VAT on the sale of developed land

The manner in which a structure on land is defined determines the tax consequences of sale of the land.

Under Art. 29(5) of the Polish VAT Act of 11 March 2004, in the case of the sale of buildings or other structures permanently connected to the land, or part of such a building or structure, the value of the land is not distinguished from the taxable amount. In other words, the method of taxation of the sale of land is exactly the same as the method of taxation of the structures on the land. The same VAT rate applies, and if sale of the structure is exempt from VAT the exemption also applies to the land.

It follows that the determination of whether a construction located on the land may be classified as a “building” or a “structure” under Art. 29(5) of the VAT Act will be vitally important for determining the method of taxation of the land. Unfortunately, the VAT Act does not include a definition of a “building” or a “structure,” or even a cross-reference to definitions in other legal acts.

Pursuant to the Polish Classification of Structures (PKOB), all structures may be divided into “buildings” (roofed objects together with built-in technical fixtures and equipment adapted to occupancy by persons, animals or protection of objects), and civil and hydrological engineering structures (i.e. all other structures that are not buildings). The classification thus does not contain a definition of a structure as such.

The Construction Law of 7 July 1994 does distinguish structures from among other objects, but defines them on the basis of a presumption that they include all structural objects that are neither buildings nor minor architectural objects such as street furniture. In practice this raises serious problems of interpretation, because the Construction Law also employs the concept of “structural equipment,” which is understood to mean technical equipment connected to a structure enabling use of the structure for its intended purpose (e.g. fencing, parking places, or a paved area around a dumpster). The situation is complicated further by the fact that in order for a construction to be regarded as structural equipment, it is not always necessary for it to be located on the same plot of land as the building or structure to which it is connected. An example is fencing, as pointed out by the Province Administrative Court in Gdańsk in a ruling dated 27 October 2009 (Case No. I SA/Gd 550/09).

Therefore, it is often difficult to distinguish clearly between a structure and structural equipment, which in turn bears serious consequences under the VAT Act in the case of sale of developed real estate. If a given construction is classified as equipment, Art. 29(5) will not apply because the land will be regarded as undeveloped. This means that there is no sale of a structure, and the transaction should be taxed under the rules applicable to land only. By contrast, if the construction is classified as a structure, the entire transaction will be subject to the taxation applicable for structures.

There is a similar problem with respect to buildings, which are defined differently in the Polish Classification of Structures than in the Construction Law. There is a particular lack of clarity for example on the sale of land together with an uncompleted building, as demonstrated by the conflicting positions taken by the tax authorities in this respect. For example, the director of the Bydgoszcz Tax Chamber found in an individual tax interpretation issued on 1 December 2009 (Case No. ITPP2/443-808/09/AP) that the supply of land together with a residential structure at the open-shell phase of construction is covered by VAT Act Art. 29(5), and the entire transaction should be taxed at the single reduced VAT rate. Meanwhile, the director of the Poznań Tax Chamber held in an interpretation issued 14 August 2008 (Case No. ILPP1/443-494/08-2/BP) that an uncompleted building including only the foundation and basement is not a building or structure of a part thereof, and thus the land should be deemed to be undeveloped.

The foregoing analysis demonstrates that the costs of a planned transaction may differ dramatically depending on how the constructions on the land are defined. Thus, before carrying out a transaction it is important to conduct a detailed analysis of all structures and equipment on the site, particularly in terms of their permanent connection to the land.

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