Tax & Legal Highlights for Real Estate – March 2021

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Transformation of the perpetual usufruct right into ownership is subject to VAT

The Court of Justice of the European Union (CJEU) in the judgement of 25 February 2021 in case C‑604/19 of the Municipality of Wrocław against the Director of the National Fiscal Information (NFI) ruled that transformation of right of perpetual usufruct (RPU) into full property ownership right against payment of a fee and provided by national legislation constitutes a supply of goods taxed with VAT. In the proceedings before the District Administrative Court in Wrocław, which further addressed the request for a preliminary ruling to the CJEU, the Municipality of Wrocław brought an action against the tax ruling according to which it should tax the fees for transformation of RPU into ownership. The Municipality argued that the perpetual usufructuary disposes of the property as owner, so the change of the title cannot constitute the subsequent supply of the same goods. The Director of NFI has not challenged that there is no subsequent supply, but claimed that in case of transformation the supply is continued and in the economic sense, the fees for transformation are part of the remuneration for supply of the property. Consequently the tax authority concluded that the transformation of RPU must be taxed with VAT.

The CJEU confirmed that the discussed transaction can be treated as supply of goods under article 14 item 2 letter a) of the VAT Directive, i.e. transfer of ownership right against payment of compensation, by order made by or in the name of a public authority or in pursuance of the law. In the opinion of the Court all necessary conditions are met: i) transfer of ownership right to former usufructuaries, ii) the transformation taking place in pursuance of the law, iii) payment of compensation (fees for transformation were strictly related to the transfer of ownership rights). Furthermore, the CJEU confirmed that for the purposes of such transformation the Municipality acts as a taxable person and not as a public authority (so does not benefit from VAT exemption), but also reserved certain circumstances to be verified by the local court within this area.

Foreign entity without Polish permanent establishment does not have to file the financial statement

In the tax ruling of 19 February 2021 no. 0111-KDIB1-2.4010.486.2020.1.BG the Director of National Fiscal Information stated that the foreign company, which plans to acquire and lease the real estate properties in Poland but will not have the permanent establishment under the provisions of corporate income tax law, is not obliged to submit the financial statement to the Chief of the National Fiscal Administration. The case at hand concerned the Belgian company registered as VAT payer in Poland. The company did not have any branch or other facilities in our country and the only income taxable with CIT in Poland was the rental income from immovable property. In the ruling issued the tax authority confirmed that such entity does not fall into Polish accounting regime and will not have the obligation to file the financial statement to the Chief of the National Fiscal Administration.

The expenses invoiced by the asset manager are not subject to limitation

The Director of National Fiscal Information explained in the tax ruling of 7 October 2020 (no. 0114-KDIP2-2.4010.182.2020.1.AS) that the payments made to the asset manager for the incurred fixed costs (such as payroll expenses of people engaged in rendering the asset management services, office rent, software and IT equipment) are not subject to limitation of tax deductible costs under article 15e of the Polish CIT Act. The company has not had doubts that such limitation applies to management and marketing services rendered by the asset manager. However it asked whether this provision is relevant for the additional fee calculated on the basis on the fixed costs incurred by the asset manager. The tax authority confirmed that such fee does not stipulate a remuneration for any service as there is no actual supply. In the present case we can only talk about costs reimbursement and therefore the fee cannot be treated as payment for any service, subject to article 15e of the Polish CIT Act.

CJEU judgment as of 11 March 2021 in Danske Bank case (C-812/19) – branch as a separate VAT taxpayer in relation to the head office being a member of a VAT group in another country

On March 11, 2021, the Court of Justice of the European Union (hereinafter: the CJEU) in the Danske Bank case (C-812/19) ruled that “for value added tax (VAT) purposes, the principal establishment of a company, situated in a Member State and forming part of a VAT group formed on the basis of Article 11 [of Council Directive 2006/112/EC dated 28 November 2006 – TPA], and the branch of that company, established in another Member State, must be regarded as separate taxable persons where that principal establishment provides that branch with services and imputes the costs thereof to the branch”.

In a broader context, the judgment clarifies the relationship between the judgments of the CJEU of 23 March 2006 in FCE Bank case (C-210/04) in which the principal establishment and its branch were recognized as a single VAT taxpayer and the judgment of the CJEU of 17 September 2014 in Skandia America (USA) filial Sverige case (C-7/13), in which the CJEU ruled that the company’s principal establishment located in a third country (USA), whose branch is part of a VAT group in one of the Member States, is a separate VAT taxpayer. Thus, in the relation between the principal establishment of the company and its branch, if one of them belongs to the VAT group, the „primacy” of the VAT group over the relationship between the company’s principal establishment and its branch, when one of them belongs to the VAT group should be taken into account establishing status of VAT taxpayer. The above will affect the method of documenting the considerations between the principal establishment of the company and the company’s branch as well as the method of calculation of the so called coefficient.

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