Obligation to apply the property supply tax exemption

Tax planning is an important element of the investment process. Knowledge of tax regulations is needed here for every entrepreneur – both the seller and the buyer.

The tax advantages that arise from the taxation of real estate supply activities, e.g.: no obligation to correct input tax; no tax on civil law activities; the acquisition of the status of taxed activity with the tax shown, make it necessary to make a careful assessment of the facts, in particular when the taxpayer has an impact on the formation of some of its elements resulting in a change of tax qualification.

Supply of undeveloped land

Content Article 43(1)(9) Act on 11 March 2004 on tax on goods and services 1 (hereinafter ‘the VAT Act” or ‘the Act’), the supply of undeveloped land other than construction sites is exempt from tax. Through construction sites, according to Article 2(33) the VAT Act the land to be built in accordance with the local spatial planning plan and, in the absence of such a plan, in accordance with the decision on the terms and conditions of the site referred to in the rules on spatial planning and planning.

This provision is an implementation Article 135(1) point (k) Directive 2006/112 to 28 November 2006 on the common system of value added tax 2 (hereinafter referred to as ‘the Directive’) pursuant to which Member States exempt from tax supplies of undeveloped land other than the supplies of the construction land in question under Article 12(1) point (b) this directive.

As per content Article 12(3) Directives, for the purposes of Article 12(1) point (b) „construction site’ means any land unarmed or armed, recognised as a building site by Member States. However, this regulation does not indicate the obligation to introduce the definition of "building space" into the laws of individual Member States.

Lack of definition of the term ‘construction period’ in the legal state to 31 March 2013 means that, in the absence of a spatial planning plan or decision on the conditions for the construction and development of the site, records of land and buildings were binding. This interpretation was used by the Supreme Administrative Court in its judgment seven Judges 3 while pointing out that, from a tax point of view, it is entirely indifferent in this respect to establish a study of the conditions and directions of the municipality's spatial development.

Introduction from 1 April 2013 definition of ‘construction space’ under Article 2(33) the VAT Act, which refers only to two the types of legislation, as a consequence, means that, for the purposes of correct classification of land, the application of the goods and services tax exemption in question under Article 43(1)(9) If there is no zoning plan or decision on the conditions for the construction and development of the site, the data contained in the land and buildings records should no longer be guided. Consequently, the supply of undeveloped land, which is not covered by a spatial planning plan or a decision on the conditions for the construction and operation of the site, is exempt from the tax on goods and services[4].

Referring to content Article 43(1)(9) the VAT Act it should be noted that the exemption under this provision applies to the supply of undeveloped land rather than any site other than construction. Neither the law nor the Directive defines ‘undeveloped areas’, to which the two instruments refer. Application of the exemption requires cumulative fulfilment two conditions:

• • the subject of the supply must be an undeveloped area,
• • the undeveloped area is of a character other than the construction site.

second it refers to the destination of the site, which shall be determined, in accordance with the definition of ‘construction area’, on the basis of the local spatial planning plan or the conditions for the construction and development of the site. However, the subject of the supply must be an undeveloped area.

In language interpretation, it should be assumed that undeveloped areas are land where no building or building is located. The law does not define the concept of a building or structure, so the meaning of these concepts in other areas of the law should be sought.

Content Article 3(2) Act on 7 July 1994 Construction law 5 , the building shall be understood as such a building which is permanently connected to the ground, separated from the space by building partitions and has foundations and roofs.

The above comments lead to the conclusion a contrario that the construction site designed (made) without external partitions, foundations or roofs or not permanently bound to the ground does not comply with the conditions laid down in the said provision and cannot therefore be considered as a building. As long as a building meets the conditions for its recognition as a building or a building, the area in which it is situated is a built-up area, even if the building does not represent any economic value for the parties to the transaction[6].

