Do Apartment Ownerships In Estonia Constitute An Enterprise?

The Estonian Tax and Customs Board sometimes seems to use unlawful measures to limit the taxpayer’s right to deduct value added tax (VAT), report Law Firm LEXTAL attorney-at-law Ants Karu and lawyer Margus Reiland.

Obligation to pay VAT usually lies with the seller of goods (e.g. apartment ownerships or immovables). As a general rule the (VAT registered) buyer of those goods has in turn the right to deduct input VAT in cases where it uses the purchased goods to create VAT liable goods or services. This means that the buyer does not generally bear any real tax burden.

However, there are situations where the buyer pays the price (including VAT) demanded under the contract, but the seller does not pay VAT to the state. In these cases the buyer must keep in mind that the Estonian tax authority has a strong interest in limiting the buyer’s right to deduct input VAT.

According to the logic of VAT, the buyer’s right to deduct input VAT should not depend on whether or not the seller pays VAT to the state (this principle does not apply in exceptional cases, such as tax fraud or when the buyer has not been diligent).

However, the Estonian tax authority has recently made several attempts to limit the buyer’s right of input VAT deduction using rather creative measures. This generates a substantial tax risk for the buyer. According to the recent decision of the Estonian Supreme Court the Estonian tax authority’s conduct in limiting the right of VAT deduction hat not always been lawful, as we shall explore.

The Supreme Court decided in favour of the taxpayer

The main question of this dispute was whether a group of apartment ownerships acquired by the buyer constituted as a transfer of enterprise. Pursuant to the Value Added Tax Act, the sales transaction of apartment ownerships may be taxable with VAT, but in cases of transfer of enterprise no supply will arise, as a result of which the purchaser has no right to deduct input VAT. The Estonian tax authority was of the opinion that the buyer acquired an enterprise instead of apartment ownerships and the buyer disputed this opinion in court.

The buyer claimed that empty flats do not constitute as an independent enterprise. An enterprise is an economic entity consisting of things, rights and obligations (e.g. workers) and is able to function independently. For example, a factory is considered to be a typical enterprise because it consists of staff, equipment, trademarks and know-how. The Supreme Court agreed with the taxpayer’s arguments. A group of apartment ownerships are simply a body of things, which do not constitute an independent functioning economic entity, that is to say an enterprise.

Summary

The mentioned case may be considered a significant victory for those taxpayers who deal with the buying and selling of apartment ownerships, immovables and similar. The Estonian tax authority’s overly aggressive conduct in limiting the right to deduct input VAT may be unlawful in some cases and should thus be revised.

The authors of this article represented the taxpayer in the referred tax dispute.

Authors:
Ants Karu, attorney-at-law, Law Firm LEXTAL
Margus Reiland, lawyer, Law Firm LEXTAL

www.lextal.ee

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Bubbles And Bubble Remnants In The Estonian Real Estate Market

The time has come when talk of a rising real estate market is again on the agenda, and so it is perhaps fitting to have a little retrospective in order to understand what really happened in the Estonian real estate bubble, writes Tõnu Toompark on his adaur blog.

Let’s imagine that the bubble is a region of gas which is enclosed in liquid, and this surface tension keeps it under pressure, Tõnu explains. Experts believe that bubbles burst when they become irritated sufficiently.

They only bubbles which, in 99.9 per cent of cases, don’t burst are chat bubbles, says Tõnu. All other bubbles either empty with a slow hiss, or burst dramatically. The strength of the ‘pop’ depends on the activity of outside factors.

A real estate bubble is usually fuelled by speculative purchases from two main groups, says Tõnu. The first groups speculates on property in the short term, keeping it for a time before reselling (in the best case scenario with improvements made!) if banks’ intrest rates are enticing enough.

The second group, he goes on, treat their investments as something more like a cash machine, using the proceeds of a sale of real estate for reinvesting in a bigger project. There was a high degree of confidence during the last bubble that “nothing will happen to me” or that the bubble is so strong that it won’t ever burst, Tõnu says.

