Sale of an office building is not sale of an OPE – judgment of the WSA in Warsaw
Numerous controversies have long surrounded commercial real estate sale transactions and hence their qualification for the purposes of VAT. For where the assets sold consist of a totality of tangible and intangible assets, thus making up an enterprise or its organised part, rather than merely being a real estate, the transaction is not taxable with VAT. As a result, no VAT can be deducted from the invoice documenting such a sale transaction. Quite expectedly, such situations often result in disputes between the Revenue Administration and the taxpayers. In order to somewhat mitigate the problem, the Minister of Finance has recently issued tax guidelines concerning the taxability with VAT of sale transactions concerning commercial real estate.
Let us, however, verify the manner in which this problem is approached by the courts, as exemplified by a judgment of the Voivodship Administrative Court (WSA) in Warsaw (III SA/Wa 3209/17).
The case involved a company which acquired, as part of its business, a commercial real estate. The transaction was documented by an invoice showing a relevant amount of VAT. The company recorded the invoice in its VAT purchase register and deducted the amount of VAT from that invoice. However, the Head of the Revenue and Customs Office questioned the right to such a deduction. The decision issued in the case in question stated that the assets sold constituted an organised part of an enterprise, which is not taxable with VAT. As a result, the invoice received did not entail a right to deduct the VAT. The Director of the Revenue Administration Chamber affirmed the decision of the lower authority.
The appellate body held that following the purchase of the real estate the company continued the business of leasing out commercial space, and all the rights and obligations of the seller under the existing lease agreements passed on to the purchaser. The administration of the building was vested with the same facility administrator. According to the Director of the Revenue Administration Chamber, circumstances such as acquisition of copyright to the architectural design, assignment of rights under the General Contractor’s warranty, the actual supply of utilities under the agreements concluded by the seller and the satisfaction by the purchaser of the seller’s liabilities justify one in concluding that an actual sale of an OPE took place. Therefore, in making the deductions, the Company inflated its input tax.
The existence or not of an OPE must be assessed from the seller’s point of view
However, the Voivodship Administrative Court did not support this way of reasoning. It relied inter alia on the CJEU’s case law in this respect whereby in order for a transaction to be excluded from VAT, it is essential that the purchaser be deemed a legal successor of the seller of the assets. Thus, an enterprise or its organised part must make up a whole that is capable of independent business operation.
In the case at issue, what was missing was, among other things, an organisational or financial separation within the seller’s enterprise. No separate accounts were kept for the real estate sold that would allow separation of the revenues and costs related solely to that very part of the enterprise. No employees were taken over that dealt solely with that part of the seller’s assets.
Also, liabilities were not transferred, which is a basic criterion for distinguishing a purchase of goods or services from a purchase of organised tangible and intangible assets making up an enterprise. The Company merely taking over the rights and obligations under the lease agreements is not sufficient as it follows by operation of law (Art. 678(1) of the Civil Code) and is independent of the will of the contracting parties. Neither can the payment of the consideration to the account of the bank financing the seller be deemed as transfer of a financial liability as the loan taken out by the seller was not taken over by the purchaser. The above payment method is commonly used where mortgage-secured real estate is being acquired.
In addition, the acquisition of the rights in the architectural design, by virtue of Construction Law itself, cannot be identified - as the lower authority mistakenly did – with acquisition of an enterprise’s trade secrets. Furthermore, the transfer of any warranty vested with the seller is inherent in the sale of virtually any asset. Yet, the furthest-going mark of the fiscal authority’s fantasy-making was its identifying a know-how transfer on account of the fact that the facility management had been entrusted to the same firm.
Ultimately, the Court found that the assets purchased by the Company did not constitute an organised part of an enterprise on the part of the seller, and it is that very criterion that is decisive in determining the tax-law qualification of a transaction of this kind.
Wojciech Jasiński, Tax Consultant, ATA Tax Sp. z o.o.