Use of a building by a taxpayer for their own purposes ruled to be first occupation and, as such, eligible for exemption from VAT | SSW TAX Alert
On the application of the Supreme Administrative Court of the Republic of Poland, the Court of Justice of the European Union (CJEU) in its decision of 16 November 2017 made a ruling on the issue of whether the definition of the first occupation of buildings, structures and their parts, as specified in the Polish Act on tax on goods and services, is consistent with the EU VAT Directive (namely Council Directive 2006/112/EC of 28 November 2006).
In the above-mentioned Polish act, the first occupation is defined as the delivery of buildings and structures or parts thereof, being a result of a taxable transaction, to the first buyer or user following their:
a) completion, or
b) improvement, if the cost of such improvement, within the meaning of the regulations on income tax, amounted to at least 30 per cent of the initial value of the relevant asset.
In the light of the above definition, a taxable transaction, therefore e.g. sale or lease of the property, is a necessary condition in order for supply to be regarded as the first occupation. Referring to this regulation, Polish tax authorities have invariably refused to interpret as the first occupation a situation where a completed building is used for the company’s purposes, pointing out that in this situation no “taxable transaction is effected”. Because of this interpretation any entity selling such a building at a later date has been prevented from using the VAT exemption applicable to real property transactions executed at a date later than two years after the first occupation.
Some administrative courts have disagreed with this interpretation, being of the opinion that the first occupation does not need to be related to a taxable transaction, as no such condition is stipulated in the EU regulations. In the light of this interpretation, the definition of the first occupation should also include the actual delivery of the building to a taxpayer intending to use it for their own purposes. Because of these discrepancies the Supreme Administrative Court of the Republic of Poland suspended the proceedings regarding a similar case and decided to seek a ruling of the CJEU as to whether the Polish regulation is consistent with the EU VAT Directive.
Acceding to the view taken on the part of some Polish administrative courts, the CJEU has made a ruling to the effect that the definition of the first occupation as specified in the Polish VAT Act is inconsistent the EU VAT Directive. Analysing the intentions of the Community lawmakers, the CJUE has ruled that the “first occupation”, used as the criterion for the applicability of the VAT exemption, is to be understood as the moment when the construction process with respect to a facility is completed and the stage of the consumption of the facility commences.
The CJUE has also ruled that the EU regulations do not include any provision to the effect that the use of a building by the owner has to be related to a taxable transaction, therefore the inclusion of this condition in the relevant Polish regulations is to be regarded as inconsistent with the VAT Directive.
The ruling made by the CJUE on 16 November should result in Polish tax authorities changing their interpretative approach and including in the definition of the first occupation also the situations where taxpayers use completed buildings in their business activities. Consequently, when such a building is sold at a date later than two years after the commencement of the usage of the facility, such sale transaction should be exempted from VAT.
Should you be interested in a more detailed presentation of these changes and their impact on your business activity, do not hesitate to contact us.
Łukasz Karpiesiuk – Partner, Tax advisor
Sławomir Mikołajuk – Senior Associate, Attorney at Law