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In short

On October 12, 2021, the tax service published the interpretative circular n ° 53 (“IC 53”) “Abolition of the circular 1987/21, of July 23, 1987,” Real estate developers and contractors “”.

Through IC 53, the tax service introduces new directives concerning the tax treatment of real estate developers and entrepreneurs (“REDC”), as of January 1, 2022.

In detail

Main characteristics of Circular 1987/21 (which is repealed as of January 1, 2022)

Circular 1987/21 entitled “Real estate developers and contractors” (“Circular 1987/21”) provided with regard to:

  • Fixed price contracts (construction of apartments / offices / shops) undertaken on behalf of a third party, and
  • Development projects (construction and sale of apartments / offices / shops),

the possibility of choosing between two distinct methods with regard to the moment of the tax recognition of their profit. These two distinct methods were:

  • The Substantially Complete Method (the “90% Method): The profit was first recognized in the year in which the certified completed work reached 90% of the total contract / project price (or 90% of the total project cost); if, for example, 93% has been achieved, then 93% of the total expected benefit of the contract / project has been recognized, the remainder to follow as the completion progresses; this profit was only recognized if the project had already been sold. The tax was imposed regardless of actual cash inflows.
  • The percentage of completion method (the “50% method”): The profit was recognized for the first time from the start of the project / contract but in any case when the certified completed works had reached 50% of the total contract / project price (or 50% of the total project cost); if, for example, 53% was achieved, then a percentage of the total expected benefit of the contract / project was recognized, equal to the percentage of cash that had been received out of the total expected cash to be received, the remainder to be followed as and as completion progressed and more cash was received. Once a method has been chosen by a taxpayer, that method should be followed consistently for all tax years and for all contracts / projects undertaken.

Compared to Agrarian development (separation and sale of sites) Circular 1987/1921 indicated that:

  • revenue was recognized from the start of site sales (provided that a site separation request has been filed and site separation procedures are in progress);
  • if the separation was carried out in phases, then each phase was taxed separately;
  • the cost of the project included the cost of land and separation costs and was allocated to the sites on the basis of their sale price;
  • the profit in respect of the sites was recognized up to the amount of cash received.

Provisions of CI 53

General

IC 53 introduces a new method of imposing CDIR which aligns the timing of this imposition with the guidelines included in implementing directive 15/2021 entitled “Taxation Treatment of the effects on the account of persons from the adoption of IFRS 9, IFRS 15 and IFRS 16 “(” ID 15 “).

Tax treatment applicable from tax year 2022

The tax recognition of income from construction projects (we understand that “construction projects” cover fixed price contracts, development projects and land development) will need to be aligned with ID 15 (and, by extension, with IFRS 15, which applies from January 1, 2018; previously, IAS 11 “Construction contracts” applied).

Consequently, any profit recognized in accordance with IFRS 15 for fiscal years up to 2021 inclusive, but not subject to tax until 2021 inclusive (due to the application of the provisions of Circular 1987/21) , will be :

  1. must be calculated cumulatively; and
  2. be included in its entirety in the 2022 tax return of said taxpayer.

IC 53 specifies that the above cumulative effect will also have to be taken into consideration for the purposes of the 2022 provisional tax returns of said taxpayer.

Transitional provisions for “old projects”, subject to choice

The following definitions are provided in IC 53 which are helpful in understanding the transitional arrangements:

  • Old projects: projects for which construction work has started until 12/31/2021 inclusive;
  • New projects: projects for which construction works will start from 1/1/2022.

The taxpayers concerned have the possibility of choosing to continue to apply the provisions of the circular 1987/21 with regard to the “old projects” for the tax years 2022 and 2023. Any profit recognized until the financial year of 2023 tax included in accordance with IFRS 15 but not subject to tax until 2023 inclusive (due to the application of the transitional provisions):

  1. must be calculated cumulatively; and
  2. be included in its entirety in the 2024 tax return of said taxpayer.

IC 53 specifies that the above cumulative effect will also have to be taken into consideration for the purposes of the 2024 provisional tax returns of said taxpayer.

It is further specified that:

  1. any choice made will relate to all the “old projects” of each taxpayer;
  2. a person can only apply the transitional provisions for the tax year 2022 (instead of 2022 and 2023); in this case, the relevant tax obligations will have to be adjusted accordingly (i.e. the cumulative profit included in the 2023 income tax return and provisional tax returns);
  3. the election must be made in the income tax return for the relevant tax year.

The transitional provisions are not applicable to “new projects”, which will have to follow (from 2022) the provisions of CI 53.

Amendment to circular 2009/13

IC 53 also modifies the provisions of circular 2009/13 entitled “Tax treatment of companies operating in the timeshare sector” by deleting paragraph C.1 which referred to circular 1987/21 which is in the process of being issued. be abolished.

Notification (ΚΔΠ) 442/2021, of October 29, 2021, issued by the Tax Commissioner

This notification removes par. 3 of notification (ΚΔΠ) 340/89 which described the same tax treatment as in circular 1987/21 which is in the process of being deleted.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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