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Current Difficulties with VAT Refunds in Real Estate Transactions

Current Difficulties with VAT Refunds in Real Estate Transactions

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The Polish tax authorities have once again changed their view on the VAT classification of specific activities. This time, the shift in opinion concerns real estate deals. Until quite recently, tax authorities agreed that in general the sale of a commercial building constituted a supply of goods and thus was subject to VAT.

However, there appears to be a trend towards classifying such transactions as sales of enterprises – which are not subject to VAT due to simultaneous transfer of lease agreements by operation of law, security deposits, house rules, and the rights to building designs. In addition, the authorities attempt to challenge the classification of transactions already in place, in spite of relevant tax rulings, by picking on minor discrepancies between the description of a future transaction and the transaction as it actually happened (a strategy often also employed where the refund of input VAT has already been revised by the tax authorities).  

This change of classification will primarily affect the buyer, who will not be entitled to deduct input VAT and, if VAT has already been refunded, will be obligated to return it with default interest. Moreover, in some cases, buyers may also be required to pay a VAT penalty (additional VAT liability). In addition, the buyer will also be bound to pay a tax on civil law transactions, charged on the market value of individual assets comprising the enterprise (up to 2%), plus default interest. Significantly, should the buyer fail to obtain a certificate which would release it from liability for the debts of the seller related to the enterprise in due time before the transaction, the buyer may be found jointly and severally liable for tax arrears related to the running of an enterprise by the seller.

In general, a change of classification of a transaction on the buyer’s part should ideally be followed by a corresponding reclassification on the seller’s part. This would mean that the seller would have the right to reclaim VAT unduly paid. In practice, however, the tax authorities may disagree with the new classification and refuse to return overpaid VAT. 

However, recent administrative court holdings show that each transaction should be examined individually and that it should not be assumed a priori that each disposal of buildings along with lease agreements represents a disposal of an enterprise.

A sale of shares in a real estate company may be used as an alternative to an asset deal. Choosing this option, however, also involves tax-related risks. First of all, it should be determined if the seller is acting as a VAT payer. If yes, in the event of a sale of 100% of shares, one may argue that the deal is, in the economic sense, a disposal of an enterprise, and therefore that it should fall outside the scope of VAT. There are, however, more problems to be dealt with. Another issue is the exemption from VAT in the event of a disposal of shares in a real estate company. Under the provisions of the Polish VAT Act, VAT exemption is excluded for disposals of company shares carrying, among others, the title to real property. Also, as exclusion of VAT exemption was incorrectly implemented in the Polish system, taxpayers may rely directly on the provisions of EU VAT Directive 2006/112/EC. However, it should be noted that in reality in may be more favorable for the parties to the transaction if the disposal of shares is VAT-able given that the buyer could have the right to deduct input VAT and at the same time would not be obligated to pay the tax on civil law transactions.

Summing up, considering the uncertainly on the real estate market about the classification of a sale of commercial buildings, it is extremely important to carefully analyze the subject matter of the transaction, ensure that the parties to the transaction are protected in the event of reclassification of the transaction by making additional arrangements, and consider what transaction structure will be best in a given situation

By Malgorzata Wasowska, Head of Tax Practice, and Sergiusz Felbur, Associate, act BSWW

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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