Sale of private property: VAT or transaction tax?
Do circumstances such as placing an advertisement for sale of real estate on an auction site or increasing the value of the land by partitioning it into smaller plots, adding utility connections, or establishing easements always indicate that the seller acts as a business and the transaction is subject to VAT, not the tax on civil-law transactions?
Determining whether a person acts as a VAT payer requires assessment of the specific case. Actions undertaken by the seller should be examined. If they resemble the actions of a trader, then he should be considered a business operator and VAT payer. If, on the other hand, the sale is merely an exercise of the right of ownership, then in Poland the tax on civil law transactions (TCLT) will apply.
Unfortunately, it is difficult to distinguish between these two situations in practice. Simple clarification of the status of the seller (as a VAT payer) is not enough. It is still necessary to check whether the activity undertaken by him is subject to VAT or he is exempt from VAT. This situation is the source of many discrepancies and also disputes with tax authorities.
Being a VAT payer is not enough to be exempt from TCLT
The two taxes—TCLT and VAT—are in principle mutually exclusive. TCLT refers to activities performed outside of professional trading, i.e. by persons who do not run a business (or who operate a business but perform a specific activity outside its scope). In turn, VAT covers activities undertaken by business entities. Thus if a transaction is subject to the VAT regime, it is not subject to TCLT.
Significantly, this rule also applies when an activity is subject to the VAT regime, but under that regime it is subject to an exemption under specific provisions (Art. 2(4) of the Act on the Tax on Civil-Law Transactions). However, this does not apply to real estate. Even if the real estate is sold by a business entity (VAT payer) and the sale transaction is subject to the VAT regime (as a supply of goods), but it is exempt from VAT (e.g. because the real estate is undeveloped and not a construction site, Art. 43(1)(8) of the VAT Act), then TCLT should be paid. This has major consequences.
As mentioned above, there are often serious doubts as to whether a given entity acts as an business operator (subjective criterion) and whether its activity is subject to VAT (objective criterion). If the parties incorrectly classify the transaction and pay TCLT (when VAT should have been paid), then VAT arrears, with interest, will occur on the part of the seller and he will be subject to sanctions under the Fiscal Penal Code. Conversely, when the parties pay VAT when they should have paid TCLT, arrears in TCLT arise and the tax authorities may question the buyer’s right to deduct the VAT, because the declaration was wrong.
Subjective criterion: the seller’s level of activity
Both Polish and EU case law has developed certain criteria to help determine when a seller of real estate is acting as a VAT payer and when he is only managing his own property, as indicated for example by the Court of Justice in Słaby and Kuć (Joined Cases C-180/10 and C-181/10) and by the Supreme Administrative Court in the judgments of 18 October 2011 (I FSK 1536/10) and 1 June 2017 (I FSK 451/17).
The courts agreed that the degree of the seller’s activity in the field of real estate trading is decisive, demonstrating that he allocates funds to this activity comparable to those employed by producers, traders and service providers as part of their business. Actions at particular stages of the seller’s activity should be considered as a whole, and not only separately. The relevant components are those that are connected with investment outlays extending beyond the standard activities of the management of private property. Certainly, this is not demonstrated by the number and scope of sale transactions or the fact that the seller has divided the land into separate plots to achieve a higher total price. Similarly, the length of the period in which the transactions took place or the amount of income derived from them is not decisive. All of these circumstances could just as well relate to management of the seller’s personal assets.
To determine the professional nature of the activity, the relevant factors will include for example any utility connections established for the property, laying out of internal roads, and marketing activities undertaken to sell plots, beyond the usual forms of advertising. Such activities may indicate professional, organised trading in real estate. This may also be indicated by obtaining a decision on terms of construction prior to the sale or applying for the preparation of a local zoning plan for the land being sold, in particular when the seller is already a taxpayer in the field of construction, development or other services of a similar nature.
Objective criterion: the type of real estate being sold
If the foregoing criteria indicate that the seller is exercising ordinary ownership rights, the sale will be subject to the tax on civil-law transactions.
However, if the seller acts as a business operator, i.e. a VAT payer, it does not mean that VAT will automatically be levied on the sale. It must also be established whether the real estate being sold is subject to an exemption under Art. 43(1)(9)–(10a) of the VAT Act (mainly due to the type of real estate sold). This task often proves difficult due to the complex criteria allowing the delivery of a property to be exempt, in particular such definitions as “initial occupancy” or “construction grounds”. Moreover, in certain situations taxpayers may decline the VAT exemption and opt to be taxed. If it turns out that the delivery of the property is subject to a VAT exemption and the taxpayer does not waive the exemption, then there will be TCLT on the transaction.
Whether a specific entity acts as a VAT payer in relation to a specific sale of real estate is strictly determined by the circumstances of the specific transaction. There is no template solution in this respect. This stems from the fact that in the case of natural persons, the flow of components between personal property on the one hand and property used for business operations on the other hand is fairly fluid and practically depends only on their will. Moreover, formal registration of the seller as a VAT payer is irrelevant in this case.
The situation is further complicated by the fact that the final form of taxation of a given transaction is determined not only by the seller’s status, but also by the type of real estate being sold. In practice, fulfilling both conditions is often difficult, which may result in adverse consequences for the parties due to the overlapping of VAT and TCLT with respect to real estate.
Dr Przemysław Szymczyk, adwokat, Real Estate & Reprivatisation practice, Private Client practice, Wardyński & Partners