VAT Act).

Letting of residential apartments

The letting of or the provision of accommodation in any premises which for the purposes of the said letting or accommodation is required to be licensed by virtue of the Malta Travel and Tourism Services Act (“MTTS”), or any Act which may be substituted therefor or in a holiday camp or camping site is treated as taxable and Malta VAT at the rate of 7% is charged.

Since the correct VAT treatment of the letting/provision of accommodation in any premises is dependent on the MTTS licensing requirement, it is pertinent to know under which circumstances this requirement arises.

In terms of the provisions laid down in MTTS, a licence is required when providing accommodation in a house to tourists. The definition of a ‘Tourist’ refers to any person who is travelling and staying in place outside his/her usual environment for not more than one consecutive year for leisure, business, and other personal purposes, other than taking up employment or to establish a business in the place visited.

Therefore, to the extent that the above-mentioned criteria have been satisfied, then Malta VAT at the rate of 7% should be charged on the lease of the residential apartments. Otherwise, the lease would be treated as exempt (without credit).

Letting of offices and other commercial establishments

The letting of property by a limited liability company to a person registered under article 10 for the purpose of the economic activity of that other person, is treated as taxable and Malta VAT at 18% will be due on the transaction.

Therefore, the rental of immovable property by Malta Co to tenants registered for VAT purposes under Article 10 of the Malta VAT Act, which tenants will use the property for their business activity, (whether they will be used as offices or for commercial purposes), would render the transaction as taxable for VAT purposes.

Input VAT Recovery on the costs incurred for the Development and Construction

Let’s say Malta Co had identified a number of sub-contractors to develop and construct the building, the supplies rendered by the sub-contractors will be taxable and therefore, Malta VAT will be charged to Malta Co on the contract of works.

In principle, the VAT charged by the sub-contractors would be fully refundable by Malta Co, to the extent that their intended supplies will be treated as taxable. This is why it is essential to determine the VAT treatment of the supplies made by the Company or in this case, the intended supplies, as this would have a bearing on the recovery of input VAT.

Given that the input VAT incurred by Malta Co will be significant, Malta Co could end up with a serious cash flow problem. However, potentially, this problem can be addressed by making an application, referred to as the ‘Tax in Danger’ application, to the Commissioner for Revenue in terms of Part Five of the Fourteenth Schedule to the Malta VAT Act.

Basically, the Tax in Danger provision, empowers the Commissioner to, with regard to any contract of supply and subject to meeting certain conditions (such as the contract between the two parties is in excess of €70,000 and the customer has a right to deduct input VAT), by notice in writing to the parties to the contract, direct that the person to whom the supply is made shall be deemed to have made that supply to himself. It means that the supplier or suppliers making the supplies indicated in the contract/s of supply shall not charge VAT on such supplies, whilst the customer is required to self-charge VAT on the supplies and simultaneously deduct the VAT so self-charged as his input VAT. Therefore, by application of the above, the Malta Co would have eliminated the cash flow problem, had the input VAT deduction been made under the normal VAT rules.

How Can We Help?

Contact us if you require assistance with the VAT treatment of transactions connected with immovable property.

Please feel free to contact Brandon Gatt on: bg@zampadebattista.com

Brandon Gatt

VAT Leader

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