When a service related to real estate is provided or purchased from a foreign entity, it is necessary to determine where it is subject to VAT. This is where the rules for determining the place of supply (taxation) of services come in – different for taxpayers and non-taxpayers. Below we discuss the rules for determining the place of supply of real estate services when they are provided between taxpayers.
Polish regulations
According to the general rule, the place of supply of services provided to a taxpayer is the place where the taxpayer, who is the recipient of the service, has its place of business (Article 28b(1) of the VAT Act). The general rule applies in all cases for which the legislator has not provided specific rules. Therefore, before applying the general rule, it is necessary to check whether one of the special rules listed in the VAT Act applies to the facts given.
Such a special rule is provided for real estate services. According to its wording, the place of supply of real estate services, including services
- provided by appraisers,
- real estate agents
- accommodation in hotels or establishments with a similar function, such as holiday centers or places intended for use as campsites,
- the use and occupation of immovable property, and
- the preparation and coordination of construction work, such as the services of architects and construction supervision,
– is the location of the property (Article 28e of the VAT Act).
As can be seen from the above, the nature/relationship of the service to the property is decisive for the application of this special rule. The wording of the above provision itself provides for a broad and open catalogue of services in which the legislator gives examples of services related to real estate. However, in order to correctly classify another service (which is not explicitly mentioned in the wording of this provision) as being related to real estate or not, additional guidelines are needed. This is where the European legislator comes in, as the provision of Article 28e of the VAT Act is based on Article 47 of Directive 2006/112/EC (hereinafter the „VAT Directive”), which in turn should be read in conjunction with the provision of Article 31a of Council Regulation 282/2011 (hereinafter the „VAT Regulation”), which clarifies examples of services related to real estate and defines the rules for their connection to real estate.
European Regulations – VAT Directive and VAT Regulation
According to Article 47 of the VAT Directive, the place of supply of services connected with immovable property, including the services of valuers and estate agents, accommodation services in the hotel sector or in sectors with a similar function, such as holiday camps or sites intended for use as campsites, the granting of rights to use immovable property and services for the preparation and coordination of construction work, such as the services of architects and construction supervisors, is the place where the immovable property is located.
At the same time, according to Article 31a(1) of the VAT Regulation, the property-related services referred to in Article 47 of the VAT Directive include only those services which have a sufficiently direct connection with the property in question. Services are considered to have a sufficiently direct connection with the property in the following cases:
- if they originate from the property and the property in question is an integral part of the service and is central and indispensable to the services provided.
- if they are provided in relation to the property or are intended for the property and are intended to alter the legal or physical condition of the property.
As can be seen from the above, the real estate-related services to which the special rule for determining the place of taxation according to the location of the property applies are those which have a „sufficiently direct connection with the property in question”, which are considered to be
- first,ly services derived from the property, i.e., services where the property is the central element of the service and without which it would not be possible to provide the service (e.g., rental services, storage services or lodging services).
- secondly, services provided for the benefit of the property as such and which are intended to change the condition of the property in a legal (e.g. property management, brokerage, legal services relating to the transfer of title to the property) or physical (e.g. construction of a building on the land, construction of permanent structures on the land such as gas, water or sewerage pipelines) manner.
In addition, the EU legislator has attempted to provide an indicative list of real estate services (Article 31a(2)), including
- Preparation of plans for a building or parts of a building intended for a specific plot of land, whether or not the building has been constructed.
- the provision of site supervision or security services.
- The construction of a building on the site and the construction and demolition of the building or parts of it.
- Construction of permanent structures on the site and construction and demolition work relating to permanent structures such as gas, water, sewer and similar pipeline systems.
- Groundwork, including agricultural services such as plowing, seeding, irrigation and fertilization.
- Surveying and risk assessment of the property and its condition.
- Valuation of property, including where such a service is required for insurance purposes, to determine the value of the property as security for a loan, or to assess risk and loss in the event of litigation.
- The rental or leasing of property, including the storage of goods in a designated part of the property for the exclusive use of the recipient of the service.
- the provision of accommodation services in the hotel sector or in sectors with a similar function, such as holiday camps or places intended for use as campsites, including the right to stay in a particular place on the basis of rights to use the property for a specified period of time and the like.
- The granting or transfer of rights to use all or part of a property, including permission to use part of the property, such as the granting of fishing or hunting permits, access to airport lounges, or the use of toll facilities such as bridges or tunnels.
- Maintenance, renovation and repair of a building or part of a building, including work such as cleaning, tiling, wallpapering and parquetting.
- Maintenance, renovation and repair of permanent structures such as gas, water, sewage and similar pipe systems.
- The installation or assembly of machinery or equipment which, once installed or assembled, is considered to be immovable property.
- The maintenance, repair, inspection, and supervision of machinery or equipment where such machinery or equipment is considered to be immovable property.
