Assignment of rights under development agreement with 23% VAT

On 24 June 2024, the Supreme Administrative Court (hereinafter: NSA), in a judgment by seven judges [1], decided that the assignment of rights from a developer agreement constitutes a service subject to 23% VAT and, therefore, the reduced 8% VAT rate applicable to the supply of a residential unit does not apply.

In its ruling, the NSA referred to the situation, where the assignment of rights takes place against payment of the so-called compensation, in the event of assignment by the seller of rights in a situation where the seller does not have the right to dispose of the residential unit as the owner (both prior to delivery of the residential unit by the developer and assignment made in the course of construction of the building).

In the presented situation, in the NSA’s opinion, it is not possible to speak of a supply of goods for consideration (i.e. a residential unit), which would be subject to VAT, as there is no transfer of the right to dispose of the goods as owner.

In the court’s opinion, in both cases of assignment (before the delivery of the premises and during construction), the fact of establishing payment for it prejudices the existence of remuneration for making the assignment. On the other hand, in the NSA’s view, the return of payments (advances) made by the seller of rights at an earlier stage of the agreement with the developer is not remuneration for the assignment, but a tax-neutral cash benefit.

As a result, the NSA decided that the transfer (assignment) of rights and obligations under a development contract for a consideration in the form of a departure payment, in a situation where the seller of rights under the contract does not have the right to dispose of the residential unit as owner, constitutes an activity taxable as a provision of services and not as a supply of goods. As a result, the reduced VAT rate (8%) applicable to the supply of residential premises does not apply to such a transaction, but the standard VAT rate of 23%.

Significance of the ruling

The commented NSA judgment is of key importance for developers and investors mainly due to the existing divergent line of rulings. On the one hand, there are judgments indicating that the assignment is linked to the future supply of a residential unit and, from the perspective of the economic purpose of the assignment – which is ultimately the acquisition of a residential unit – it is subject to taxation at the 8% VAT rate. This is the case, inter alia, in the NSA judgment of 9 February 2022, ref. I FSK 1974/18.

On the other hand, there are judgments indicating that the assignment of rights as an autonomous service is taxed at the rate of 23%.So, for example, in the judgment of the NSA of 19 January 2023, ref. no. I FSK 2007/1.

Taking into account the ruling presented by the NSA, taxpayers should carry out an internal analysis of the assignments already made by them, taking into account the theses of the NSA, in the context of what risk the discussed judgment creates for them and whether the necessity to correct past settlements may arise.

The necessity to change the VAT rate may result in tax arrears on the part of taxpayers and the determination of a possible price increase for the counterparty.

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ref. I FSK 1661/20