VAT on the sale of commercial premises

Whether VAT is charged on the sale of commercial premises depends on whether, and when, the initial occupancy of the space occurred within the meaning of the VAT Act.

The rules concerning VAT in Poland on the sale of buildings and other structures or parts thereof are particularly imprecise, and thus applying the rules may present a significant tax risk. Beginning in 2009, the baseline rule has been an exemption from VAT on supply of structures, but with several exceptions which introduced considerable confusion in this area. This has to do with situations in which the sale is made in connection with the initial occupancy, prior to that event, or within 2 years after that event. The definition of “initial occupancy” has thus taken on particular significance.

Under Art. 2(14) of the VAT Act of 11 March 2004, “initial occupancy” means delivery for use in performance of activities subject to VAT to the first buyer or user of a building, other structure, or a part thereof, after construction or improvement, if the expenditures on improvement within the meaning of income tax regulations constituted at least 30% of the tax basis. The seller of commercial premises must thus determine whether, and when, the premises underwent initial occupancy pursuant to this definition.

The first problem facing the seller will be how to determine the exact date on which the premises might have been delivered for use. It is unclear whether this means entry into actual use of the premises, or only creating the potential to use the premises. This concept may also be understood to mean the necessity to include the structure in the books as fixed assets within the meaning of the Corporate Income Tax Act concerning amortisation. But the issue also comes up in the case of premises acquired sometime in the past solely as an investment asset intended for resale.

Another uncertainty concerns the definition of the first acquirer or user. This issue is particularly complicated in the case of hotels or other facilities providing short-term lodging. The tax authorities treat the owners of such property as the users, but refuse to accept that the initial occupancy occurred when lodging a customer in one of the rooms.

There are also significant doubts surrounding fulfilment of the condition of conducting taxable activities, particularly because this requirement is not consistent with EU regulations. This issue applies particularly to buildings that were built by taxpayers themselves to meet their own needs. In such a situation, even though the building was in fact occupied and used, perhaps for a decade or more, according to the law the initial occupancy has still not occurred yet, because the building was not put to use in performance of taxable activities, such as sale or lease. The situation of premises acquired before the effective date of the VAT Act is also unclear. Some of the tax authorities take the view that the concept of initial occupancy may also apply to actions performed at an earlier time.

As it may be seen, there are numerous doubts that may arise in the area of VAT on sale of commercial premises. Everything depends on correctly determining whether and when initial occupancy of the premises has occurred. If it happened more than two years before, the sale will enjoy an exemption. In order to avoid a potential risk, it is worthwhile to apply to the relevant tax authority for an advance interpretation.

Przemysław Szymczyk, Real Estate & Construction Practice, Wardyński & Partners