Poland: Definition Of ‘First Occupancy' In VAT Regulations Inconsistent With EU Laws?

Description

On February 23, 2016 the Supreme Administrative Court (NSA) decided in case no. I FSK 1573/14 to submit a preliminary question to the Court of Justice of the European Union to establish whether the definition of 'first occupancy' of a building or structure or any part thereof provided in Poland's VAT Act is compatible with EU laws.

The NSA issued its decision in a case concerning a taxpayer who sold a building less than two years after having made improvements to it worth more than 30 percent of the initial value of the building, without declaring any VAT liability in connection with this action. Importantly, having made the improvements, the taxpayer used the building exclusively for his own needs, without making it available to any third party (prior to the sale) under a transaction subject to VAT.

The Polish VAT Act defines 'first occupancy' of a building or structure or any part thereof as requiring the said space to be handed over for use "in performance of taxable acts". It follows from this definition that the use of the property by the taxpayer subsequent to the improvements made to it did not amount to the first occupancy of the building. The tax authorities and the Provincial Administrative Court (WSA) which reviewed the taxpayer's appeal against the decision finding him in arrears with VAT concluded therefore that the first occupancy of the building took place only upon the sale of the property and that it was this latter transaction that was subject to VAT. The NSA was, however, uncertain as to whether the definition of 'first occupancy' in the Polish VAT Act is consistent with Directive 2006/112/EC on the common system of value added tax.

Comment

The ruling referred to above comes in the wake of several precedential rulings handed down recently by the NSA which found the definition of first occupancy adopted in Polish law to be inconsistent with EU laws and refused to apply it in the cases brought before it (cf. e.g. the judgment of the NSA of May 14, 2015, case no. I FSK 382/14). The main objection voiced by the NSA in these cases was against the explicit precondition laid down by the Polish legislator whereby the first occupancy of a building or structure or any part thereof may take place only if these spaces are handed over for use "in performance of taxable acts". It follows from this precondition that if a taxpayer commences to use a real property it had developed or improved for its own purposes, this will not amount to the first occupancy of the property. The NSA holds that EU laws do not provide any grounds for Poland's legislator to impose a condition of this kind.

The Court of Justice of the European Union may be expected to rule on this issue in 2017 at the earliest, although the Advocate General may get around to issuing an opinion often correctly anticipating the Court's eventual judgment already before 2016 is out. If the Court finds the Polish regulations to be inconsistent with EU laws, the consequences for real property taxation with VAT would be substantial. To begin with, the definition of 'first occupancy' in the VAT Act would have to be amended. Secondly, although the tax authorities cannot, in principle, rely directly on VAT-related EU Directives to find against taxpayers, transactions that have already been completed would need to be subjected to detailed reconsideration, including those that were the subject of tax rulings (although in the case of the transactions covered by such rulings risks would be much less significant).

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