Contribution and VAT - which type of contribution should be taxed?

Service-Tax

Contribution in kind means a contribution in kind made to a commercial or civil partnership by a shareholder or partner. Upon the contribution in kind, all ownership rights are transferred to the company. Since we already know the general definition of an in-kind contribution, it is worth considering the effects of an in-kind contribution in terms of VAT. Contribution and VAT - what are the dependencies?

Making an in-kind contribution is a taxable activity - in-kind and VAT

The activity of making an in-kind contribution, in return for which the entity receives shares, meets the definition of a paid supply of goods specified in the VAT Act. This means that if the subject of the contribution in kind is, for example, land, buildings, equipment or vehicles, we are dealing with a paid delivery of goods. It is also worth noting that the in-kind transaction may also be considered the provision of services against payment, when, for example, the in-kind contribution consists in the payment of licenses or patents. This was also confirmed by the Director of the Tax Chamber in Poznań, in his individual interpretation of September 22, 2014, reference number ILPP2 / 443-698 / 14-5 / Acre, where we read: The act of making an in-kind contribution, depending on its subject, may therefore meet the conditions for recognizing it as a supply of goods pursuant to Art. 7 (transfer of the right to dispose of the goods as an owner) or for the provision of services pursuant to Art. 8 (any service that is not a delivery of goods, in particular the transfer of rights to intangible assets).

It should also be noted that the in-kind contribution is not subject to VAT in a situation where it is made by a person who is not a taxpayer, and even when he is a VAT taxpayer, but in this specific activity he does not act as such.

Example 1.

Ms Monika does not run a business within the meaning of the VAT Act. It decided to make an in-kind contribution to the company with real estate built up with a residential house. The building was used only for private purposes. In such a situation, the contribution in kind will not be subject to taxation, as this activity is not performed by the VAT payer as part of his business activity.

In-kind contribution of the enterprise or its organized part

Pursuant to Art. 6 of the VAT Act, the provisions of the Act do not apply to a transaction consisting in the sale of an enterprise or an organized part of an enterprise. It follows directly from the fact that if the enterprise or its part is sold by means of a contribution in kind, such an activity does not give rise to a tax obligation at all. However, it is important to remember that the presented solution applies to the entire enterprise or its organized part. If a single component of the enterprise is contributed in kind, which is only a component, we treat such a transaction as a supply of individual goods or provision of services. It is emphasized that the components of the enterprise should be related to each other in such a way that they can be referred to as a team, and not a set of certain elements. Therefore, it is important that the functional relationships between individual components are maintained in the company being sold, so that the transferred mass can be used to continue a specific business activity. The definition of an enterprise can be found in Art. 551 of the Civil Code, while the definition of an organized part of an enterprise is provided in Art. 2 point 27e of the VAT Act.

Example 2.

Mr. Włodzimierz is the owner of a furniture manufacturing company. He decided to contribute the entire enterprise by means of an in-kind contribution to the newly established company. Such an action will not be subject to taxation.

Example 3.

Mr. Krystian is the owner of a construction company. He brought one of his excavators as an in-kind contribution to the company. Due to the fact that it is a single component, such a transaction will be considered a supply of goods and taxed under general rules.

Tax base in-kind

The VAT Act does not provide for specific solutions for determining the tax base in the event of an in-kind contribution, therefore we apply general rules. This means that the tax base for the contribution in kind will be everything that the contributor receives from the company as payment. Thus, in the event of an in-kind contribution made to a capital company, the taxable amount will be the nominal value of the shares or stocks received in exchange. The nominal value should be strictly adhered to, even if it is different from the market value.

Example 4.

Company X made an in-kind contribution to ABC sp.z o.o. a car worth PLN 20,000. In return, she received shares with a nominal value of PLN 20,000. The tax base is PLN 20,000 (less VAT).

Example 5.

Company Y contributed in kind to ABC s.a. a lathe with a market value of PLN 100,000. In return, however, it received shares with a nominal value of PLN 80,000. The tax base in this case is PLN 80,000 (less VAT).

However, many more problems arise when determining the VAT tax base in the event of an in-kind contribution to partnerships, because in this case no shares or stocks are issued for the in-kind contribution, so the nominal value cannot be indicated. The applicant only acquires the right to a share in the company's profits, which as at the date of the contribution in kind are unknown and its value cannot be determined. In such a case, it is justified to assume that since there is no payment amount, such a transaction should be considered free of charge. The taxable amount for free transactions is the purchase price of goods or similar goods, and if there is no purchase price - the manufacturing cost, determined at the time of delivery of these goods (Article 29a (2) VAT).

Example 6.

Ms Edyta purchased a warehouse worth PLN 200,000, which she then made as a non-cash contribution to the general partnership. Due to the fact that she did not receive payment for the hall, but only the right to share in the company's future profits, the tax base should be the purchase price of the goods, ie PLN 200,000 (less VAT).

Invoicing in kind

A contribution in kind, understood as a supply of goods or services, is subject to normal invoicing. This means that the invoice documenting the in-kind contribution should be issued no later than on the 15th day of the month following the month in which the delivery was made or the service was performed, but not earlier than 30 days before the delivery or provision of the service. The time of issuing the invoice is irrelevant to the emergence of the tax obligation, as this, as a general rule, arises at the time of delivery or performance of the service.