5% VAT Rate for Newly Built Residential Properties

What must be completed by 31  December 2026 to preserve the reduced VAT rate for later sales?

This is far from being merely a theoretical issue, as it may have substantial financial consequences in practice. The difference between the two VAT rates is 22 percentage points, which translates into HUF 22 million in VAT on a property with a net value of HUF 100 million, and potentially several tens of millions of forints in more complex projects. With only four months remaining until the deadline, the entire permitting procedure must be completed within this timeframe in order to preserve eligibility for the reduced VAT rate.

However, the building permit becoming final is only one of the conditions: the property must also qualify as a new residential property, comply with the applicable size limits, and the transaction must be classified correctly for VAT purposes,” highlighted Dr Alexandra Dely-Simon, VAT expert at RSM Hungary.

5% VAT rate for newly built residential properties: four conditions that must all be met

To apply the reduced VAT rate, the following four conditions must be satisfied simultaneously:

• timing: where the date of supply or receipt of an advance payment falls after 31 December 2026, one of the transitional provisions must apply. This means that the building permit must become final by 31 December 2026, including, where applicable, the completion or acknowledgment of a simplified notification procedure;
• qualification as a new residential property: the concept of a “new residential property” is not limited to a completely newly constructed property in the everyday sense. For VAT purposes, a residential property may also qualify as new where it has not yet been put to its first intended use, where less than two years have elapsed between its first intended use and its sale, or where less than two years have elapsed since a change in its designated use or in the number of separate functional units;
• size: the reduced VAT rate may be applied to residential units with a total useful floor area of no more than 150 square metres in multi-unit residential buildings and no more than 300 square metres in single-unit residential buildings;
• type of transaction: the 5% VAT rate applies to supplies of goods, i.e. traditional sales, turnkey handovers by a general contractor falling under Section 10(d) of the Hungarian VAT Act, and, in certain specific cases, the sale of a new property created through renovation or conversion. The latter, however, requires a comprehensive prior assessment, as discussed in more detail below

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Renovation or the creation of a new property?

For newly constructed residential properties in the conventional sense, assessing the applicability of the 5% VAT rate is generally more straightforward, as it is usually easier to establish that the transaction concerns the sale of a new residential property. However, the issue is not limited to traditional new-build projects. Certain renovation, reconstruction or conversion works may also result in the creation of a new residential property for VAT purposes. This is a much more sensitive area, however, as what is commonly regarded as a “renovation” does not necessarily coincide with the creation of a “new property” for VAT purposes.

 Dr Alexandra Dely-Simon, VAT expert at RSM Hungary, highlights: “One of the most critical practical questions is whether the investment qualifies as a straightforward renovation aimed solely at restoring or repairing the condition of the property, or whether it constitutes a conversion of such a scale that it results in the creation of a new residential property for VAT purposes.”

Where the existing property is already owned by the customer and the contractor performs only renovation or reconstruction works, the transaction will generally qualify as a supply of services. In such cases, there is no sale of a new residential property, which would qualify as a supply of goods, and the contractor’s fee will therefore typically be subject to the 27% VAT rate.

The VAT treatment may be different in projects where the conversion results in:

• a change in the designated use of the property;
• a change in the number of separate functional units or condominium units;
• the requirement for a new occupancy procedure or an official certificate.

Overall, therefore, the decisive factor is not the age of the property, but rather what is created as a result of the conversion from a legal, technical and tax perspective. The VAT treatment of such renovation and conversion works must always be assessed on a case-by-case basis. Determining whether the works result in a new property within the meaning of the Hungarian VAT Act, and whether the 5% VAT rate may therefore be applied, requires a complex analysis. The transaction should be assessed in its full context, including not only the parties’ contractual intentions and written agreement, but also the construction documentation, the property registration status, the relevant administrative procedures and the invoicing structure.

Transitional rules for the 5% residential property VAT rate: what happens to advance payments and supplies after 2027?

The application of the reduced 5% VAT rate to residential properties does not necessarily end on 31 December 2026. Under the transitional rules, subject to certain conditions, the 5% VAT rate may also apply to advance payments received or credited after 31 December 2026 but no later than 31 December 2030, as well as to supplies completed during that period.

“In practice, this means that construction may extend into subsequent years and the 5% VAT rate may still apply to supplies completed by the end of 2030. However, a key requirement is that the necessary permit or notification reaches the required status during 2026.

For this reason, the year-end deadline should not be considered merely by reference to the planned commencement date of construction. Instead, project timelines should be worked backwards: the time required for the permitting procedure, any requests for supplementary documentation, and all administrative steps necessary to ensure that the project qualifies under the transitional rules must be factored into the schedule.

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What should be clarified before the investment begins?

The question of whether the 5% VAT rate applies should not first arise when the first invoice is issued. The best time to address the issue is during the planning stage, when the developer already has a clear understanding of the property to be created, but the contracts, architectural plans, legal structure and tax treatment can still be aligned.

If the question only arises when “the first major invoice is due tomorrow – should it include 5% or 27% VAT?”, the available options will usually be significantly more limited. At that stage, the question may no longer be how the structure could be optimised, but whether the tax treatment of the arrangement already in place can still be supported.

This is particularly important in more complex projects where the creation of separate condominium units, the establishment of the condominium structure, administrative procedures and construction contracts run in parallel. In such cases, it is not sufficient to examine the VAT rules in isolation; it is also necessary to assess how the relevant legal, technical and administrative steps interact with each other in terms of both timing and substance. Where justified, obtaining the tax authority’s position in advance may also be worth considering.

It is important to recognise that the 5% VAT rate cannot be applied to every residential property project. However, in many cases, eligibility is lost not because the legislation inherently excludes the project, but because the issue is addressed too late. Appropriate VAT treatment should therefore not be regarded as a retrospective “invoicing technique”, but as an integral part of project preparation.