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Polish regulations about VAT exemption on the supply of buildings inconsistent with VAT Directive


In its judgment of 16 November 2017 in Case C-308/16 Kozuba Premium Selection Sp. z o.o. v Director of Tax Chamber in Warsaw, which we reported about already in September 2016, the Court of Justice of the European Union confirmed that the Polish legislator had narrowed a definition of the first occupation in relation to a definition given in Directive 2006/112/EC. In the opinion of CJEU, it is contrary to the Directive to make exemption from VAT in connection with the supply of buildings subject to the condition that the first occupation of such buildings arises in the context of a taxable transaction.


The point of dispute was taxation on the sale of a building erected in the early 1990s. and taken over by the company in 2005. In the years 2005-2006, the company made improvement works in the above property aimed at adapting the same for the purposes of the economic activity carried out, and the investment expenditure corresponded to circa 55% of the initial value of the building. Following completion of the works, the building was entered to the fixed assets register under the heading “show home”. Over two years later the company, treating the building as second-hand goods, sold the same by applying the exemption envisaged in Article 43.1.10 of the Polish VAT Act.


Pursuant to that Article, 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 should be understood as the release for use of buildings, civil engineering works or parts thereof, in performance of taxable transactions, to the first customer or user, following their:

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


The tax authorities made a different assessment of tax effects of the sale transaction, concluding that on the date on which the building was released for use following the improvements made to it, there was no first occupation within the meaning of the Polish regulations, because the release for use was not made in the context of taxable transactions (as the building was used for the purposes of the company’s economic activity as the show home). In the opinion of the tax authorities, the first occupation of the improved building took place only as a result of its sale – as that transaction is taxable with VAT. Thus, the company was not eligible for the exemption envisaged in Article 43.1.10 (or in Article 43.1.10a) of the VAT Act.


Article 135(1)(j) of the VAT Directive provides that the supply of buildings, other than those referred to in Article 12(1)(a) thereof, i.e. the supply of a building or a part of a building and the land on which it stands, made before its first occupation, is exempt from VAT. So in practice, the Directive exempts from VAT the supply of old (second-hand) buildings.


When analysing the case, the CJEU came to conclusion that the Polish legislature excluded from the scope of the exemption in question – by linking the concept of “first occupation” to the exercise of a taxable transaction – occupations which were not the source of or did not generate taxable transactions, with the consequence that the exemption provided for in the VAT Directive is not applicable to a transfer of an existing building which has been the object, as in the case in the present proceedings, of use by its owner for its own commercial purposes (as the show home), on the ground that that use cannot be classified as “first occupation” in the absence of a taxable transaction (e.g. lease). The VAT Directive uses the concept of “first occupation”, but it is not defined therein. Nevertheless, already at the time of preparing the Sixth VAT Directive of 1977 it was assumed that the criterion of the “first occupation” of a building must be understood as corresponding to the first use of the property by its owner or tenant.  So that criterion was included as determining the point in time when the product was likely to leave the production process and enter into the consumption sector. It does not follow from the foregoing that the use of the building by its owner was to arise only in the context of a taxable transaction.


It follows from that that the condition implemented to the Polish VAT Act, according to which the first occupation arises in the content of a taxable transaction, violates the VAT Directive.


The discussed judgment confirms what has been noted for a long time by both experts and taxpayers. The Polish tax authorities have been consistently claiming and continue to claim that the use of a building, whether new or improved, by its owner does not constitute the first occupation (see: individual binding ruling of 6 October 2017, ref. no. 0114-KDIP4.4012.314.2017.2.MPE). We should expect that the challenged regulations will be changed soon in line with the Directive, which should enable to avoid similar disputes in future.


Barbara Otrzonsek, Tax Consultant, ATA Tax Sp. z o.o.