Right to deduct VAT charged on expenditure incurred on investment in the form of a sports hall by a local government unit

Position taken by the Director of National Tax Information in an individual interpretation of tax law 1 , the question whether the Municipality has the right to fully deduct the input tax resulting from invoices documenting the purchase of goods and services in connection with a particular investment. Once put into service, the municipality plans to lease the facility in an unlimited tender. Is the conditions for the applicant to qualify for such a deduction fulfilled in the present case?

Introduction – reality/future event

On 13 July 2018 the Director of National Tax Information has received a request for an interpretation of the provisions of tax law relating to the tax on goods and services on the right to a full deduction of the tax charged on expenditure incurred for the investment in the form of a sports hall.

The municipality, as a local government unit, is an active registered taxable person for goods and services and makes monthly declarations VAT-7.

In accordance with the provisions of the Municipal Government Act[2] is also a body carrying out its own public tasks and commissioned from the government administration imposed by laws, including through the functioning budget units within the structure of the municipality, which do not have legal personality and are appointed by it on the basis of separate provisions.

One of the responsibilities of the Municipality is to meet the collective needs of the community in the field of physical culture and tourism, including recreational areas and sports facilities.

Within the framework of the activities of the Municipality in years 2018-2020 plans to carry out an investment related to the development of public spaces: ‘Construction of the hall’, which will be financed from the municipal own resources.

These measures are secured in the Multiannual Financial Forecast and the Municipal budget for 2018 The applicant also plans to apply for funding for the investment project in question. The investment may be co-financed by the Fund at the disposal of the Minister under the Investment Programme (hereinafter the Programme).

The amount of funding may be up to 50% eligible costs.

As part of the programme's funding, VAT will be at the expense of the ineligible. The city plans to submit an application after the successful award of an open tender for the execution of project documentation and construction works in the framework of the investment task in question. The total amount of funding allocated to the project is approx. 30,000,000 PLN.

The subject of the investment task is a sports and entertainment hall, which mainly serves as a sports venue. The task provides for the construction of the ready-to-use building of this hall with the development of the site, technical infrastructure, connections, parking spaces, squares, internal roads and exit from the public road.

The facility will be carried out for the City Municipality on the basis of an unlimited tender in the formula “design and build” and will allow to play matches in the highest class of Polish sports leagues in disciplines: basketball, handball, volleyball – according to the current requirements of league managers.

The facility will have an arena to organize non-sport events such as concerts, fairs, exhibitions, balls, etc. Events in the arena will be included as mass events and high-risk mass events. The facility will be equipped with technical facilities and a catering section to handle the events. The facility is scheduled to open and start operation in October 2020

After the investment is carried out, the municipality will be the owner of the arena, and thus it will belong to its assets as a permanent measure. After the investment has been put into service, the municipality intends to lease the entire building to the tenant through an unlimited tender. All purchases of goods and services related to the investment task carried out by the Municipality will be documented by VAT invoices on which the Municipality will appear as a purchaser.

The proposal asks the question: will the municipality have the full right to deduct input tax on expenditure incurred for the investment of the building of the hall?

The municipality has taken its own position, according to which it will have the full right to deduct input tax on investment expenditure, as these expenditures are intended in full to carry out taxed operations.

Public authority and taxpayer status

Subject to the provisions Article 15(6) Goods and Services Tax Act (hereinafter: the VAT Act) 3 and Article 13 Common 1 January 2007 Directive 2006/112 Council on the common system of value added tax 4 , The municipality, as a public authority, is not regarded as a taxable person for the tax on goods and services. However, in the light of the provisions of Community law, where public authorities or offices serving those authorities undertake economic activities or carry out economic transactions, they shall be regarded as taxable persons in respect of those activities or transactions if their exclusion from the category of taxable persons leads to significant distortions of competition.

This means that the authority will be considered a taxable person for the tax on goods and services in two cases, i.e. when performing activities other than those which fall within the scope of its tasks and when carrying out activities falling within its tasks, but doing so under civil law agreements.

It follows from the above that the exclusion of public authorities from the category of taxable person is of a subjective nature.

An important criterion of division is the nature of the actions taken. Public-law activities exclude these entities from the category of taxpayers, while civil-law activities result in the recognition of these entities as taxable persons from goods and services.

