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Brussels, 14 May 2009

VAT: the European Commission requests Latvia to apply VAT on land for construction

The European Commission has formally requested the Republic of Latvia to stop exempting from VAT transactions involving land for construction. EU VAT rules expressly provide for VAT on supplies of land for construction. The request is communicated in the form of a ‘reasoned opinion’ (second step of the infringement procedure provided for in article 226 of the EC Treaty). If the relevant national legislation is not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

According to Article 2 of the VAT Directive all supplies of goods and services are subject to VAT except for the cases explicitly provided for in the VAT Directive. Article 135 (1) (k) of the VAT Directive explicitly requires that land for construction is taxed whilst it allows exemption of land used for other purposes.

Under Latvian VAT legislation, sale of immovable property, including land, is exempt from VAT, except when it concerns the first sale of "unused immovable property" (that is the first sale before first occupation). Under the VAT Directive land for construction must be subject to VAT regardless whether it is used or not and whether it is sold for the first time or not.

The Commission therefore concludes that the Latvian legislation is not compatible with the VAT Directive.

Should the Republic of Latvia fail to comply with the reasoned opinion within the prescribed two-month time limit, the Commission may bring this case before the European Court of Justice.

The Commission's reference number of the case is 2007/2264.

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