Advance payment towards the lease - VAT settlement

Service-Tax

In the field of tax on goods and services, the tax obligation also arises from the receipt of an advance payment for the future delivery or provision of services. Such a situation takes place when the tax obligation arises on general principles. On the other hand, in the case of the rental service, this obligation is determined on the basis of specific rules. Therefore, it is worth considering whether the received advance payment for the lease raises issues related to VAT settlement.

Advance payment received for the lease and the tax obligation

According to the general rule expressed in Art. 19a paragraph. 1 of the VAT Act, the tax obligation arises when the goods are delivered or the service is provided, subject to paragraph 5 and 7–11, art. 14 sec. 6, art. 20 and art. 21 sec. 1.

The provision therefore shows that the tax becomes chargeable in the period in which the delivery of goods or services was made and should be accounted for this period.

However, attention should also be paid to the content of Art. 19a paragraph. 8 of the VAT Act, where it is stated that if, before the delivery of goods or the service, all or part of the payment has been received, in particular: prepayment, advance payment, down payment, installment, construction or housing contribution prior to the establishment of a cooperative right to a dwelling or premises for another purpose, the tax obligation arises upon its receipt in relation to the received amount, subject to paragraph 5 point 4.

This, in turn, means that if the supplier of goods or the service provider receives an advance payment before the service is rendered, the obligation to pay the tax arises on the date of its receipt.

However, we must point out that the legislator has provided for a specific tax point for certain categories of taxable activities. This is exactly what happens in the case of a lease.

Pursuant to Art. 19a paragraph. 5 point 4 lit. b of the Act, the tax obligation arises upon issuing an invoice for the provision of services:

  • telecommunications;

  • listed in item 24–37, 50 and 51 of Annex 3 to the Act;

  • rental, rental, leasing or similar services;

  • protection of persons and services of security, supervision and storage of property;

  • permanent legal and office services;

  • distribution of electricity, heat or cooling and line gas.

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As can be seen, one of the special exceptions is the provision of the rental service.

Pursuant to Art. 19a paragraph. 7 of the VAT Act in the cases referred to in sec. 5 points 3 and 4, when the taxpayer did not issue the invoice or issued it late, the tax obligation arises at the time of the expiry of the invoice issuance deadlines specified in art. 106i paragraph. 3 and 4, and where no such time limit has been specified - upon the expiry of the payment deadline.

Pursuant to Art. 106i paragraph. 3 point 4 of the VAT Act, the invoice shall be issued no later than the payment deadline.

In the case of a rental agreement, the moment when the invoice is issued decides when the tax obligation (i.e. the need to pay VAT) arises. If the taxpayer has not issued it, this moment determines the payment date agreed between the parties to the contract.

Advance payment towards the lease - no obligation to settle VAT

Due to the fact that in the case of a rental agreement, the tax obligation arises on special principles, Art. 19a paragraph. 8 of the VAT Act.

As a result, it leads to the conclusion that the received advance payment for the lease does not generate a tax obligation in this respect. The obligation to pay tax applies only to the correct remuneration, and the tax obligation arises on the date of the invoice or on the date of payment.

Such a position is confirmed, among others, by the judgment of the Supreme Administrative Court of 3 August 2018 (No. I FSK 1842/16), where it was indicated that Art. 19a paragraph. 7 of the VAT Act concerns payment for the provision of the rental service, i.e. the situation when the service has been performed or is performed, as in the case of a continuous service, such as rental. The fact that the parties to the contract set a deadline for the advance payment still does not allow the application of Art. 19a paragraph. 7 of the VAT Act, because this fact does not change the nature of the payment, it is still an advance and we are still dealing with receiving the payment before the service is performed.

Since Art. 19a paragraph. 8 of the VAT Act (due to the fact that the content of this provision states: "subject to paragraph 5 (4)"), receiving an advance payment for a future service, even if the obligation to pay the advance payment is specified in the contract, does not require the payment of VAT .

The tax obligation in VAT will not arise, even if the rental agreement specifies the date of payment of the advance and makes its payment before the service is performed. The received advance payment for the rental service does not give rise to a tax obligation.

Received advance payment for the lease and the obligation to issue an invoice

We also have to clarify the question of whether the received advance payment for the lease obliges us to issue an invoice on this account.

It is worth pointing out that pursuant to Art. 106b paragraph. 1 of the VAT Act, the taxpayer is obliged to issue an invoice documenting:

  1. sale, as well as delivery of goods and provision of services referred to in art. 106a, point 2, made by him for the benefit of another taxpayer of the tax, value added tax or a tax of a similar nature or for the benefit of a non-taxable legal person;

  2. mail order sale from the territory of the country and mail order sale within the territory of the country to an entity other than indicated in point 1;

  3. intra-Community supply of goods to an entity other than indicated in point 1;

  4. receipt by him of all or part of the payment before performing the activities referred to in points 1 and 2, except in the case when the payment concerns the intra-Community supply of goods or activities for which the tax obligation arises in accordance with art. 19a paragraph. 5 point 4.

Pursuant to Art. 106i paragraph. 1 of the Act, the invoice shall be issued no later than on the 15th day of the month following the month in which the goods were delivered or the service was performed, subject to paragraph 2-8.

If, prior to the delivery of the goods or the performance of the service, all or part of the payment referred to in Art. 106b paragraph. 1 point 4, the invoice shall be issued no later than on the 15th day of the month following the month in which all or part of the payment was received from the buyer (Article 106i (2) of the Act).

As you can see, directly from the content of Art. 106b paragraph. 1 point 4 of the VAT Act, there is no obligation to document the receipt of part of the payment with an invoice before the rental service is performed.

The received advance payment for the lease is a tax-neutral event as far as VAT is concerned, which means that there is no obligation to issue an advance invoice on this account.

Moving on to the summary of our findings, first of all, it should be noted that in the case of rental services, the tax obligation is determined on specific terms. This, in turn, affects the issues of the advance payment received for the lease. This is because this does not create an obligation to pay tax in relation to the amount received on this account. As a result, an advance payment for the lease is also not required.