An interesting issue in this context is the determination of the status of the site on which the building was demolished or on which the building for demolition is located. In one of decisions of the Court of Justice of the European Union[7] (Further: ‘TSEU’) considered that the value added tax exemption does not cover a transaction concerning the supply of land not built after the demolition of the building on which it was located, even if no other work was carried out on the date of delivery relating to the arms of the site outside the designated demolition, provided that the general assessment of the circumstances relating to the transaction and existing on the date of delivery, including the intention of the parties, shows that at that date the land in question was actually intended for construction.

It should therefore be recognised, in the light of the provisions of the Act, that if, after the decision granting the demolition permit, the buildings disclosed in the land register were actually demolished prior to the delivery of the property, the land in which they were located must be described as undeveloped.

If the land on which the building was located is not in the absence of a spatial planning plan or a decision on the conditions for the construction and development of the site (e.g.

the building was built in a period where there was no provision for the decision on the conditions for the construction and installation of the site; "construction autonomy" etc.), its supply benefits from tax exemption.[8].

For the taxpayer, this means that it is de facto possible to choose how to tax the supply of the land. The application and receipt of the decision on the conditions for the construction and development of the site defines the use of the land as a construction site.

Alternatively, if the supply of the property takes place before the start of demolition work, even if the decision to permit demolition was made, the site still has not lost its status as ‘built’. Whether we are dealing with an undeveloped area is determined by the fact that demolition work is started.

It doesn't matter that the building is already being demolished because a decision has been made for it. The actual activity confirmed by the construction documentation confirming the commencement of demolition works is important.

If the work is started, even if the demolition is not completed for the moment of delivery, it should be considered that we are already dealing with an undeveloped area.

In one ruling, the CJEU took the view that supply and demolition transactions constitute, in the light of VAT, a single transaction intended as a whole to supply not so much of the existing building and land on which it stands, as an undeveloped plot, regardless of the state of progress of the demolition works of the old building at the time of the actual delivery of the land[9].

In view of the above, it is important for the buildings to be demolished to begin demolition work. Knowledge of tax rules allows you to plan a work schedule to achieve the intended objective. It is important that the exemption is based on content Article 43(1)(9) the VAT Act is mandatory in contrast to the provision Article 43(1)(10) the VAT Act

Supply of built-in areas

In the case of the supply of buildings or structures permanently connected with the land or parts of such buildings or structures, the value of the land shall not be distinguished from the tax base. Based on Article 43(1)(10) the VAT Act the supply of buildings, structures or parts thereof, except where:

(a) delivery is made within the framework of first settlements or before,

(b) between first settlement and delivery of buildings, structures or parts thereof have been less than 2 years.

In order to apply the exemption, it becomes crucial to define what is meant by the term "first settlement’. The existing definition has been declared incompatible with Community law. It provides that by first settlement, according to Article 2(14) the VAT Act is understood as putting into service, in the performance of taxable activities, first the buyer or user of buildings, structures or parts thereof, after:

(a) the construction or

(b) an improvement where expenditure incurred for improvement, within the meaning of the income tax rules, represented at least 30% baseline.

A few years ago, the Supreme Administrative Court In one of judgments 10 pointed out that the condition ‘in the performance of taxable activities’ as set out in the statutory definition first settlements in the Act are not binding in the Directive and the exemption provided for in the Directive concerns supplies of second-hand buildings, i.e.

those which have been used in any way.

The Supreme Administrative Court therefore concluded, taking into account both the linguistic interpretation and the objective of the VAT system, that if the taxable person used the property in question and fulfilled the condition for the use of the property for the required period of time, an optional exemption rather than taxation would apply to the sale of the property right.

However, only in accordance with the judgment of the Court of Justice of the European Union 11 the legislator has decided to amend the provisions which apply from 1 July 2018 In that judgment, the CJEU concluded that Article 12(1)(2) and Article 135(1) point (j) it must be interpreted as contrary to national rules which make the exemption from value added tax conditional on the supply of buildings subject to the condition that first the settlement of these buildings takes place under a taxable activity.

