Transfer of immovable property to a tax authority and VAT
On 11 May 2017, a judgment was given in Case C-36/16 Minister of Finance vs Posnania Investment SA. The request for a preliminary ruling covered determination whether the transfer of ownership of land (the tangible property) by a taxable person to the State Treasury, a municipality, district or regional authority in settlement of tax arrears constitutes a transaction that is subject to tax (supply of goods for consideration).
The case involved the Polish taxable person active in the field of property transactions, which transferred the ownership to un-built on land to the municipality in settlement of tax arrears. This special manner of discharge of a tax liability is envisaged in Article 66 paragraph 1 of the Tax Code. Paragraph 2 of that provision states that the transfer shall take place at the request of the taxable person:
- in the case of transfer of the property to the State Treasury (i.e. in settlement of tax arrears constituting State budget revenues), on the basis of a contract concluded, with the consent of the relevant head of the tax office, between the district officer and the taxable person,
- in the case of transfer of the property to a municipality, district or regional authority (i.e. in settlement of tax arrears constituting revenues accruing to their budget), on the basis of a contract concluded between the head of municipality, the mayor (the town president), the district officer or the president of the region and the taxable person.
The time at which the tax debt is discharged is the date on which the transfer of ownership of the tangible property or property rights occurs.
The Company had doubts whether in the situation which occurred the transaction concluded with municipality should be subject to VAT (in consequence of which a corresponding invoice should be issued). In view of the Polish tax authority, since as a result of transfer the municipality has acquired all the rights of an owner, that transfer of ownership in settlement of tax arrears constitutes a supply of goods for consideration, within the meaning of the VAT Act, and is subject to VAT. The Regional Administrative Court supported, however, the position of the taxable person.
The CJEU did not agree with the view of the Polish tax authorities. In the assessment of the CJEU, the provisions of the Directive indicate that the transfer of ownership of immovable property by a person subject to VAT, for the benefit of the State Treasury or a local authority of a Member State, occurring, as in the analysed case, in payment of tax arrears, does not constitute a supply of goods for consideration that is subject to VAT. It is stressed in the judgment that that a supply of goods is made ‘for consideration’, if there is a legal relationship between the supplier and the purchaser entailing reciprocal performance, the price received by the supplier constituting the value actually given in return for the goods supplied. No such situation exists in the case at hand – the public authority has no obligation to provide any performance.
Nonetheless, it should be remembered that such a transfer of property, although it does not constitute directly a supply of goods, may be chargeable with VAT as the free of charge provision of goods pursuant to other legal regulations. As provided for by Article 16 of the VAT Directive, the application by a taxable person of goods forming part of his business assets for purposes other than those of his business shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible. The above provision of the Directive is reflected in Article 7 paragraph 2 of the VAT Act.
So, should a taxable person want to settle a tax liability by transferring the ownership of the property to the state authorities, in principle such a ‘transaction’ will not be a supply of goods. However, if the taxable person deducted the input tax at the time of acquisition, it may constitute the free of charge provision of goods which is treated, both by the Directive and the VAT Act, as a supply of goods subject to tax.