Preparing for TAMA 38? Key clarification issued by the tax authority

A few weeks ago, the Tax Authority announced that it had begun issuing a new type of publication: professional position papers. These are brief and focused publications, usually addressing a specific issue on a particular topic. Following this announcement, an additional position paper was published on October 15 on the Tax Authority’s website, addressing the sale of building rights in TAMA 38/2 projects and the cash-based purchase of construction services from the contractor. 

In transactions where the building is strengthened by demolition (TAMA 38/2), the residents sell their building rights to the developer in exchange for construction services provided by the developer. Chapter 5 of the Real Estate Taxation Law stipulates that, generally, the owner is exempt from capital gains tax for receiving a residential apartment in the building, provided its area does not exceed the original apartment’s area plus 25 square meters.

However, there may be cases where one of the homeowners in the building holds additional building rights that were not sold to the developer and wishes to exercise these by ordering construction services and paying the developer for them.

The position paper clarifies that in these cases, for the portion of the building rights not sold to the developer, the owner can be regarded as purchasing construction services from the developer in full monetary payment, which would not necessarily constitute a "sale" of real estate rights according to the law.

For the portion of rights sold to the developer, the owner will receive an apartment in the building and be eligible for the exemption mentioned above, subject to meeting the conditions of the chapter. 

The position paper also specifies various parameters that will be examined to ensure that the transaction is reasonable, including the market rate for construction services, the proportion of building rights sold by other residents to the developer, and more. Additionally, it clarifies that if the Real Estate Taxation Administrator determines the transaction constitutes a sale of real estate rights rather than a payment for construction services, the owner will be liable for purchase tax as if buying a completed residential apartment. 

It should be noted that this is not a change in the existing legal situation but rather a clarification of the Tax Authority's position, aimed at providing greater certainty to homeowners and their representatives when deciding how to proceed.