NSA: It is unreasonable to require from the taxpayer to confirm that a remitter has paid the tax to the account of the German tax authorities
The case concerned a company operating in the IT industry, which engaged in, among other things, software development, outsourcing of IT systems or providing training services. As business continued to grow, the company began to acquire customers also outside Poland, including in Germany.
The company provided licensing services to foreign clients, including tax residents in Germany. In the case of payments for licenses, the German tax resident may have been obliged to collect lump-sum income tax. There were no gross-up clauses in contracts signed between the company and its contractors, and thus the Polish company had to bear the economic burden of the tax. When making settlements with the tax office, the company had evidence of tax collection by the German tax office, but it did not have confirmations of tax payment by the contractors to the German tax authority due to the fact that each transfer operation contains the total tax collected from all the client’s contractors from a given period (usually a quarter). Thus, it was not possible to separate the specific value of foreign tax collected by the client from payments to the company. In addition, the counterparties refused to provide aggregate transfers, particularly transfer orders.
The company applied to the Director of National Tax Information for an individual ruling, seeking to confirm, among other things, whether it is possible to deduct from Polish corporate income tax payable, foreign tax collected in Germany on remuneration classified by customers as royalties.
The company took the position that it was entitled to do so, otherwise they were taxed in both Germany and Poland, even though the payer (i.e., the German company) did not have confirmation of tax payment.
The Director of National Tax Information disagreed with the Company, arguing that under the provision of Article 20(1) of the CIT Law, the tax actually paid abroad is deductible, not the one shown in the tax return. Therefore, since the taxpayer does not have a confirmation documenting the payment of the tax, the condition for deducting the tax paid has not been met.
The case went to the Provincial Administrative Court, which, in a judgment dated October 11, 2023 (III SA/Wa 1548/23), found the complaint justified and revoked the challenged ruling. In justification, it argued that the authority had imposed additional documentation requirements on the company, not provided for in the law, which in practice prevented the Polish company from deducting tax paid abroad. The WSA pointed out that the authority failed to take into account that the company in the facts presented was acting as a taxpayer, not as a remitter. On the other hand, the Polish company cannot be required to present documents confirming the expiration of obligations that are incumbent on the payer. This is of particular importance, since the taxpayer has no legal tools to oblige contractors to present documents confirming the payment of tax in Germany. The WSA stressed that if the Polish tax authorities have such doubts, they themselves can inquire with the German tax authorities.
The tax authority has filed a cassation appeal against the WSA’s ruling to the NSA. The NSA, in a judgment dated August 14, 2024, ref. II FSK 110/24, confirmed the position of the WSA in Warsaw, thereby dismissing the cassation complaint. In a verbal justification, the court pointed out that the taxpayer bears the economic burden of the tax, but it is the payer’s obligation to collect and pay the tax to the German tax authorities. Thus, in the court’s view, there is no basis for requiring the taxpayer to confirm payment of the tax.
Provincial Administrative Court: criteria for recognizing a construction project as organized part of the enterprise
The case concerned a company that planned to spin off part of its construction investment business to a branch office, and then, following further reorganization (division by spin-off), transfer the OCP to another entity, and wanted to confirm its position that the Company’s spin-off construction investment business constitutes an organized part of the enterprise (OCP) by obtaining an individual ruling.
The Company indicated in its description of the future event that it is engaged in the business of transportation and related services, as well as freight forwarding services. Regardless of its activities in this field, the Company owns several real estate properties on which it is developing a hotel and recreational facility (apartments to be purchased by investors or for rent).
The Company planned to spin off its real estate construction investment activities from its existing structure as ZCP. The spin-off would be carried out by transferring these projects to a branch of the company, together with the associated assets, liabilities (a mortgage loan for the purchase of real estate) and day-to-day operations (a team of a dozen people involved in project work).
Prior to the spin-off, the company would have a business plan to confirm that the investment would be able to finance itself through the sale or rental of the units. According to the plan, the sale of the constructed residential units will finance further stages of the investment, and the company’s assets will enable it to continue financing the investment process under the OCP, which will be transferred to a related company along with the mortgage.
In requesting an individual ruling, the company asked whether the branch (investment) that the company planned to spin off from the existing enterprise would constitute ZCP, in accordance with Article 4a(4) of the CIT. According to the company, the conditions set forth in this provision are met.
