Tax and accounting aspects related to the possession of Real Estate for trade owned by companies. IRES taxation, IRAP, VAT and local taxes. Finally, the correct indication in the financial statements.
Goods of businesses are the goods for the production or exchange of which the business activity is directed.
Companies’ ownership of real estate can lead to various consequences, both in terms of direct taxes and indirect taxes.
Think of the case of a property built by a construction company that it is sold. Or the case of a residential property leased by an industrial company. These are just two examples of the many instances that may concern companies’ possession of the real estate.
In this article, I want to focus my attention on the Goods Properties of the Companies and analyze direct and indirect taxation.
Business property: direct taxes
Real estate for the production or exchange of which the company’s activities are directed constitutes the so-called “Goods Properties“. To this end, the object of the company’s activity is identified based on:
- By laws;
- Alternatively, of the activity actually carried out.
They may therefore constitute “Goods Properties“:
- Buildings constructed or renovated for sale by real estate construction and renovation companies;
- Real estate (land and buildings) purchased for resale by real estate buying and selling companies.
In addition to commodity properties, it is also possible to identify properties that are instrumental by nature and by destination.
Circular 26/E/2016 of the Italian Revenue Agency specified that:
“Instrument for destination have defined those properties whose only use is to be directly used in typical entrepreneurial activities. While the instrumental properties by nature are those not susceptible to a different use”.
Below we are going to analyze the relevance of these properties to determine business income.
Relevance for business income purposes
According to art. 83 of the Consolidated Income Tax Act, real estate properties constructed or purchased for sale by real estate companies participate in the formation of business income according to the results of the Income Statement, through:
- Revenues from sales (item A.1 of the Income Statement);
- Changes in inventories value (items A.2 and B.11 in the Income Statement);
- Income from their rental (item A.5 of the C.E.);
- Construction costs (items B.6, B.7, B.9, etc.).
According to art. 92 of the Italian income tax law, Properties held for trade variations contribute to the Company profit and loss statement. Therefore the items for sale value needs to be evaluated at each year end based on the specific costs associated with the financial statements.
If once completed but still in possession, the Properties are leased to third parties, the related rents (rental income) constitute positive components of the company’s income for the amount shown in the Income Statement (item A.5).
Lease to third parties
The rental to third parties of real estate properties recorded in the warehouse can be configured for the period in which these properties, placed on the market for sale, remain unsold. That is, for the period in which the real estate construction and/or sale company deems it appropriate to suspend the sale to postpone it to a time when market conditions allow for a higher return.
The letting of a building or part of it by an undertaking that has constructed it with a view to selling must be regarded as an act forming part of the undertaking’s own activity (in this case, the construction and sale of buildings). This is, however, only if it forms part of a conservative management plan during the period when the market situation suggests a postponement of the disposal of the property.
This is what is stated in the judgment of the Supreme Court n 6194 of 3.5.2001.
Real Estate for trade of companies: I.R.A.P. profiles
For IRES and I.R.P.E.F. entrepreneurs who have opted to determine the I.R.A.P. taxable base based on the financial statements, the income components (positive and negative) relative to the properties of the goods constructed or purchased for sale by the real estate companies participate in the formation of the net production value according to the results of the Profit and Loss Account (art. 5 of Legislative Decree n. 446/97).
For I.R.P.E.F. entrepreneurs who do not determine the I.R.A.P. taxable base based on the financial statements, the income components (positive and negative) relating to real estate properties constructed or purchased for sale by real estate companies contribute to the formation of the value of net production according to the same provisions applicable to the calculation of business income. This, provided that they are included among the relevant income and charges according to art. 5-bis of Legislative Decree no. 446/97.
Real Estate for trade of Companies: V.A.T. and Indirect Taxes
The notion of Real Estate provided for by direct taxes does not correspond to V.A.T.
Buildings used for production (building firms) or trade (resale firms) may constitute land, residential buildings, or buildings used for business purposes for V.A.T. purposes.
Classification of real estate for V.A.T. purposes
In the V.A.T. context, real estate is classified into:
- Land: divided into a building and non-building land;
- Buildings: distinguished in residential and instrumental, depending on the cadastral category of belonging and regardless of the actual use (Circ. Agenzia Delle Entrate 4.8.2006 n. 27 and Circ. Agenzia Delle Entrate 28.6.2013 n. 22).
