Amendments to the definition first settlements

When discussing the revision of definitions first settlements in the context of tax obligations must first be identified Article 43(1)(10) Act on 11 March 2004 on tax on goods and services 1 (Next: the VAT Act).

According to him, the supply of buildings, structures or parts thereof is exempt, except where: 1) delivery is made within the framework of first settlements or before; 2) between first settlement and delivery of buildings, structures or parts thereof have been less than 2 years.

The author presents in his article the case law of the Court of Justice of the European Union and the Polish administrative courts concerning the definition of first settlement.

1. First settlement

The legislator has a definition first settlements under Article 2(14) the VAT Act, according to which they are meant to be put into service first the buyer or user or the commencement of use for their own use of buildings, structures or parts thereof, after their construction or improvement (if the expenditure incurred for the improvement, within the meaning of the income tax legislation, represented at least 30% baseline).

According to the VAT Act the development of immovable property means the construction of a building, a building or a part thereof or its improvement, as defined in the income tax legislation. The concept of construction and creation must be understood as identical.

Income tax laws shall consider situations where the expenditure incurred by the taxpayer for that improvement was at least an improvement in real estate 30% the initial values before they are entered in the records.

The wording of the definition mentioned above first settlements apply from 1 September 2019 – has been introduced by law with 4 July 2019 amending the Goods and Services Tax Act and certain other laws 2 (continue u.z.the VAT Act) and is a direct consequence of adapting Polish law to the provisions of European Union law and the case law of the EUSEU.

2. Preexisting definition first settlements

Before the abovementioned amendment by first settlement is understood as putting into service, in the performance of taxable activities, first the buyer or user of buildings, structures or parts thereof, after:

• 1) construction or
• 2) improvement if the expenditure incurred for improvement, within the meaning of the income tax rules, represented at least 30% baseline.

The previous wording of the provision required that the putting into service should take place as a result of taxable activities. The introduction of such a requirement has for a long time been the subject of a dispute between taxpayers and tax authorities.

Doubt was raised as to whether a Member State could impose a restriction on tax exemptions which have their source in EU law (in this case according to Article 132(1) Directive 2006/112 to 28 November 2006 on the common system of value added tax 3 , Further to the VAT Directive, Member States shall exempt from taxation the supply of buildings or parts thereof and associated land other than the supply in question under Article 12(1) point (a) This Directive).

As per content Article 12 VAT Directives:

1. Member States may treat as a taxable person anyone who occasionally conducts transactions related to the activity in question under Article 9(1) paragraph second that Directive, in particular one of the following transactions:

(a) the delivery of the building or part of the building and the associated land, before first settlement,

(b) the delivery of the construction site.

1. For purposes section 1a) „building’ means any structure permanently linked to the ground. Member States may lay down detailed rules for the application of the criterion in question. Under section 1a), to rebuild buildings and define the concept of ‘building-related land’. Member States may apply criteria other than criteria first settlements, such as the period between the completion date and the date first delivery or period between the date first settlements and the date of subsequent delivery, provided that those periods do not exceed, respectively, five and two years.

There is no provision in the VAT Directive that Member States may impose a requirement that, for exemption from taxation, supplies of buildings may be made first settlement is conditional first VAT taxable activity. For many years, tax offices have held that national legislation does not conflict with the VAT Directive. However, this approach was contested by both taxpayers and administrative courts.

3. Resolution of the EU Court of Justice on the contested provisions

Doubts about the interpretation of the rules were settled in the judgment of the Court of Justice of the European Union.

Judgment

Article 12(1)(2) and Article 135(1) point (j) The VAT Directives must be interpreted as opposing national rules, such as those subject to the main proceedings, which make the value added tax exemption for the supply of buildings subject to the condition that first the settlement of these buildings takes place under a taxable activity. The provisions of that Directive must be interpreted as meaning that they do not object to such national provisions making this exemption conditional on the condition that, in the event of an ‘improvement’ of an existing building, expenditure incurred must not exceed 30% the initial value of this building, in so far as the concept of ‘improvement’ in question is interpreted in the same way as the concept of ‘reconstruction’ contained under Article 12(2) The VAT Directive, that is to say, that the building concerned should be subject to substantial changes made to change its use or to significantly alter its conditions of settlement[4].

As a consequence of the judgment cited, the definition has changed. first settlements in Polish national law. Importantly, it should be pointed out that the amendment itself is more orderly than the legislative one. Where national rules conflict with the provisions of the Directives, Union rules should be applied directly.