The director of the Tax Chamber, in an ruling dated March 1, 2024, ref. 0111-KDIB1-2.4010.669.2023.4.AK, found the company’s position incorrect. According to the authority, the set of tangible and intangible assets and liabilities related to the construction project, which has not yet been completed, will not be able to be used for business activities in the strict sense. This is because the tangible and intangible components do not meet the criterion of being able to carry out economic activities independently. At the time of the spin-off, the investment will not constitute a separate, functional whole capable of performing its own economic tasks, and the economic objectives of selling or renting out the apartments will be achievable only after the investment is completed.
The company appealed the issued ruling to the Provincial Administrative Court (WSA). The WSA in Łódź, in a judgment dated July 4, 2024, ref. I SA/Łd 281/24, disagreed with the view presented by the tax authority and revoked the ruling.
In the WSA’s opinion, the real estate assets transferred to the branch meet the requirement of functional separation, as they can constitute an independent source of the company’s economic activity, which will be continued by the separated company. At the same time, it is not possible to accept the position presented by the authority and assume that the lack of realization of the investment at the time of separation is an obstacle to the qualification of this activity as OCP. As the WSA pointed out: “This is because it implies the impossibility of spinning off within the framework of the OCP any set of assets in a situation in which certain assets included in this set of assets 'do not generate revenue,’ which is extremely common when it comes to spinning off within a given company.”
Classification of real estate management services as a complex service
The case concerned a company whose main business is the management of real estate owned by its contractors (among which are apartments, commercial premises, storage units and garages).
Within the framework of the management service, depending on the expectations of the contractor and the content of the contract signed with it, activities may be performed, among others, such as:
- verifying the legal and factual status of the property, maintaining and updating the list of premises and unit owners;
- keeping records of advance payments and accounting for costs;
- keeping off-book records of the costs of common property management and advances to cover these costs, as well as settlements of other expenses for the common property;
- keeping technical records of the property;
- ordering technical inspections and periodic maintenance of the property and its technical equipment, in accordance with the regulations;
- keeping documents and correspondence relating to the property, owners and premises;
- timely payment of taxes and other public charges relating to the joint property, insofar as they are not paid directly by the owners;
- maintaining the real estate in good condition, including undertaking in this respect the actions necessary to keep the common property and the building in a state of disrepair;
- making settlements through a bank account;
- preparing, convening and servicing community meetings;
- Preparing the annual financial report, preparing the annual economic plan;
issuing certificates or certifications required by law, upon request – providing a current settlement for the premises. The company indicated that it receives monthly remuneration for the above services, calculated according to a flat rate multiplied by the area of the building. The applicant does not add VAT to the remuneration calculated in the above manner, treating the services performed as services benefiting from an exemption under § 3(1)(3) of the Decree of December 20, 2013 on exemptions from value added tax. In addition, the Company provides maintenance and standby services to the same contractors, to which it applied a VAT rate of 8%.
According to the Company, ongoing maintenance and technical emergency services are part of integrated property management services, and these elements are exempt from VAT as components of comprehensive services.
The director of KIS disagreed with the applicant. According to the authority, there is no indication that maintenance and technical emergency services are auxiliary services to the management service, so there is no possibility to apply the subject exemption to them – they should be taxed at the appropriate VAT rates.
The company, disagreeing with the authority’s position, filed a complaint with the Provincial Administrative Court, which, in a judgment dated July 23, 2024, ref. no. I SA/Gd 415/24, agreed with the applicant.
According to the Court, based on the facts presented by the applicant, it would be unreasonable to separate the main service and auxiliary services (maintenance and emergency services) from each other and as a result, treat them differently for VAT purposes. As the WSA also stressed, ongoing maintenance and standby services fall within the definition of real estate management, so there are no grounds for artificially separating them from each other. Consequently, these services are subject to VAT exemption.
Virtual sale of electricity and VAT
A Polish company, which is a taxpayer of goods and services tax, which, in order to hedge against the risk of fluctuations in electricity prices, has entered into a contract for the so-called virtual sale of electricity. The buyer enters into the contract to obtain a predictable, fixed price for electricity, while the sellers, operating in the field of renewable energy sources, hedge these prices and seek to make a profit on the transaction.
