Real estate sales and different VAT rates

Service-Tax

As a rule, business activity requires premises. If they had their own, a possible sale of real estate may cause problems in terms of VAT, due to unclear regulations on this matter. In some situations, one building may be taxed at different rates.

Real estate sales and VAT

As a rule, the paid delivery of goods, including real estate, is subject to VAT.

The provisions of the VAT Act provide for two exemptions determining the sale of real estate contained in Art. 43 section 1 point 10 and 10a of the VAT Act.

Pursuant to the provision of Art. 43 sec. 1 point 10 of the VAT Act, the delivery of buildings, structures or parts thereof is exempt, except when:

  • the delivery is made within or before the first settlement,

  • a period of less than 2 years has elapsed between the first occupancy and the delivery of the building, structure or parts thereof.

In the light of the above-mentioned provision, the key to determining the taxation rules for the delivery of a building is to determine when it was first occupied and what period has elapsed since then.

The first occupation (Article 2 (14) of the VAT Act) is understood as putting into use, in the performance of taxable activities, to the first buyer or user of buildings, structures or parts thereof, after their:

  • construction or

  • improvement, if the expenses incurred for the improvement, within the meaning of the income tax regulations, constituted at least 30% of the initial value.

The above-cited regulations show that the delivery of real estate that meets the conditions specified in the regulations may be exempt from VAT. Exclusion from this exemption occurs when the delivery is made as part of the first settlement or before it, and when at least 2 years have passed since the first settlement.

In addition, the delivery of buildings, structures or parts thereof is in principle exempt from VAT pursuant to Art. 43 sec. 1 point 10a of the Act There are also exceptions to this rule from this provision. The delivery (including sale) of a building, structure or parts thereof is subject to VAT when:

  • in relation to these objects, the person delivering them was not entitled to reduce the amount of tax due by the amount of input tax,

  • the person who delivered them did not incur the costs of their improvement, in relation to which he was entitled to reduce the amount of tax due by the amount of input tax, and if he incurred such expenses, they were lower than 30% of the initial value of these objects.

Pursuant to Art. 43 sec. 10 of the VAT Act, the taxpayer may withdraw from the application of the tax exemption he is entitled to in relation to the building, structure or parts thereof, when the delivery will be made after 2 years from the first settlement, and choose their taxation, provided that both the supplying and the and the buyer of the facility will be registered as active VAT taxpayers and will submit a declaration prior to the delivery to the head of the tax office competent for the buyer that they choose to tax this supply.

This declaration must contain:

  • the names and surnames, addresses and tax identification numbers of the delivering and the buyer,

  • the planned date of concluding the facility delivery agreement,

  • address of this object.

Moreover, in order to waive the VAT exemption in relation to the delivery of the object, the amount due for the delivery cannot be lower than the purchase price or production cost specified at the time of delivery of the objects.

First settlement and two VAT rates on sale

Taxpayers often have a problem with the definition of the first settlement. The tax authorities indicated that the use of a built or modernized building for taxable activity does not result in the first settlement, if it was not given for use to another entity, e.g. for lease. Such a position was presented, among others, by Director of the Tax Chamber in Warsaw in an individual interpretation of May 27, 2015, file ref. IPPP1 / 4512-249 / 15-2 / AP, in which we read:

"(...) Therefore, if the taxpayer (or a third party) builds an object or modernizes it, and the expenditure on the improvement exceeds 30% of the initial value, then the object (or improvement) will be put into use (entered by the taxpayer in the fixed assets register) ), it does not mean that it was inhabited because it was not put into use in the performance of taxable activities. The first occupancy will take place, however, when the constructed or modernized facility is sold or, for example, leased, rented, and these activities are subject to VAT. It should be noted that both the sale, lease or rental performed by VAT taxpayers are activities subject to taxation. Therefore, the moment of handing over the building, structure or parts thereof for use to the first tenant (lessee) or buyer (...) should be considered the first occupancy ”.

Thus, there could be a situation where two rates were applicable when selling a building, as the building could be partially rented and partially used for running a business.

The courts did not agree with this view of the tax authorities. In the judgment of the Supreme Administrative Court of May 14, 2014, ref. No. I FSK 382/14 For the court to state unequivocally that in order for the first occupation to take place, it is enough for the building to be built or improved by the taxpayer to be used for business purposes. Such putting into use does not have to involve the performance of taxable activities.

As a result of the judgment, the tax authorities also revised their views to the benefit of the taxpayer. An example is the individual interpretation of the Director of the Tax Chamber in Warsaw of April 25, 2016, No.IPPP3 / 4512-208 / 16-2 / ISZ. We read in it that:

"(...) It should be noted that the Supreme Administrative Court in its judgment of May 14, 2014, file ref. No. I FSK 382/14. In that judgment, the Court stated that: 'The linguistic, systematic and teleological interpretation of Directive 112 clearly indicates that the above-mentioned the term should be understood broadly as "first occupation of a building, use". Therefore, this is how the definition provided for in Art. 2 point 14 of the VAT Act (...).

This means that the Applicant, using the above-mentioned The building for business purposes has met the conditions for exemption in Art. 43 sec. 1 point 10 of the VAT Act. The planned delivery of the Building will take place after the first occupancy within the meaning of Art. 2 point 14 of the VAT Act and a period longer than 2 years will elapse from the first occupation to the planned sale of the Property.

Therefore, the delivery of the Building located on the Real Estate will benefit from tax exemption under Art. 43 sec. 1 point 10 of the Act on tax on goods and services. (...) ".

Thus, under the provisions of the VAT Act, there are no grounds for applying two VAT rates when selling a building that was used for the company's needs and, for example, rented.