It can be argued from the statistics that the volume of this type of transaction made up a quarter of the total of real esate transactions. Money was readily available for investors, even for those whose primary activity was anything but real estate. Changes in the volume of real estate ownership could be used as a benchmark of success, Tõnu goes on.

Anyone can pop a soap buble by poking it. “Investors” enetering the market, naturally with the banks’ help, led us to the situation in 2007 when it was suddenly realised that the ‘surface tension’ of the bubble was so great that the time when the air started to come out of the bubble was imminent, writes Tõnu. The surface tension of the bubbe was now so thin that all the taps were immediately shut off, and for the last time.

Naturally, adverse criticism should be aimed not only at the banks but also at the government, where politicians continue to be populist in the run up to an election, and stressed the right of everyone to be a home owner particularly aggressively.

The net result was that all these dogmas were suddenly refuted, resulting in viable projects being halted and prices starting a steep decline. Thus there was a huge disappointment. Those who realised what the true nature of the bubble was started to sell all they could. Those who did not realise its true nature subsequently often went under.

But as with each ebb (read: bubble) comes a flow, every increase also leads to another bubble. Real estate agents are already advertising the advent of all types of investors. Thus it can be said that the only bubbles which are not prone to bursting are conversation bubbles!

The original article (in Estonian) can be viewed here.

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UK-style Tallinn property agency Goodson & Red doubles in size

Hope you don’t mind us bragging a bit about some thrilling developments our company is going through.

It is an exciting time for Goodson & Red Tallinn property consultants and managers as the company expands to include four highly experienced team members, doubling in size, making us ready and eager to bring a fresh approach and set new standards for our industry.

We are therefore delighted to welcome Andrew Whyte, Kati Lips, Erki Kommussaar and Tuuli Edur on board. At Goodson & Red we embrace change and are constantly challenging tradition, because we have a strong desire to improve the way our industry operates. With Andrew, Kati, Tuuli and Erki we are laying the cornerstone for building up even stronger buying, selling, and investment advisory services, as well as property brokerage services for sellers. Additionally, we believe the synergy with our existing letting and management team will prove to be priceless.

Kati, Tuuli, Erki and Andrew have over 30 years combined comprehensive experience in property buying, selling, letting and rental advisory and brokerage services. Kati Lips has been working in the real estate field since 2000. At Ober-Haus, one of the biggest real estate companies in Estonia and part of the Realia Group, she built up an impressive array of letting advisory and rental brokerage services and later became a leading selling advisor and agent. Tuuli Edur started in real estate about 13 years ago (including 9 years with Rime, another leading property agent in Estonia). During her years at Rime and Ober-Haus she was recognized by both companies as the top performing agent many times, and has found her niche as a specialist and leading selling advisor and agent for new homes, developments, land and houses. Erki Kommussaar has specialised as a selling advisor and agent, and focused on new homes, developments and distressed properties at Ober-Haus . He has been working closely with the banks to help banks’ clients to sell their properties. Andrew Whyte joined Goodson and Red in 2010 with the remit of building and fostering partnerships with UK and other overseas agencies and acting a broker for UK and other property investors. He is also responsible for updating the Tallinn Property blog and English language aspects of our website. He is a UK national with several years’ experience in property investment. Overall, our team knows everything there is to know about property in central Tallinn.

Through more than eight years of consistency in one of the most active property markets in Eastern Europe, the joint UK-Estonian venture of Goodson & Red Property Consultancy (former RED Group Apartments) has developed an enviable reputation for in-depth market knowledge, expert, and considerate personal service. Although Goodson & Red is a full service property agency, in Tallinn and throughout the whole of Estonia we are widely regarded as the market leader in our niche of the property market: serviced short-lets, mid- and long-term rentals, management services, home search, as well as buy-to-let consultancy. Currently Goodson & Red has almost 100 apartments under management.

Goodson and Red seeks to set the benchmark by which other property agents in Estonia will measure themselves, in terms of vision, quality of service, clarity and honesty.