- The management of real estate, other than the management of a real estate investment portfolio, including the management of commercial, industrial or residential real estate by or for the benefit of the owner of the real estate.
- Brokering the sale, lease or rental of real estate and the creation or transfer of certain interests in real estate or rights in rem relating to real estate (whether or not considered to be tangible assets).
- Legal services related to the transfer of ownership of real estate, the creation or transfer of certain interests in or rights in rem in real estate (whether or not treated as tangible assets), such as notarial acts or the drafting of contracts for the sale or purchase of real estate, even if the transaction does not result in a change in the legal status of the real estate.
When analyzing the above sample list of real estate services, it should be noted that their common feature is an identifiable specific property.
At the same time, the EU legislator has listed an example of non-real estate services (Article 31a(3)), i.e:
- Drawing up plans for a building or parts of a building if they are not intended for a specific plot of land.
- the storage of goods on land, where no part of the land is intended for the exclusive use of the recipient.
- The provision of advertising services, even if they involve the use of real property.
- the intermediation of hotel accommodation services or sectors with a similar function, such as holiday centers or places intended for use as campsites, where the intermediary acts in the name and for the benefit of a third party.
- the provision of stand space at trade fairs or exhibitions, including other related services that enable the exhibitor to present goods, such as stand design, transport and storage of goods, provision of machinery, cabling, insurance and advertising.
- The installation or assembly of machinery or equipment, the maintenance, repair and inspection of machinery or equipment, and the supervision of machinery or equipment that is not or will not become part of real property.
- Management of the real estate investment portfolio.
- legal services in connection with contracts, including advice on the terms of a contract for the transfer of real estate, or the execution of such a contract, or evidence of the existence of such a contract, where such services do not relate to the transfer of title to real estate.
Considering the above examples of the EU legislator, it should be noted that the catalogue of services potentially related to real estate is quite broad and the criterion that allows to distinguish whether they are services directly related to real estate or not is „a sufficiently direct connection with the real estate in question”.
Definition of real estate in the VAT Regulation
It is important to note that the VAT Regulation uses its own definition of „immovable property” in Article 13b. According to this definition, for the purposes of the application of the VAT Directive, „immovable property” means:
- any specific part of the land, on its surface or underneath it, which can become the object of ownership and possession.
- any building or structure attached to or embedded in the ground, whether above or below sea level, which cannot be readily dismantled or moved.
- Any installed element that is an integral part of a building or structure, without which the building or structure is incomplete, such as doors, windows, roofs, stairs and elevators.
- any element, equipment or machine permanently installed in a building or structure that cannot be moved without destroying or altering the building or structure.
The first two items above seem self-explanatory. Point c), on the other hand, refers to such installed elements that form an integral part of the building, without which the building is incomplete, giving examples of such elements as doors, windows, roofs, stairs and elevators. In this part of the definition, the EU legislator thus refers to those building elements which are in principle installed once only and which also enclose the building structure (doors, windows, roof). Once installed in a building, doors, windows or a roof are an integral part of the building and cannot be easily removed and reinstalled in another building.
The same is true for stairs and elevators, even though they are internal building components. Firstly, they are often too large to be easily dismantled and reinstalled elsewhere; second, they are too complex and consist of too many components. ISecondly, their removal from a given building affects its functionality (the ability of building users to move around inside).
On the other hand, point d) emphasizes the link between a given element, equipment or machine permanently installed in a building and the inability to move it without destroying the building. Therefore, for the purposes of the VAT Directive, any item of equipment or machinery which is permanently installed in a building in such a way that its possible dismantling involves the destruction of part of the building should be considered as real estate and, consequently, the place of supply of services relating to that item of equipment or machinery will be the place where the real estate is located.
Examples of determining the place of taxation of real estate services
Example 1 – Construction and renovation services
A Polish entrepreneur runs a business that provides services for the construction, reconstruction, repair, renovation and modernization of buildings, mainly involving the adaptation of certain usable areas (e.g. offices or shops in shopping centers) to the needs of a specific user (so-called fit-out). It provides its services in Poland and abroad, mainly in Germany.
In a situation where a Polish entrepreneur provides services outside of Poland, the place of taxation of such services remains to be determined. As mentioned above, the services provided by a Polish entrepreneur consist in adapting a certain usable area to the needs of a certain user (i.e. a lessee of office or commercial premises). Firstly, it should be noted that the work relates specifically to a particular property. Second, such adaptation work becomes a permanently installed element of the property that cannot be moved without damaging or altering the property.
As a result, such services should be classified as services directly related to the property. The place of their provision should be determined on the basis of Article 28e of the VAT Act, according to which the place of provision of services related to real estate is the place where the real estate is located.
