Is the reservation fee taxable and when?

The Nature of the Reservation Fee

In the real estate development sector, it is common to conclude a so-called reservation agreement with a prospective purchaser of a unit to secure the property sale transaction. The reservation fee, if the agreement does not come into effect, is refundable and can be offset against any contractual penalties or credited towards the purchase price of the property. However, questions often arise concerning the VAT treatment of this fee, specifically if and when the VAT liability arises. A developer company regularly concluding such reservation agreements requested an individual interpretation on this matter. As a result, on 29 September 2020, the Director of the National Tax Information issued a ruling (ref: 0114-KDIP4-3.4012.337.2020.2.MAT) addressing in detail the tax settlement of reservation fees.

Inquiry to the National Tax Information (KIS)

In the factual situation described in the inquiry, the Company stated that it concludes reservation agreements with clients. These agreements are not notarised. The client declares interest in purchasing a specific unit and transfers the agreed reservation fee to the Company’s current bank account. If the client ultimately decides not to purchase the unit and cancels the reservation, the fee is refunded to the client (except for the portion retained by the Company as a contractual penalty if the transaction fails due to the client’s fault). Upon concluding a preliminary agreement with the client, the previously paid reservation fee is credited towards the unit’s purchase price and simultaneously transferred by the developer to an escrow account. To streamline the transaction, the Company, acting on behalf of the client, transfers the previously received funds from its current bank account to the escrow account maintained in accordance with the Developer Act’s requirements. The developer stated that the reservation fee paid by the client under the reservation agreement constitutes a deposit, which the Company may freely manage until the developer agreement is concluded.

The Company asked whether the VAT liability arises at the moment the reservation fee is received into the Company’s current account.

According to the developer, in the described factual scenario, the reservation fee paid by the client to the Company’s current account does not constitute either an advance payment or a prepayment within the meaning of Article 19a(8) of the VAT Act, and therefore VAT is not due at the moment these funds are received into the Company’s bank account.

The Tax Authority’s Position – Reservation Fee Is Not an Advance Payment

In its issued interpretation, the authority distinguished between an advance payment, prepayment, and a deposit. It explained that an advance payment is made towards a future supply of goods or service before the actual delivery or performance. A prepayment is a specified sum forming part of the price paid in advance to secure the purchase or service within a defined timeframe. Both advance payments and prepayments, as payments on account, must be linked to a specific transaction and represent payment in money.

Furthermore, according to dictionary definitions, a deposit is a sum of money paid as a guarantee to ensure performance of an obligation and as compensation in case of non-fulfilment. A key feature of a deposit is that it can only be used in a strictly defined situation — namely, if the obligation is not met. The deposit thus serves as security for contract performance, meaning it is established in case the party providing the deposit fails to perform. In such a case, the other party may satisfy their claims from the deposit. This does not constitute receipt of part of the payment and therefore cannot be treated as an advance, earnest money, prepayment, or instalment.

Given the above, the authority concluded that the reservation fee paid by clients to the Company’s current account before signing the preliminary agreement has the character of a deposit. Consequently, in this case, the reservation fee is not a prepayment or advance towards the future delivery of the unit/building. This means no VAT liability arises at the moment the deposit is received from clients, in accordance with Article 19a(8) of the VAT Act. In summary, the VAT obligation in connection with receiving the reservation fee under the reservation agreement does not arise upon receipt into the Company’s current account. The VAT liability arises when funds held in the escrow account are paid out by the bank to the Company (if the payment occurs before the unit is handed over).