VAT Refund on an Apartment Purchase: What Is Possible and What Is a Myth

Why an individual cannot recover VAT

VAT is an indirect tax. It is built into the price and passes along the chain from supplier to supplier, and only those who are themselves payers of this tax and use the purchase in taxable activity are entitled to recover it.

A citizen buying an apartment to live in remains the final link in the chain: they pay the tax as part of the price but do not participate in the VAT system, do not file VAT returns and have no input tax that could be credited. That is why a VAT refund on an apartment purchase by an individual does not exist as a separate procedure.

What a VAT refund on an apartment is confused with

Most often, people mean exemptions and deductions under personal income tax, which in some cases are available on buying housing and paying mortgage interest. That is a fundamentally different tax and a different procedure.

The second frequent mix-up is with support programmes and subsidies for home buyers. They have nothing to do with VAT either, although in everyday conversation all refunds from the budget are often called by the same word.

• deductions and exemptions under personal income tax
• state support programmes for home purchases
• recalculations of mortgage interest
• refunds of overpaid tax unrelated to VAT

When a company buys the apartment

Here a discussion of VAT becomes meaningful, but with caveats. An organization that is a VAT payer can consider crediting input VAT on acquired real estate only if the property is used in taxable activity.

If the apartment is acquired for VAT-exempt operations or for purposes unrelated to the business, no right to credit the input tax arises. This is what inspectors' claims are most often built on: the transaction was completed, the tax was claimed, but the actual use of the property does not match the stated purpose.

What determines the fate of input VAT on real estate

The key question is the actual purpose of the property, not the wording in the contract. The inspector looks at how the property is recorded in the books, who uses it, whether it generates income and whether that income is taxable.

The second factor is the seller's status and the nature of the transaction. The sale of residential and of commercial property may be subject to different tax regimes, and this determines whether there is any input tax that could be claimed at all.

• actual use of the property in taxable activity
• the seller's tax status and a properly issued invoice
• how the property is recorded in the books and its initial cost
• whether the buyer has exempt operations requiring the tax to be apportioned
• a subsequent change in the property's purpose

Typical mistakes in housing transactions

The first mistake is claiming input VAT on an apartment registered to the company but actually used by the director or employees as a home. Such a structure almost always raises questions and ends with the amount being disallowed.

The second is failing to account for a change in the property's purpose. If the property was first used in taxable activity and then ceased to be, the tax previously claimed may need to be adjusted.

The third is relying on verbal advice and «what everyone does». The taxation of real estate transactions is set by tax legislation and is revised from time to time, so decisions should be made on the basis of the current version, not last year's experience of acquaintances.

How to work out your situation

If you are an individual, start by framing the question correctly: most likely you need not VAT but personal income tax exemptions — and here it is important to understand whether you meet the conditions and what documents are needed.

If a company is buying the apartment, the analysis revolves around the purpose of the acquisition and the planned use. We review the contract, the seller's documents and the planned accounting treatment, and assess in advance which position will be defensible in an audit.

Leader Audit is an audit organization; over 13 years of practice we have helped clients recover more than UZS 200 billion of VAT — and that is partly why we prefer to say honestly when a refund is impossible, rather than create expectations.