In this case, national rules introduced an additional requirement for the application of an exemption which is not included in the VAT Directive. This approach was presented explicitly in individual interpretations before the amendment of the rules.

4. Concept first settlements and case law of Polish administrative courts

Despite defining the concept first settlements in the VAT Act It is worth noting the interpretation guidelines which have been clarified under the case law of the administrative courts. The NSA judgment cited below, issued before the TEU ruling, underlines the pro-EU interpretation of the provision.

Judgment

It must be stated that the definition ‘first the occupations’ contained in the VAT Directive is autonomous. So it was not necessary to define it in the VAT Act, except where indicated in the contents Article 12(2) sentence second VAT directives, i.e. building reconstruction.

It follows that the Polish legislature did not have the power to specify the conditions for applying the criterion first settlements in relation to situations occurring after building. The Polish legislator decided to clarify the above-mentioned concept in order to clarify the scope of the VAT exemption.

Comparing the scope of the definition ‘first settlements’ resulting from the VAT Act and the VAT Directive must be stated that the Polish legislature has narrowed down the above definition compared to the EU definition.

The language, systematic and practical interpretation of the VAT Directive clearly indicates that the above term should be understood broadly as "first occupying the building, using". Therefore, the definition provided for in the content should be read in this way. Article 2(14) the VAT Act 5 .

As is apparent from the wording of the judgment referred to above, the putting into service in question under Article 2(14) the VAT Act, shall be interpreted widely, taking into account any activities leading to the commencement of the use of the building.

However, it should be stressed that the exemption in question under Article 43(1)(10) the VAT Act is not of an absolute nature, the wording of which determines the definition first settlement under Article 2(14) the VAT Act Wait.

first settlements must be defined in relation to the moment of construction or the moment of improvement, where the expenditure incurred for improvement exceeds 30% initial value, within the meaning of the Income Tax Act.

5. Improvement a first settlement

Analysis of concepts of improvement in the context first the settlement was carried out by the Supreme Administrative Court.

Judgment

According to Article 2(14) the VAT Act first settlement means putting into service, in the performance of taxable activities, first buyer or user of buildings, structures or parts thereof, after their construction (point (a) or improvement (point (b), if the expenditure incurred for the improvement, within the meaning of the income tax provisions, represented at least 30% baseline.

Definition first the settlement also refers to the concept of improvement of buildings, structures or parts thereof. As the Court rightly stated first instances, the concept of improvement, in accordance with the legislative guidelines set out in the provision, should be referred to the meaning given in the income tax laws.

According to Article 16g(13) Act on 15 February 1992 on corporate income tax 5 (Next the Corporate Income Tax Act) fixed assets shall be considered to be improved when the sum of the expenditure incurred for their reconstruction, extension, reconstruction, adaptation or modernisation in a given tax year exceeds 3,500 PLN (from 1 January 2018 This limit is 10,000 PLN, In addition, the wording of the provision has not changed) and these expenditure increases the useful value in relation to the value on the date of adoption of fixed assets for use, measured in particular by the period of use, capacity, quality of products obtained through improved fixed assets and the cost of their operation.

When the facility is improved, the expenditure incurred will result in an increase in useful value compared to the value on the date of acceptance of the facility for use.

As the sentence shows second Article 16g(13) the Corporate Income Tax Act, fixed assets shall be considered to be improved where the sum of expenditure on their reconstruction, expansion, reconstruction, adaptation and modernisation results in an increase in useful value compared to the value on the date of acquisition of fixed assets for use[7].

According to the above decision to first settlements can happen many times. In order to determine whether a supply is VAT-taxed, it is necessary in each case to examine whether, even though it has already occurred in the past, first settlements, this property may have improved.

This statement is confirmed by the judgment of the WSA in Gorzów Wielkopolski with 10 July 2019 8 , in which it was concluded that: first settlements can take place many times, as long as the property can only be built once, as many times it can be improved."

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Bibliography item numbered 5: NSA judgment of 14 May 2015, reference no. I FSK 382/14, Legalis.

Legal basis

1. Article 2(14), Article 43(1)(10) the VAT Act,

2. Article 132(1), Article 12(1)(2), Article 135(1j) VAT Directives,

3. Article 16g(13) the Corporate Income Tax Act

The article comes from the book “Changes in Taxes and Accounting 2020 taking into account the anti-crisis shield" under the ed. prof. adjunct. dr. hab. Artur Hołda, published by C.H. Beck Publishing House: https://www.ksiegarnia.beck.pl/19149-zmiany-w -tax-and-account-2020-with-including-disc-anti-crisis-artur-hold