You can meet our new property consultants Andrew Whyte, Kati Lips, Tuuli Edur and Erki Kommussaar at Goodson & Red Property Consultancy site.

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Tallinn Real Estate Market Report December 2010

To wrap-up 2010 and look ahead to 2011, please don’t hesitate to check our latest Tallinn Property and Rental Market Quarterly Review.

As always our review contains an in-depth look at the Tallinn residential market, the situation regarding mortgage loans, information on average asking and transactional prices, the current state of the central Tallinn rental market, and also offers invaluable sample transactions and advice on rental business considerations.

You can find the full report at: http://www.goodsonandred.com/sharedfolder/tallinn-property-market/marketreview-tallinn-real-estate-q4-2010_web151210.pdf

We would very much like to hear your views regarding the Tallinn or Estonian property market. Furthermore, if you have any suggestions regarding topics, please do not hesitate to leave your comment or tweet us, or write on our wall.

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Ten Tips Which Landlords Should Keep In Mind

Why invest in Tallinn and not another European city, particularly in the former Eastern bloc? Well, now is a very good time to consider investing here. Prices are at around a five year low and the rental market is buoyant. Furthermore Tallinn will be European Capital of Culture in 2011, undoubtedly bringing with it a rise in already-high levels of tourism and associated businesses, and Estonia routinely scores higher in corruption indices than its baltic neighbours, for example. Furthermore Estonia joins the Euro zone on January 1, 2011.

But more than all this, the buying process here is quite simple in comparison with some other countries. For instance, it is not necessary for both parties in a transaction, the buyer and the seller, to find their own solicitor and to suffer the inevitable delays, not to mention cost, of paperwork and procedures during this stressful time. Here in Estonia the process is very transparent and it is sufficient for both parties, upon agreeing a sale, to make their way to one of the many competent notaries, who will carry out all the necessary procedures. This takes place with both parties present (together with a sworn translator where necessary) in a short space of time and for a very reasonable fee (including the standard state fee).

Nevertheless, many people become a ‘landlord’ with little knowledge of the realities of what the process involves. Maybe they are moving out of their former home or part time home, but wish to retain it and let it out. Or maybe they invested in property at the height of the boom here in Tallinn. Or perhaps they came by a property through family connections. Whatever the case, a lack of knowledge about being a landlord can lead to such unwanted scenarios as unexpected expenses, void periods or problem tenants.

To help you avoid any of these undesirable situations, here are some important pieces of advice that we will give to any aspiring, or existing, landlord!

  1. Be prepared to be flexible in rental prices. Sometimes a happy situation will arise where a property will immediately be let out for its full asking price, but at other times, particularly when it is a renter’s market, it might be wiser to accept a reasonably reduced offer from a potential tenant rather than hold out for the full amount and carry the burden of a void period for any length of time.
  2. Steer clear of void periods at all costs, even if this means being flexible about rent figures. This also means you should be flexible in terms of rental periods, for example having a short term let for part of the year and longer terms the remainder, to maximise profits and minimize void periods. This can have the effect or earning 10-15 per cent more per year. Naturally having a fully managed service will mean that the hassle of organising this is out of your hands.
  3. If the property was formerly your personal home or part time home, or contains fixtures and fittings left over from a former occupant, be prepared to make the necessary internal alterations in order to successfully attract a tenant. One’s own personal tastes may not match with those of other people. Experience has shown that tenants on the whole prefer light, neutral colours and modern (but not too extreme) fixtures and fittings. Time to get rid of that lime green ceiling or novelty lampshade! ‘Minimal is king’, is a useful watchword here.
  4. Consider getting a property professionally cleaned at the end of a tenancy period. This can work wonders in attracting a new tenant, breathing new life into worn carpets and making grubby tiles sparkling again. First impressions last and it would be a shame to put off a potential tenant simply because of an unpleasant odour or dirty bathroom.
  5. It’s worth having an inventory taken (even in unfurnished properties). This lists in detail all the items which have been left in the property for the tenant’s use, and the condition of the apartment in general. This will be signed by both landlord and tenant, thus avoiding any unpleasant disputes arising surrounding any damage at the end of a tenancy.
  6. Expect a certain amount of wear and tear. This is only inevitable, and over time items will need to be replaced. As a general rule, fridges and other white goods will need to be replaced as they become outdated or cease to work over the years, and a property will need small redecoration works and maintenance works approximately every four years. Wooden parquet flooring also requires attention from time to time.
  7. Do not leave anything of great financial or sentimental value in a property which you are letting out.
  8. Location, location, location: something of a cliche but true nevertheless. Experience shows that the best chance of investing in a successful rental property falls within the central part of Tallinn. This incorporates the old town, the ‘Kesklinn’ (city centre) and to a certain extent the areas of Kadriorg and Kristiine, to the east and west of the centre respectively.
  9. Do think about the type of property you are investing in. Is it likely to be suitable for a student, foreign national or young professional(s)? How old is the building? What are communal areas like? Are there likely to be any planning permission issues? Is there much storage? Is there a parking space? A garden? What are the communal charges? Is it near public transport links, retail outlets and other facilities?
  10. Keep in touch: your managing agents can advise you about developments at the property, maintenance issues etc, but always respond to emails and queries on this promptly. This will lead to a better relationship with a tenant and an increased likelihood that they will want to stay on.

