Advance payment received by the developer - settlement part 2

Service-Tax

The residential real estate market in Poland is relatively stable in terms of the supply of flats. Developers implement development projects on the basis of payments received during their lifetime. On the other hand, ready-made flats are sold on the basis of preliminary sales contracts. In any case, the developer is obliged to settle the delivered housing supply against VAT and PIT (CIT) and in the relevant periods received payments (reservation fees, advances, other fees), however, the moment of their taxation differs significantly from the basic taxation rules. How is the advance payment received by the developer accounted for? We answer!

Consequences of concluding a developer agreement

In a situation where a developer agreement is concluded between the buyer and developer, there arise mutual obligations for both parties to perform the agreement within specified time frames.

In the case of a developer, he is usually obliged to build a flat or a single-family house on specified dates, at a specific address, and after the construction of the property, to establish separate ownership of the property in question.

On the other hand, the buyer most often undertakes to pay, within the time limits specified in the contract, a part of the apartment purchase price for the development project carried out during the development project to an escrow account specially created by the developer (open or closed).

The details of the developer agreement are set out in Art. 22 of the Act on the protection of acquired rights of a dwelling or a single-family house.
In addition to the development agreement, there is also a preliminary sale agreement which is a kind of replacement for the development agreement, which most often applies to commercial premises, but sometimes it may also occur when selling apartments.

The preliminary sale agreement is usually concluded before or after the completion of a development project. The specificity of the contract consists primarily in establishing the separate ownership of the property and the buyer's commitment to purchase the property in question. Interestingly, when the developer uses the preliminary sale agreement instead of the development agreement, he is not obliged to collect the funds paid from the buyer on an escrow account.

The final stage of the process of acquiring a flat or house is the conclusion of an agreement to establish separate ownership and a final agreement for its sale, or simply a sale agreement.

A word about an escrow account

To explain the essence and operation of an escrow account, it is worth quoting Art. 59 sec. 1-3a of the Banking Law, in which the legislator specifies that only funds entrusted to the account holder by a third party may be deposited on an escrow account.

The parties to the escrow account agreement are the bank and the account holder (trustee). The contract concluded between the above-mentionedparties determines the conditions that should be met for the funds of third parties deposited into the account to be paid to the account holder or for his instructions to use these funds to be carried out.

The escrow account is kept in a way that enables the identification of third parties who have deposited funds on the account at any time and the calculation of their share in the amount collected on the escrow account.

On the basis of the provisions cited above, it can be seen that the essence of an escrow account is aimed at securing the interests of third parties (buyers) as to the funds that affect this account. In addition, funds may be accumulated on this account only on the basis of the concluded contract and in accordance with its terms.

In the case of a developer, after receiving payments to an escrow account, they do not constitute funds that can be freely used by the developer. It does not matter whether it is an open or closed escrow account.
Thus, at this stage, that is, when the buyers make payments to the escrow account in accordance with the development agreement, the developer cannot talk about receiving an advance payment and the obligation to tax the received payments in VAT due to the inability to freely dispose of the "special" money accumulated in the escrow account.

Advance payment received by the developer and the tax obligation in VAT and PIT

If an active VAT payer receives an advance payment before the service or sale of goods, then he is obliged to issue an advance invoice documenting the given receipt no later than on the 15th day of the month following the month of payment.
In the case of the developer, the moment of the VAT obligation in relation to the payments received (based on the developer agreement) will arise only when the developer releases funds from the escrow account to which the buyers made the "advances".

In addition, it should be mentioned that the funds on the escrow account may in some situations be returned to the buyer and therefore do not have the characteristics of advances, i.e. final payments for the future delivery of goods.

Thus, the mere receipt of funds does not oblige the developer to tax the fact of their receipt neither in VAT nor in PIT (CIT). Only the moment (month) of releasing these funds from the escrow account results in the obligation to tax the collected funds in VAT (amounts received from buyers should be treated as gross amounts).

Supplementing the above with the tax obligation in the income tax, it will arise on the day of transferring the ownership of the real estate to the buyer. This moment usually occurs in connection with the signing of a sales contract or a final sales contract.

The confirmation of the above position is, inter alia, individual interpretation issued by the Director of the National Tax Information of July 12, 2018. with reference number 0114-KDIP1-1.4012.323.2018.2.KOM as well as the individual interpretation issued by the Tax Director in Bydgoszcz of June 11, 2014. with reference number ITPP1 / 443-299b / 14 / MN.

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Invoicing for private persons

When discussing the process of settling VAT with a developer, it is also worth mentioning the aspect of issuing invoices to private persons, who are most often recipients of apartments. If they do not ask for invoices, the developer settles VAT on the basis of the created internal ID (according to the date of payment of funds from the escrow account).

If, on the other hand, the buyer requests an invoice, pursuant to Art. 106b paragraph. 3 of the VAT Act, the developer is required to issue an invoice documenting the receipt of all or part of the payment before the service or the delivery of goods, if the request for issuing it was received by the developer within 3 months from the end of the month in which the goods were delivered or the service was provided or the whole or part was received. payments.

Example 3.

The Kowalski family signed in 04/2019 a preliminary sale agreement for the purchase of a flat. By the end of the month of 04/2019, in accordance with the agreement, they made an advance payment of PLN 50,000 to the developer's regular bank account. Within two months, i.e. in the month of 06/2019, they signed an agreement transferring the previously established separate ownership of the property and a sale agreement. At what moment will the developer who is an active VAT payer be obliged to tax the real property supply in question?

Due to the fact that the developer had a ready apartment at his disposal, he applied a preliminary sale agreement in this case. Thus, the obligation to tax in VAT and only in VAT of the advance payment was made in the month of 04/2019, while in the month of 06/2019, i.e. in the period of transferring the ownership of the real estate to the buyer, the real estate is delivered, and therefore the obligation to tax the remaining amount in VAT and the full value of the selling price in PIT (CIT).

Example 4.

The Nowak family signed a reservation agreement with the developer. On its basis, they paid PLN 5,000 of fees to the developer's regular bank account, who is an active VAT payer. Then, they signed a developer agreement according to which by the end of 02/2019 they paid PLN 100,000 to the developer's escrow account, and by the end of 03/2019 the amount of PLN 150,000. In 04/2019, the developer paid PLN 100,000 from the escrow account and in 05/2019 another PLN 100,000.

The apartment has not yet been completed. The contract for the establishment of separate ownership of the real estate with the transfer and the contract of sale, also due to the incomplete completion of the apartment, have not been signed. The developer is wondering how and whether it should tax the received advances in VAT at all?
In the month of collecting the funds from the escrow account, the developer should tax the amount of PLN 100,000 against VAT (treating it as a gross advance payment). Then, in the next month of 05/2019, he should tax the next amount of PLN 100,000 paid from the escrow account.

For each payment, the developer should issue an invoice documenting the amounts paid, and for the date of receipt of the advance payment, the developer should enter the date of release of funds from his escrow account, and not the date of receipt of payments from buyers.

The remaining PLN 50,000, which has not yet been released from the escrow account, is not subject to VAT.
On the other hand, due to the fact that the construction of the apartment has not been completed yet, it has not been collected by the supervision, and the ownership of the property has not been established with the transfer to the buyers, the obligation to tax this supply in income tax has not arisen.