The exercise of the responsibilities of the municipality to meet the collective needs of the community is clearly a public-law activity, but the use of the facility under lease to an entity selected in an unlimited tender gives this activity a civil-law nature.

Director of National Tax Information in an individual interpretation from 6 September 2018[5], according to Articles 2(1) and 7(1) The municipal self-government Act, inferred from the provisions cited above, that local government units are taxable persons of tax on goods and services only in respect of any activity which is of a civil nature, i.e. they are implemented by them on the basis of civil law contracts, including rental and lease.

According to Article 86(1) the VAT Act, the taxable person has the right to reduce the amount of tax due in so far as the goods and services are used to carry out taxed activities. It should be stressed that this right is only entitled to registered, active taxable persons tax on goods and services, in respect of goods and services used to carry out taxed activities forming a tax obligation.

As indicated in the description of the facts/event of the future, the municipality plans to build a performance and sports hall. The newly created infrastructure intends to lease by means of an unlimited tender in which the tenant will carry out business. Based on the VAT Act the lease constitutes the provision of services and is subject to tax on goods and services.

It follows from the above that the sums paid from the tenant will constitute a remuneration which will result in a tax liability on the part of the municipality. Therefore, the purchases made will be directly linked to the sales generating the tax due. These fees will be directly linked to the performance of taxed activities.

Therefore, since the Municipality will acquire goods and services as a taxable person for the tax on goods and services for the purpose of carrying out taxable activities, it should be considered that the conditions in question will be met in the present case.

Under Article 86(1) Laws governing the full right to reduce the tax due by the input tax on expenditure incurred for the implementation of the investment in question.

In addition, the municipality, in connection with the activities to be carried out by the investment, conducts an economic activity and thus acts as a taxable person for goods and services within the meaning of Article 15(1) the VAT Act

The above position is also confirmed by tax authorities, among others in the interpretation of the individual Director of the Tax Chamber in Katowice from 8 December 2015[6] and Director of National Tax Information from 23 June 2017 7 .

It should be stressed that, under the right to deduct input tax, the legislator has not only created the necessary conditions for positive conditions, but also the conditions for the absence of negative conditions, specified under Article 88 the VAT Act That provision sets out a list of exceptions which deprive the taxpayer of the right to reduce the amount of tax due by the amount of input tax.

Summary

The investment planned by the Municipality fulfils all the conditions of the abovementioned laws, i.e.:

• The municipality will act as a taxable person for the tax on goods and services, the goods and services acquired in connection with the implementation of the investment will be used to carry out activities taxed on goods and services (in this case a civil-law contract consisting in leasing infrastructure for business purposes).
• In this situation, the conditions for deducting input tax are fulfilled (or will be) because the applicant acts (or will act) as a taxable person for the tax on goods and services and the purchases of goods and services relating to the construction of the hall investment are (or will be) closely linked to the carrying out of activities taxed on goods and services. This is mainly due to the fact that after the construction of the facility, it will be leased to the tenant by an unlimited tender.

It will therefore be a VAT-taxed operation.

Director of National Tax Information, in an individual interpretation from 6 September 2018 8 , He agreed with the applicant that he would be entitled to a full deduction of input tax resulting from invoices documenting the purchase of goods and services relating to investments n.e. ‘Construction of the hall’, provided that there are no negative indications of a particular under Article 88 the VAT Act

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1 Individual tax ruling from 6 September 2018, reference no. 0112-KDIL2-3.4012.371.2018.1.ZD. 2 Act of 8 March 1990 about municipal government, i.e. Journal of Laws of 2018, item 994 as amended 3 Act of 11 March 2004 on tax on goods and services, i.e.

Journal of Laws of 2017, item 1221 as amended 4 Directive 2006/112 Council 28 November 2006 on the common system of value added tax, Official Journal of the European Union L, No. 347. 5 Op. cit., reference no. 0112-KDIL2-3.4012.371.2018.1.ZD. 6 reference no. IBPP3/4512-660/15/UH. 7 reference no. 0112-KDIL4.4012.118.2017.2.SŚ. 8 Op.

cit., reference no. 0112-KDIL2-3.4012.371.2018.1.ZD.