Tax Highlights for Real Estate – September 2023

Supreme Administrative Court held in the context of the sale of commercial property

At the end of July, an important judgment of the Supreme Administrative Court was handed down (case number I FSK 892/18) concerning the purchase of a commercial property – in this case concerning  shopping center. The essence of the dispute was whether the subject of the acquisition was (i) an organized part of an enterprise (ZCP) or (ii) the acquisition of individual assets together with the rights attached to them.

The case began in 2016, when the two entities entered into an agreement for the sale of a commercial property which consisted of land together with a building, appurtenances and rights pertaining to it. The seller transferred all its rights and receivables under the leases and the security documents for the leases to the company. However, the transaction did not transfer the rights and obligations arising from the management agreement, including monitoring, the property insurance agreement, the agreements for the supply of utilities and the ongoing administration of the project as well as the bank account agreements. The company had a tax ruling confirming the right to deduct VAT on the acquisition in question. In the course of the investigation, the authorities questioned the right to deduct input tax, as, according to the authorities, the transaction involved the disposal of an enterprise or an organized part of an enterprise. The case ended up before the Supreme Administrative Court, which submitted preliminary questions to the CJEU, which were as listed below.

1) Has Poland correctly implemented the provisions of the EU VAT Directive by exempting the supply of an organized part of an enterprise from VAT without making the application of such an exemption conditional on the existence of a legal succession between the transferor and the purchaser? – In the CJEU’s view, the national provisions do not infringe the VAT Directive with respect to ZCP.

2) In order for the VAT exemption to apply to the supply of commercial property, must there have been a transfer of all the components of such an organized part of the vendor’s assets, and does a change in this respect (in particular the failure to take over insurance and management contracts for the assets disposed of) mean that there has been a supply of goods subject to VAT? – According to the CJEU, the failure to transfer e.g. insurance or management contracts is not sufficient to prevent the continuation of the business.

The CJEU, in its judgment of 16 January 2023, reference C 729/21, replied that:

1) national legislation on the organized part of an enterprise does not preclude the EU VAT Directive;

2) the lack of transfer of elements such as a management contract or an insurance contract within the framework of the sale of the immovable property is not sufficient to prevent independent economic activity. Consequently, the VAT treatment of the supply of a commercial property is not dependent on the transfer of the components in question.

The Supreme Court, having regard to the CJEU’s answers to the preliminary questions, dismissed the cassation appeal, stating that the sale of the commercial real estate did not constitute a supply of goods subject to VAT, but a disposal of an organized part of an enterprise. Judges noted that the absence of a transfer of the management contract does not prejudge the classification of the sale as a supply of immovable property subject to VAT. Consequently, the Supreme Court held that in the facts described, the transaction should be excluded from VAT taxation.

What is worth emphasizing is the part of the NSA ruling which makes reference to the lack of protective power of a tax interpretation. It was pointed out that the company’s interpretation concerned only the right to deduct input tax, and not the classification of the transaction as ZCP. This means, in practice, that taxpayers purchasing real estate should pay attention not only to the right to deduct or the absence of a VAT exemption, but also to whether the real estate transaction made did not constitute a disposal of a business/CCP and a supply of goods subject to VAT.

It is worth recalling that in 2018. The Ministry of Finance has issued clarifications on this issue, which retain their protective effect. However, in practice, the protection of the clarifications may be limited due to the complexity of the real estate disposal transaction. Therefore, when planning a transaction involving the supply of commercial real estate it is still advisable to obtain an individual interpretation.

Obligations regarding tax residence certificates has changed

On 1 July 2023, the state of epidemic emergency related to the COVID-19 pandemic was revoked. This affects the previously extended due to the pandemic expiry dates of residency certificates. Preferential provisions introduced during the pandemic period due to impeded access to offices.

The special provisions mainly concerned certificates which:

– were issued without an expiry date, could then be used by payers for the duration of the epidemic or epidemic emergency state, if the 12-month deadline for their issue would have expired during these states and 2 months after the states had ceased, or

– covered 2019 or 2020, they could then be used by Polish payers subject to a declaration by the taxpayer as to the validity of the data contained therein.

From 2 September 2023, withholding tax payers can no longer count on preferential provisions  regarding certificates of residence.

Therefore, the completeness of the certificates of residence in their possession should be verified in connection with the end of the epidemic emergency state.

Contractual penalties as tax deductible costs

The company that produces food and then resells it to a multi-trade (where customers include wholesalers or distributors) applied for a tax ruling. The company’s contracts signed with business partners include provisions on contractual penalties for events such as non-delivery or delayed delivery.

In view of the above, the company decided to ask the director of the National Tax Administration (NTA) about the possibility of classifying contractual penalties as tax deductible costs under Article 15(1) of the CIT Act.

The dispute between the company and the director of NTA revolved around the wording of Article 16(1)(22) of the CIT Act, pursuant to which contractual penalties and damages for defects in goods delivered, work performed and services performed, and a delay in delivering goods free of defects or a delay in rectifying defects in goods or work performed and services are not regarded as tax deductible costs.

In the company’s view, all expenses, apart from those listed in Article 16(1) of the CIT Act, may constitute tax deductible costs, provided that they are causally related to the revenues obtained by the company or serve to preserve or secure a source of revenue. The applicant company also drew attention to the prohibition on the application of an expansive interpretation, which the director of the CIT tried to apply in this case. Therefore, penalties associated with a failure to deliver or a delay in delivery could be included in tax costs.

The NTA’s director disagreed with such a position, indicating that the reason for the non-performance of an obligation or the obligor’s failure to meet a performance deadline is irrelevant. A sufficient premise is the occurrence of liability of the obligor for non-performance of the service, its delay or delay, which may result from the law or from the bond relationship between the parties.

The Provincial Administrative Court in Warsaw in its judgment of 17 July 2023, ref. III SA/WA 716/23 finally agreed with the company, at the same time deciding to revoke the appealed interpretation. In a verbal justification, judges drew attention to the view, which has been well-established in case-law for many years, according to which Article 16 para. 1 pt. 22 of the CIT Act cannot be interpreted broadly. The court also argued its decision on the grounds that if it were to be considered that any contractual penalty could not be an expense, there would be no justification for indicating specific contractual penalties in the non-deductible costs provision.