Below is a table summarising the types of property for V.A.T. purposes with the relevant regulatory details:
- Disposal of real estate;
- The leasing of real estate.
Table: types of property for V.A.T. purposes in the event of supply or letting
|Type of property for V.A.T. purposes||Cadastral category||Transfer||Lease|
|Building land||– –||Article 2, paragraph 1 of Presidential Decree No. 633/72||Art. 3, paragraph 2, no. 1) of Presidential Decree no. 633/72 (including parking areas)|
|Non-buildable land||– –||Art. 2, paragraph 3, letter c) of Presidential Decree No. 633/72||Art. 3, para. 2, no. 1) of Presidential Decree|
633/72 Art. 10, para. 1, no. 8) of Presidential Decree 633/72 (including areas not used for parking)
|Residential buildings||A excluding A/10||Art. 10, paragraph 1, no. 8-bis) of Presidential Decree 633/72||Article 10, paragraph 1, no. 8) of DPR 633/72|
|Instrumental buildings||A/10, B, C, D and E||Art. 10, paragraph 1, no. 8-ter) of Presidential Decree 633/72||Article 10, paragraph 1, no. 8) of DPR 633/72|
V.A.T. territoriality of transactions relating to business premises
For the V.A.T. territoriality of transactions involving immovable property, the regulatory references vary depending on whether they are supplies of immovable property or services relating to it.
Disposal of company real estate
Real estate properties located in Italy, and disposed of, attract taxation in Italy (art. 7-bis co. 1 of DPR 633/72).
Provision of services relating to business premises
Once again, professional services associated with properties located in Italy follow the Italian rules of taxation (Article 7-quater paragraph 1 letter a) of Presidential Decree 633/72).
Time of execution of transactions relating to immovable property
Also, to identify the time of execution of transactions involving real estate, it is necessary to distinguish between the supply of real estate and services relating to such goods.
Disposal of company real estate
The supply of immovable property shall be deemed to have taken place, as a general rule, and except in cases of advance payment or invoicing, upon the conclusion of the deed entailing the transfer of ownership or the constitution or transfer of rights of use over the property.
Suppose the translative or constitutive effects occur after the stipulation of the deed. In that case, the moment of execution of the transfer of the real estate property occurs when these effects are produced (art. 6 co. 1 of D.P.R. n. 633/72).
There are some special cases, also applicable to real estate, in which the time of the transaction is identified based on specific criteria (Article 6 paragraph 2 of Presidential Decree 633/72).
|Exceptional cases of supply of goods||Time of execution of the transaction|
|Supply of goods by an act of public authority||payment of consideration|
|Transfer of goods from principal to contractor||deed of sale of the asset by the contractor|
|Allocation of goods for the personal or family consumption of the entrepreneur (so-called “external consumption“)||removal of assets|
|Allocations of residential homes to members by housing cooperatives||date of notarization|
Supply of services relating to immovable property
The provision of services relating to real estate is considered performed, as a rule, and except in cases of advance billing, at the time of payment of the consideration (Article 6 paragraph 3 of Presidential Decree 633/72).
Deductibility of V.A.T. paid
To deduct V.A.T. paid on acquiring a good or service, the taxable person must refer to the general rules summarised in the table below.
|Type of purchase of goods or services||Criterion for exercising the V.A.T. deduction|
|Purchase related to the execution of an occasional exempt transaction while carrying out a taxable activity||direct relevance (art. 19 co. 2 of DPR 633/72)|
|Purchase related to the performance of occasional taxable transaction while carrying out an exempt activity||direct relevance (art. 19 co. 2 of Presidential Decree no. 633/72)|
|Mixed-use purchases related to the non-systematic performance of both taxable and exempt transactions||pro-rata (art. 19 co. 4 of Presidential Decree no. 633/72)|
|Mixed-use purchase related to the systematic carrying out of taxable and exempt transactions||pro-rata (Article 19, paragraph 5 of Presidential Decree no. 633/72)|
|Purchase related to the performance of both taxable and exempt activities||pro-rata (article 19, paragraph 5 of Presidential Decree 633/72). Except for the separation of activities (Article 36, paragraph 3 of Presidential Decree 633/72).|
Objective deductibility of V.A.T. on the purchase of residential buildings
There is also a special case of objective non-deductibility applicable to the relevant V.A.T.:
- To the purchase of residential buildings and portions thereof, as well as that relating to
- To the leasing, maintenance, recovery, and management thereof.