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Residential Prices In Estonia: Index Shows Fall, Many Agents Favour Rise

The KV.ee index for residential prices in Estonia, which has stayed with the range of 61-65 points through the course of this year, yesterday settled at a figure of 61.8, thus  falling by 4.3 per cent through the course of the year, according to a report by Tõnu Toompark on adaur.ee (in Estonian).

The average price for the whole of Estonia stands at 12 686 EEK per square metre at the time of writing, down from 13 272 per square metre exactly a year ago.

This is hard to believe, given the fact that the residential property market is becoming increasingly active, Tõnu argues, and could in fact be due to the fact that the index lags behind actual prices by as much as a year. Actual transaction prices are probably stable and not falling at the moment.

Looking at the three major Estonian towns (Tallinn, Tartu and Pärnu) it appears that the gap between asking  prices and the corresponding actual transaction prices has narrowed somewhat, to below 4600 EEK and 4200 EEK per square metere  in Tallinn and Tartu respectively, and just 2200 EEK per square metre in Pärnu.

However Tõnu predicts that this trend will not continue indefinitely, and it seems likely that transaction prices will start to rise slightly in the near future. He goes on to explain that most of the difference between asking and final transaction prices does not represent a growing market but rather reflects the differing expectations of buyers and sellers. He also speculates that estate agents are wanting to return to pre-crisis price levels and are thus influencing prices upwards to a certain extent – this could mean that the disparity between asking and transaction prices will rise…

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Slight Fall In Tallinn Property Transactions For October

Tallinn property transactions fell in October in comparison with the previous month, according to Tõnu Toompark’s blog Adaur.ee (available in Estonian only).

Citing figures compiled by Tallinn real estate agents 1Partner Kinnisvara, transactions fell by 12 per cent, from a figure of 482 million Kroons (c. 30.8 million Euros)  in September to 423 million Kroons (c. 27 million Euros) in October. 1Partner’s executive director Martin Vahteri said that activity was particularly noteworthy in the Vanalinn (Old Town) and City Centre areas, where the highest real estate prices are generally to be found. He further remarked that a significant proportion of transactions involved overseas nationals, most notably Finns and Russians. 17 per cent of transactions, a total of 112 objects, comprised foreign investors, he said.

Average price per square metre stood at 15,546 Kroons (c. 994 Euros). The value of transactions of apartments varied hugely, from a reported highest price of 6.225 million Kroons (a little less than 400,000  Euros) to a low of 10,000 Kroons (c. 640 Euros)!  The most expensive transaction on a whole housing unit stood at 11.5 million Kroons ( c. 735,000 Euros). There were foreclosures on 31 buildings in October.

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