Taxation and military levy when concluding assignment agreements when investing in new buildings

There are many offers on the real estate market for purchasing apartments in new buildings through the assignment of rights of claim (assignment agreement or cession agreement). Many people are wary of this method of purchasing real estate, because the question immediately arises: "What is the reason for selling an unfinished apartment? Or maybe there are some problems with the documentation for the residential complex?" Of course, before purchasing real estate, it is worthwhile to do a legal check of the new building and the owner: it is necessary to check both the reason for the sale and the seller (the first investor: arrests, mortgages, court decisions, other encumbrances that may lead to the recognition of the assignment agreement as invalid at the initiative of the regulatory authorities), the legal purity of the developer and the construction site itself (documents for the land plot, permits, licenses, examinations, technical conditions for the connection of communications, arrests, mortgages, court decisions, etc.). It is worth noting that the acquisition of apartments in new buildings through the assignment of rights of claim is a legal way of obtaining ownership of real estate.

What is the acquisition of an apartment in a new building through assignment?

For example, a buyer (the first investor) at the initial stages of construction enters into a contract of sale of property rights to an apartment with the developer. The price of the apartment under this contract is 500,000 hryvnia. Before the commissioning of the residential complex, the buyer decides to sell his property rights to this apartment for certain reasons (moving to another country for permanent residence or otherwise). The buyer (the first investor) sets the price of property rights to the apartment at 800,000 hryvnia, taking into account the increase in prices per square meter as the commissioning of the residential complex approaches. The first investor finds a new buyer. For more information on the assignment of rights in a new building, read here.

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Important! Before the sale, the first investor must pay the full price under the contract of sale of property rights to the apartment, that is, 500,000 hryvnia.

Further, a tripartite agreement on the assignment of rights (assignment agreement) of property rights to the apartment is concluded between the developer, the first investor and the new buyer.

Important!

New investors should pay attention to the fact that when concluding an assignment agreement, the amount of UAH 500,000, which was initially invested by the first investor, will be included in the agreement.

Since the settlement of UAH 800,000 occurs between the first investor and the new investor, the developer has nothing to do with the settlements. Under the assignment agreement, the rights and obligations of the first investor are simply transferred to the new investor.

The difference in the amount of UAH 300,000 is the income of the original investor and is subject to tax and military duty.

In practice, there are often cases when the parties enter into an assignment agreement, for example, as in our example, for UAH 500,000 in order to avoid paying taxes and military duty. This is a violation of the law and is fraught with consequences for the new buyer, since in the event of termination of the contract or its recognition as invalid, the new buyer will receive back 500,000 hryvnia specified in the assignment (transfer) agreement! He will not be able to return the remaining 300,000 hryvnia, even by going to court, since there is no confirmation of payment of the entire amount.

To comply with the law and protect the rights of the new buyer, it is necessary to conclude, in addition to the assignment (cession) agreement, a settlement agreement between the original buyer and the new buyer. This agreement will specify the amount of 300,000 hryvnia. According to the current legislation, the Settlement Agreement is in writing and is not subject to notarization, but this agreement can serve as confirmation of the payment of the full amount by the new buyer and the receipt of income by the initial investor.

Rates of payment of tax and military duty for the conclusion of the assignment (cession) agreement:

In response to our request, the State Fiscal Service of Ukraine provided tax advice on the practical application of the norms of the current tax legislation when carrying out transactions for the assignment of rights of claim.

Thus, the list of incomes that are included in the monthly (annual) taxable income of the taxpayer, established by paragraph 164.2 of Article 164 of the Tax Code, includes income that makes up the difference between the amount of funds received by such a payer from other persons as a result of the assignment in their favor of the right of claim under the agreement on participation in the construction financing fund (including if such assignment is made on the basis of a sale and purchase agreement), and the amount of funds contributed by the taxpayer to such a fund under this agreement.

That is, the initial investor must pay personal income tax (5% for residents, 18% for non-residents) from the amount of UAH 300,000, which is his income.

Also, the said income is subject to taxation by a military tax of 1.5% of UAH 300,000.