On this point, see Article 19-bis1, paragraph 1, letter i) of Presidential Decree 633/72. This limitation does not apply to taxpayers who:
- Their exclusive or principal purpose is the construction of residential buildings and parts thereof;
- They carry out real estate rental activities, exempt under Article 10, paragraph 1, No 8) of Presidential Decree No 633/72. This, if they derive a reduction in the V.A.T. deductibility pro-rata.
In case of objective non-deductibility provided for by art. 19-bis 1, paragraph 1, letter i) of Presidential Decree 633/72 does not apply to residential properties of businesses. The tourist accommodation units fall outside the above mentioned article, deeming the properties instrumental by nature.
Business property: local taxes
Let’s now see how the Properties for trade owned by businesses is treated to pay local taxes related to the ownership of real property.
Unsold goods properties of construction companies – Exemption from IMU
As of 1.1.2014, buildings constructed and intended by the developer for sale (commodity properties) are exempt from IMU. This, as long as such destination remains and they are not, in any case, rented out (art. 2 co. 1 and 2 lett. a) of DL 31.8.2013 n. 102, Conv. L. 28.10.2013 n. 124).
Objective scope of the rule
Given the wording of the rule, the exclusion from IMU and subsequently the exemption appears to be rather broad, and such as to cover:
- Both buildings, portions of buildings or individual building units intended for residential use,
- Both buildings are intended for other uses, such as industrial, craft, commercial, professional, etc., activities, and buildings intended for other uses, such as industrial, craft, commercial, professional, etc.
A characteristic element is that the buildings are offered for sale by the company that built them.
However, the Ministry of Economy and Finance clarified in its Resolution 11.12.2013 no. 11/D.F. that not only the buildings constructed by the construction company that remained unsold and those buildings purchased by the same company and on which incisive recovery works were carried out benefit from the favorable treatment.
In particular, these interventions must be understood as those defined by letters c), d), and f) of art. 3 paragraph 1 of Presidential Decree 380/2001 (Consolidated Law on Construction). That is, respectively:
- The interventions of restoration and renovation;
- The interventions of building restructuring and the interventions of urban restructuring for the definitions of which please refer to the rule mentioned.
The favorable provisions introduced by DL n 102/2013 operate only on the condition that the building:
- Keep it as an asset for sale;
- It’s not leased.
Failure to meet just one of the conditions attracts the item’s taxation.
From a subjective point of view, the companies concerned are first and foremost those who construct buildings for sale by their statutory activities, i.e., ‘ real estate developers‘.
In the hands of such companies, such buildings typically constitute commodity assets, taxed at cost and revenue.
In general, however, the exclusion from the tax should be the responsibility of the builder, i.e., the person who holds the building permit.
The law does not require that the construction company’s main activity be the construction of buildings. Therefore, it is believed that the IMU exemption can be used by any company that has constructed buildings for sale, even as a secondary activity.
Excluded from the benefit are property management companies, i.e., those that purchase finished buildings for sale.
Presentation of the IMU declaration
In order to take advantage of the benefits contained in Article 2 of DL n. 102/2013 and, specifically, the exemption from IMU from 2014 for unsold properties of construction companies, paragraph 5-bis of the same article, introduced during conversion, provides that it must be submitted a special declaration (the model of which was approved by the Ministerial Decree 30.10.2012), under penalty of forfeiture of the benefit itself.
The declaration must be submitted within the ordinary term provided to submit declarations of changes relating to IMU. That is, it must be presented within June 30:
- Of the year following that in which possession of the real estate began
- The year in which the changes relevant to the determination of the tax occurred.
Unsold property of construction companies – T.A.S.I. reliefs
For the T.A.S.I., co. 678 of art. 1 of Law no. 147/2013 provides relief for buildings:
- Constructed and intended by the construction company for sale, for as long as this destination remains;
- That they are not in any case rented.
In these cases, the reduced 0.1% rate applies, allowing the Municipalities to increase it up to 0.25% or decrease it down to zero.
From 1.1.2022, such buildings are exempt from T.A.S.I. (art. 7-bis of DL n 34/2019).