The contract does not provide for physical delivery of electricity or transfer of title to it to the Purchaser. The Purchaser will not receive energy as a commodity that it can dispose of. Settlement will be in financial form only, which is why the contract is referred to as a virtual sale of electricity.
The contract is for a period of 12 years.
Sellers are solely responsible for selling electricity generated at the Power Plants on the Polish Power Exchange (TGE). Each party shall bear the costs associated with the sale or purchase of energy, including balancing costs. If the amount of energy specified in the Agreement does not meet the Purchaser’s requirements, the Sellers are not obliged to increase the supply
The contract specifies two types of intervals for mutual settlement between the parties – a calculation interval and a settlement interval, and a fixed price and a variable price are also specified.
As indicated in the contract, if the settlement value is greater than zero then there is a calculation of the settlement amount payable by the buyer to the seller, which is a net amount, expressed in euros.
If, on the other hand, the settlement value is less than zero, then there is a calculation of the settlement amount payable by the sellers to the buyer, which is the net amount, expressed in PLN using the exchange rate described in the contract.
When the amount is zero, neither party will be entitled to receive the amount due.
Against the background of the facts presented in this way, the company submitted a request for an individual rulling to the Director of National Tax Information. The Applicant wanted an answer to a number of questions:
- will the Applicant be a VAT taxpayer in connection with electricity price hedging transactions when Sellers are obliged to pay the Settlement Amount?
- will the Sellers be VAT taxpayers in connection with electricity price hedging transactions when the Purchaser is obligated to pay the Settlement Amount?
- Do electricity price hedging activities constitute VAT-exempt services?
- can the Applicant and Sellers waive the VAT exemption for financial services?
- will the Parties be able to deduct input tax after giving up the VAT exemption?
- will the taxable amount be the Settlement Amount for a given Settlement Interval?
- should corrective invoices be recognized for VAT purposes in the month in which they are issued?
The Director of the KIS in an individual ruling of September 15, 2023, ref. 0114-KDIP4-1.4012.296.2023.2.APR confirmed that:
- “in a situation where, in a given Settlement Interval, the Settlement Amount payable is positive (i.e., the Fixed Price Amount exceeds the Variable Price Amount) and paid by the Purchaser to the Sellers, the Sellers are the taxpayers providing the energy price hedging service, and the Purchaser is the beneficiary.
- If, on the other hand, the Settlement Amount payable is negative (i.e., the Fixed Price Amount is lower than the Variable Price Amount) and paid by the Sellers to the Purchaser, the Purchaser becomes the taxpayer providing the energy price hedging service, and the Sellers are its beneficiaries.
At the same time, however, he pointed out that in the case under review, all the prerequisites for the application of tax exemption under Article 43(1)(41) of the Law will be met for services provided by the Parties under the concluded agreement. However, the taxpayer may choose not to exempt the services, provided to taxpayers, and choose to tax them, which will also apply in the present case.
In addition, the tax authority considered that the services provided by the sellers and the buyer related to securing the price of electricity enjoy/will enjoy tax exemption under Article 43(1)(41) of the Law. It is also possible to opt out of the exemption.
If the parties to the contract choose to tax these services, the transactions will be fully subject to VAT. Upon receipt of the correct invoice, the Parties will be able to reduce the amount of output tax by the input tax in accordance with Article 86(1) of VATu.
The taxable base for VAT purposes will be the actual remuneration, i.e. the Settlement Amount Payable paid by the other Party for a given Settlement Interval.
- For Sellers, this will be the amount when the Fixed Price Amount exceeds the Variable Price Amount, and
- for the Purchaser, when the Variable Price Amount exceeds the Fixed Price Amount
During the preparation of the notice, not all the data needed to calculate the Settlement Amount are final, as some of them may not be available. The initial invoices are issued on the basis of the available data, but may later be adjusted when the final data becomes available. The parties have provided a mechanism for adjusting the Settlement Amount to the actual data through corrective invoices.
Only after receiving information from the distribution system operator about the amount of energy injected into the grid and payments from the balancing entity, can the Parties correctly calculate the Settlement Amount. The adjustment is caused by a “consequential” cause, and the obligation to settle the adjustment invoice in plus arises (according to the wording of the issued ruling) in the period in which the cause of the adjustment arose.
