Tax Highlights
Table of contents:
- Non-application of the so-called reverse charge VAT mechanism in relation to fit-out works re-invoiced to tenants
- The application of the surface ratio does not allow to deduct input VAT from invoices documenting expenditures on the construction of a residential building used for VATable and VAT-exempt activities
- Without VAT as the municipality only gives back expropriated property
Non-application of the so-called reverse charge VAT mechanism in relation to fit-out works re-invoiced to tenants
Until 30 October 2019, the reverse charge mechanism was in force, inter alia, with respect to construction services listed in Appendix No. 14 to the VAT Act. Due to doubts concerning the method of settlement of the so-called fit-out works (arrangement and adaptation works in accordance with the lessee’s needs), a company (further also as the lessor) conducting activity in the scope of office space rental applied for a tax ruling in this respect. In the background of the tax ruling dated 7 June 2017, ref. 0114-KDIP1-2.4012.25.2017.1.RM, lessor indicated that as a rule lease agreements provide that he is obliged to perform fit-out works. Simultaneously, those works are contracted out in its entirety to an external construction company. The costs of the fit-out works performed are transferred to the lessee through inclusion in the rent or in the form of a so-called re-invoice issued by the lessor on the lessee. The applicant took the position that the construction company does not act as a subcontractor of the lessor, but as the main contractor, and thus the transaction should be settled based on general principles (the construction company reports output VAT, and the lessor has the right to deduct input VAT). The Director of the National Fiscal Information disagree with this position with regard to the fit-out works transferred to the lessee by means of a re-invoice. The case was contested to the Voivodship Admiralty Court in Warsaw, which in its judgment of 9 May 2018 (ref. III SA/Wa 2770/17) waive the negative for the lessor tax ruling. As a result of the cassation appeal filed, the Supreme Administrative Court dismissed the cassation appeal. In its verbal justification to the judgment of 22 October 2021 (ref. no I FSK 204/18), stated that the VAT Act does not define the notion of „subcontractor” referred to in Art. 17.1h of the VAT Act [this provision is currently repealed due to introduced split payment mechanism – TPA], as a consequence of which the mutual relations between the parties should be inferred from the content of the agreement. In a situation where the lessor modernizes the premises, which are the subject of the lease agreement, the construction services purchased in this connection are purchased in its own name and, to a predominant extent, for its own benefit. It is impossible to assume that the beneficiary of these services (outlays) is in any form the lessee. Thus, the Supreme Administrative Court held that we are dealing with a single comprehensive lease service and the fact that atypical form of transferring these costs to the lessee was adopted (through re-invoicing) does not mean that the purpose of the transaction has changed. As a result, the construction company performing the fit-out did not act as a subcontractor of the lessor and the transaction should be settled in accordance with general principles (and not under the reverse charge mechanism).
The application of the surface ratio does not allow to deduct input VAT from invoices documenting expenditures on the construction of a residential building used for VATable and VAT-exempt activities
In the case at hand, a housing cooperative planned to build a multi-family residential building where all flats would be sold to the members of the cooperative taxed lower 8% rate, except for one flat designed for lease (VAT exempt). The cooperative applied for a tax ruling in order to confirm correctness of right to deduct input VAT based on surface ratio. The case was finally judged by the Supreme Administrative Court in its judgment of 22 October 2021, ref. no I FSK 996/18, stating that in case VAT payer conducts mixed activity, i.e. taxable and exempt, if the VAT payer is unable to make the so-called direct allocation, the VAT ratio should be calculated on the basis of the realised turnover (surface ratio for purpose of calculation of coefficient is not allowed). Direct allocation should be understood as allocation of purchase invoices to categories of taxable or exempt activities.
Without VAT as the municipality only gives back expropriated property
The Supreme Administrative Court, in a judgment dated 26 October 2021, ref. no. I FSK 119/18, ruled on the treatment of the return of an expropriated plot of land to the owner’s heirs in exchange for the return of the valorised compensation. The municipality applied for a tax ruling in order to confirm the tax consequences of returning the property expropriated in the 1980s for the construction of a housing estate. In the end, the investment was not realised and after communalisation it remained the property of the municipality. Years later, the heirs exercised their claim for restitution of the property as the property had not been developed in accordance with the purpose of the expropriation. Starosta (one of the local authority) ruled on the return of part of the plot. The heirs could recover it by returning the valorised compensation. The tax authority issued a tax ruling in which indicated that it should be treated as delivery of goods subject to 23% VAT rate. Both the Voivodeship Administrative Court in Warsaw (in its judgment of 12 October 2017, ref. VIII SA/Wa 606/17) and the Supreme Administrative Court confirmed that the restitution of the ownership right does not create the delivery of goods but only restores the previous relations. Thus, the actions of restitution of real estate on the one hand and of valorised compensation on the other remain outside VAT. The municipality does not act as a VAT payer and the tax authority, when issuing the appealed tax ruling, did not take into account the specifics of the compensation that has been revalued, which has no connection to the market value of the returned real estate.
Legal Highlights
Table of contents:
No changes with respect to perpetual usufruct of non-residential land
Contrary to earlier announcements, the legislator withdrew from the planned legislative changes intended to lead to the phasing out of perpetual usufruct. The first stage of these changes was the Act of 20 July 2018 on the transformation of the perpetual usufruct of land developed for residential purposes into ownership of such land, which, by virtue of law, as of 1 January 2019, resulted in the transformation of the perpetual usufruct of land developed for residential purposes into the ownership right.
However, the newly prepared project plans, inter alia, that the State Treasury or a local government unit (i.e. the public owner of the real estate) will be able to propose to the entrepreneur a land price in the amount not lower than 20 times the current annual fee for perpetual usufruct, but not higher than the market value of the land. The amendments do not provide for the possibility to effectively request the sale of the ownership right to the perpetual usufructuary. Compared to those expected, the proposed changes have a very narrow scope. The situation in which the sale of the real property may take place when the public owner expresses the will to sell the ownership right to the perpetual usufructuary is already known under the Real Estate Management Act.
Reservation agreement
Regulations concerning a reservation agreement were included among the novelties introduced by the so called Development Act (the Act of 20 May 2021 on the Protection of Rights of Buyers of Residential Premises or Single-Family Houses and the Developer Guarantee Fund). This agreement has not been regulated by any regulations so far, although it is common for developers and purchasers to enter into such agreements before entering into a development agreement.
The Development Act introduced a legal definition of a reservation agreement – pursuant to Article 29 of the Act, it is „an agreement between the developer or an entrepreneur other than the developer, and a person interested in the sale offer, hereinafter referred to as the 'reserving party’, the object of which is the obligation to exclude temporarily from the sale offer the residential unit or single-family house selected by the reserving party”. The regulations specify the legal form and the minimum content of the agreement. They specify, inter alia, the maximum amount of the reservation fee, provided that the parties agree that the obligation under the agreement is related to the obligation to bear it by the reserving party, and they regulate the rules of returning the reservation fee if the agreement is terminated.
The Act also provides for the developer’s information obligations towards the reserving party. The developer should inform, during the term of the agreement, about changes introduced to the information prospectus or its appendices in a way that makes it possible to identify them, indicating what the change concerns.
The changes concerning the reservation agreement will come into force on 1 July 2022.