The term ‘first settlement’ outside putting into service first the buyer or user of buildings, structures or parts thereof shall also include the commencement of use for the own use of those buildings, structures or parts thereof. Draft amendment of the law provides for a change of definition first settlement. The provision is to be worded as follows − this is meant to be put into service first the buyer or user, or the commencement of use for own use, of buildings, structures or parts thereof, after:

(a) the construction or

(b) an improvement where expenditure incurred for improvement, within the meaning of the income tax rules, represented at least 30% baseline.

Tax exemption on the basis of Article 43(1)(10) the VAT Act is optional. The taxpayer may waive the tax exemption in question Under section 1 point 10 and choose to tax the supply of buildings, structures or parts thereof, provided that the supplier and buyer of the building, structures or parts thereof:

• 1) are registered as active VAT payers;
• 2) submit, before the date of delivery of these facilities to their buyer, to the head of the tax office, a consistent statement that they choose to tax the supply of the building, buildings or parts thereof.

The use of the so-called tax option applies only if the basis for the exemption is quoted above. Article 43(1)(10) the VAT Act It does not cover situations where that provision cannot apply and the basis for the exemption is an alternative provision Article 43(1)(10a) the VAT Act, by which the supply of buildings, structures or parts thereof not covered by the exemption in question is released Under point 10, provided that:

(a) they were not entitled to a reduction in the amount of tax due by the amount of input tax,

(b) the person making their supply did not bear expenditure for their improvement, in respect of which he was entitled to reduce the amount of tax due by the amount of input tax, and if he incurred such expenditure, they were lower than 30% initial values of these objects.

The application of this provision means the compulsory application of the exemption to the supply of these properties. However, the obligation of that provision should be considered to be incompatible with the Directive. According to Article 136 Directives, Member States are required to exempt:

• • the supply of goods used exclusively for the purposes of exempt activities, specifically mentioned in the provisions of the Directive, where those goods have not given rise to the right of deduction;
• • supplies of goods for which the acquisition or use of VAT was not deductible in accordance with Article 176.

The latter provision (Article 176 (d) exclude the deduction in the case of expenditure which has been considered not to be closely related to economic activities (e.g. luxury, entertainment or representative expenditure) and allow Member States to maintain the exemptions provided for in national law on the date of their accession to the European Union (stand still principle).

The scope of the exemption from tax on supplies of goods for which the taxable person did not deduct VAT when they were acquired was therefore limited to those situations.

It should be noted that in each of these situations the acquisition tax will occur as a chargeable tax, which as a chargeable tax will not be deductible due to the restrictions imposed by the Directive.

This conclusion is confirmed by the judgment of the Court of Justice of 8 December 2005 12 , according to which the supply of goods for which the taxable person has not deducted VAT charged for reasons other than those specifically specified under Article 136 directives.

In other words, the TEU stated that the supply of goods does not benefit from the exemption if, at the time of its acquisition, the input tax did not occur at all, for example when the goods were acquired from an entity that was not a taxable person or that benefited from the entity’s exemption.

Member States may not extend the exemptions provided for in Community law on their own account, as the CSF has repeatedly drawn attention to. For example, in the judgment of 8 May 2003[13] The Court found that, in so far as the VAT exemption of a particular transaction is not provided for by the Directive, it derogates from the general principle of taxation of an activity expressed under Article 2 directives.

Such derogation is compatible with Community law only if it is confirmed by the provisions of the Directive. Therefore, national legislation imposing an exemption from tax which is not subject to the exemption provided for in Union law or confirmed in accordance with the exception provided for by the Directive, constitutes an infringement of it.[14].

Mandatory exemption for supplies of buildings, structures or parts thereof included under Article 43(1)(10a) the VAT Act, which goes beyond the framework provided for in the Directive, should therefore be declared incompatible with Community law. In the light of EU regulations, this exemption should be interpreted narrowly.

