VAT on private lease of real estate
In order for VAT to apply to letting of real estate, it is not necessary that the property be let as part of the landlord’s business activity.
The VAT Act of 11 March 2004 contains its own definitions of a taxpayer and of business activity. Under Art. 15(1), a taxpayer is any entity (a natural person, a legal person, or an organisational unit without legal personality) independently performing business activity, regardless of the purpose or result. The definition of business activity contains two prongs. The first prong concerns business entities (producers, traders, service providers and so on) regarded as professionals conducting registered activity. The second prong concerns activities involving the use of goods or intangibles on an ongoing basis for gainful purposes.
The definition of business activity created for purposes of the VAT therefore does not require that any taxable activity, including more specifically providing lease services, be performed professionally. The act also provides for the situation in which activity is not conducted by professionals but involves only use of goods in a continuing, gainful manner. It appears that the private letting of real estate may also be regarded as such activity, so long as it is continuous. The other condition, that it be for monetary gain, will always be the case because one of the essential elements of a lease agreement is payment of rent. Continuity may be understood not only as regular letting, but also as the desire to let property, e.g. through a standing offer. It should be stressed that fulfilment of this objective criterion will automatically mean that the lessor is considered to be a VAT payer pursuant to the VAT Act, and thus the service of letting real estate is subject to VAT.
There are certain doubts, however, surrounding the definition of structures or portions of structures which are the subject of the lease. This is because the second prong of the definition of business activity refers to goods. Under the VAT Act, goods are defined to include, among other things, buildings, other structures and premises which are the subject of taxable activities, as listed in the classification issued pursuant to regulations on public statistics. The Government Regulation on the Polish Classification of Goods and Services of 29 October 2008 classifies such activities as services performed by commercial entities. Thus if a “good” in this sense can only be a building or other structure or a part thereof which is the subject of activity performed by a commercial entity, this could suggest that property let by a private entity is not a good. In that case, the definition of business activity pursuant to the VAT Act would also not be fulfilled, and there would be no basis for taxation. This approach could be considered in the event of a dispute with the tax authorities concerning VAT on private letting of real estate.
Przemysław Szymczyk, Real Estate & Construction Practice, Wardyński & Partners