Example 2 – Maintenance services for control drives and grates in shopping malls
A Polish entrepreneur runs a company that provides maintenance services for operator drives and rolling grilles for shops and service outlets located in shopping malls. These grates are not fixed to the building and can be removed at any time. The Contractor performs contracts both in Poland and in the countries of the European Union. As part of the contracts concluded with the contractors, the Polish contractor undertakes to periodically service (inspect) the control drives and roller grilles installed in shopping centers. In the case of shopping centers located outside of Poland, the Polish contractor commissions local subcontractors to perform periodic maintenance (inspection) of the grilles.
As mentioned above, the control drives and rolling grilles for shops and service outlets located in shopping centers and serviced by the Polish operator are not permanently installed in the building, they can be dismantled and moved as a whole at any time without causing any damage or changes to the shopping center building. As a result, the control drives and rolling grilles do not meet the definition of „immovable property” under Article 13b of the VAT Regulation. Therefore, the maintenance services for the control drives and rolling grilles in shopping malls should be considered as services not related to immovable property, as in the example provided in Article 31b(3)(f) of the VAT Regulation – „the installation or assembly of machines or equipment, the maintenance and repair and inspection of machines or equipment, and the supervision of machines or equipment which are not or will not become part of immovable property”.
As a result of the recognition of the maintenance of control drives and gratings in shopping malls as services not related to real estate, the place of performance of such services should be determined on the basis of general principles (the place of performance of services for a taxpayer acting in such capacity is the place where the taxpayer has its registered office).
Example 3 – Design services for the expansion of a production plant
A German entrepreneur won a tender organized by a Polish entrepreneur for the preparation of technical/design documentation related to the expansion of a production plant in Poland. The German company decided to outsource a large part of the work to Polish subcontractors, who were entrusted with the task of preparing the architectural design and project documentation for the expansion of the production plant in Poland.
In view of the above, two aspects should be noted. Firstly, the services provided by the Polish subcontractors to the German contractor that won the tender should be classified as services related to the property located in Poland. The work of the Polish subcontractors relates specifically to the designated property in Poland, which will be the subject of the planned expansion. Therefore, the subcontractors should issue their sales invoices with Polish VAT (based on Article 28e of the VAT Act) and not without VAT, which is taxed in the buyer’s country of residence (as would be the case if the general rule of Article 28b of the VAT Act were applied). Secondly, the services provided by the German contractor who won the tender organized by the Polish contractor should also be documented with invoices including Polish VAT (due to Article 28e of the VAT Act), and thus the German contractor should register for VAT in Poland.
Example 4 – Warehousing services
A Polish entrepreneur provides warehousing and logistics services to contractors from Poland and other European Union countries. His warehouse is located in Poland. The service provided by the Polish entrepreneur consists in storing the contractors’ goods in an unaltered condition and providing logistics services consisting in processing the received order and sending the goods to the contractors’ customers. However, the Polish entrepreneurs using the Polish entrepreneur’s warehousing and logistics services do not have a specific place in the warehouse that they can use directly.
Over the years, the issue of warehousing services and their relation to real estate has been particularly exploited in disputes between taxpayers and tax authorities and has ended up before the CJEU. In its judgment of June 27, 2013, case C-155/12, the CJEU ruled that two cumulative conditions must be met in order for a storage service to qualify as a property-related service for VAT purposes:
- Storage must be the main element of a comprehensive service.
- The recipient of the service must be given the right to use all or part of a clearly defined item of property.
In the light of the above rules defined by the CJEU and the example presented, the warehousing and logistics service provided by a Polish entrepreneur to entrepreneurs from other EU countries does not meet the above conditions because, firstly, the recipient of the service is not granted the right to use a part of the warehouse. Although the goods of the service recipient are stored in the warehouse, the service recipient does not have free access to them or to a certain part of the warehouse. Secondly, the central object of the service provided by the Polish entrepreneur is not the real estate itself and the storage of the customer’s goods, but the entire comprehensive service consisting in fulfilling orders on behalf of the customer. Storage of goods is only one element of this service, but not the only one.
As a result of the recognition of the above described storage and logistics services as services not related to real estate, the place of performance of such services should be determined on the basis of general principles (the place of performance of services for a taxpayer acting in such capacity is the place where the taxpayer has its seat).
Summary
With regard to services related to real estate, it is necessary to verify whether the relationship between these specific services and the real estate is sufficient. In order to confirm that the service is related to real estate within the meaning of Article 28e of the VAT Act, the following conditions must be met jointly:
- The service must be related to a specific, individually identified property (defined in a specific way),
- There must be a direct link between the provision of the service and the individually designated property, i.e. the service could not be provided without the property.
The above criteria show that not every service involving real estate as such can be linked to real estate under Article 28e of the VAT Act.
If the above links are proven and the service in question is therefore classified as a service connected with real estate in the light of Article 28e of the VAT Act, the place of supply of the service will be the country in which the real estate is located.