It does not apply, therefore, when the lack of a right to deduct the input tax on the acquisition of the property was due to the fact that the tax on acquisition did not occur at all, e.g.: the property was acquired or built before the implementation of the value added tax system in Poland, the property was acquired under the tax-exempted aport or as an organised part of the company, or was acquired from the taxable person exempted by the entity or non-taxable entity.

In view of the general position of tax authorities, which treat the exemption under Article 43(1)(10a) the VAT Act In these circumstances, the taxable person who wishes to tax the supply of immovable property must rely directly on the provisions of the Directive.

The same must be done by the purchaser in the light of regulation Article 88(3a)(2) the VAT Act justify the deduction of input tax. The right of the taxpayer and the obligation of tax authorities to apply Community rules directly have already been confirmed several times by the TSEU[15].

The taxpayer does not need to risk a legal dispute with the tax when it verifies precisely the possibility of applying the commented provisions of the Act.

Summary

The supply of undeveloped property, for which there is no land use plan, gives the taxpayer the opportunity to decide how to settle the transaction. By making a decision on the terms and conditions of the construction and development of the site, it makes use of the option to tax this transaction. Obligatory exemption based on Article 43(1) pk 9 the VAT Act in this case, the taxable person's actions shall have an accident.

Exemption of supplies of real estate built on the basis of Article 43(1)(10) the VAT Act may also be excluded from the will of the parties. However, the most important reason for using the option of taxation is the status of the parties to the transaction. The supplier and purchaser must be taxable persons registered as active VAT.

In certain situations, e.g. when supplying a building which is subject to demolition, taking into account the legal implications of the exemption or taxation of supplies, the taxpayer should take into account the whole of the commented regulations.

Tax exemption for the supply of immovable property on the basis of Article 43(1)(10a) the VAT Act is not a last resort only where the conditions for applying a pro-Community interpretation are met. While the facts allow, proper tax planning can help achieve the desired result.

___________________

1 Journal of Laws of 2017, item 1221 as amended [2] Official Journal of the European Union L, No. 347, p. 1, as amended 3 NSA judgment of 17 January 2011, reference no. I FPS 8/10.

4 So also in the interpretation of the general Minister of Finance from 14 June 2013, on the taxation of taxes on goods and services in the supply of undeveloped land in the absence of a land use plan and decisions on the conditions for the construction and operation of the site, No. PT10/033/12/207/WLI/13/RD58639.

5 Journal of Laws of 2017, item 1332 as amended 6 Judgment of the WSA in Warsaw 17 May 2013, reference no. III SA/Wa 3407/12. 7 Judgment of the Court of Justice of 17 January 2013, in the Woningstichting Maasdriel case v Staatssecretaris van Financiën, C-543/11.

8 See the individual interpretation of the Director of the Tax Chamber in Warsaw from 21 July 2016, No IPPP2/4512-416/16-3/DG.|9 Judgment of the Court of Justice of 19 November 2009, Don Bosco Onroerend Goed BV v Staatssecretaris van Financiën, C461/08. 10 NSA judgment of 15 May 2015, reference no. I FSK 382/14.

11 Judgment of the Court of Justice of 16 November 2017, in the case of Kozuba Premium Selection Sp. z o.o. v Minister of Finance, C-308/16. 12 Judgment of the Court of Justice of 8 December 2005, Jyske Finans A/S v Skatteministeriet, C-280/04.

13 Judgment of the Court of Justice of 8 May 2003, Wolfgang Seeling v Finanzamt Starnberg, C-269/00. 14 Cf. A. Bącal et al., Case law of the ECJ and the Polish VAT Act, Oficyna Wydawnicza UNIMEX, Wrocław 2010, p. 338. 15 Judgment of the Court of Justice of 19 January 1982 Ursula Becker v Finanzamt Münster-Innenstadt, C 8/81.