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CJEU will clear doubts about VAT chargeability at the sale of a real property

2016-09-30

Proper determination whether in the case of a real property sale transaction planned by taxpayers VAT exemption will be applicable or the sale has to be taxed by applying the basic rate seems to be problematic not only for taxpayers but for tax authorities as well. It was reflected by the Supreme Administrative Court in its decision of 23 February 2016 (case ref. no. I FSK 1573/14), which referred to the Court of Justice of the European Union a request for a preliminary ruling regarding the compliance of a definition of the first occupation as adopted in the Polish law (which has an influence on the right to exemption) and Directive 2006/112/EC.

Just to remind: according to the Polish regulations, the supply of buildings, civil engineering works or parts thereof is exempt from VAT, save where:

  1. the supply is made within the framework of the first occupation or prior to the first occupation,
  2. the period between the first occupation and the supply of the building, civil engineering works or parts thereof was shorter than 2 years.

And the first occupation is the release for use of buildings, civil engineering works or parts thereof, in performance of taxable activities, to the first customer or user, following their:

  1. erection or
  2. upgrade, if the expenditure incurred for the upgrade, as defined in the regulations on income tax, constituted at least 30 % of the initial value.

Doubts are caused by the reservation that the release for use be made in performance of taxable activities – meaning a supply or service. Literal wording of the provision may trigger a conclusion, as indicated by the Supreme Administrative Court in its decision, that there is no release of the building for use after its construction (or upgrade), in spite of its actual occupation, if that activity is not accompanied by a supply or service. Such interpretation of the regulations brings about another conclusion that the sale transaction involving a building constructed by a taxpayer and used by the same for over e.g. 20 years will not be eligible for exemption but will be treated from tax perspective in the same way as the sale of the building right after its construction – as the first occupation would take place only within the framework of the sale transaction. It is useless to look for a similar regulation in Directive 2006/112/EU – although Directive uses the term of the first occupation, it does not define the same.

In the case law and binding rulings issued in regard to this topic we may find both a position that the narrow understanding of the first occupation as indicated above is proper as well as a more liberal view. Of special interest is here a decision of the Supreme Administrative Court of 14 May 2015, case ref. no. II FSK 382/14, wherein the Court stated that the Polish legislator had narrowed a definition of the first occupation in relation to a definition arising from the Directive, by implementing a restriction connected with the release for use within a taxable activity.

By giving a verdict in this case, which was already designated as Case C-308/16 Kozuba Premium Selection, the CJEU should clear doubts of Polish taxpayers as to the proper chargeability of VAT on their real property transactions. It is worth noting that such transactions, often involving very high amounts of money, may be connected with a significant tax risk in view of unclear regulations. At the moment such risk may be mitigated by applying for an individual binding ruling, which requires, however, patience from the parties to the transaction – the tax authority will issue a ruling within 3 months of the date of receiving the application.

Unfortunately, as at the date of publishing of this article, the date of the hearing is not yet known.