Crowdfunding contributions VAT-exempt

Crowdfunding today is not only a way to raise funds for an expensive medical treatment or support people in a life crisis. Online platforms such as Patronite are popular at present among writers, travelers, online creators or start-ups. It is just about setting up an online fundraising and promote it well… However, it is worth to consider tax aspects of such a source of financing beforehand.

An individual tax ruling regarding VAT taxation of contributions made within a crowdfunding platform was issued by the Head of National Tax and Customs Information (Dyrektor Krajowej Informacji Skarbowej) on 8 February 2023[i]. The applicant was an online creator, conducting a dual activity – the first one being paid consultations and selling online training, and the second one posting free, publicly available educational and humorous content on a blog and social media. The creator, after some time of placing free educational content online, managed to build a community of viewers and readers around himself. As the next step, he decided to create a profile on a crowdfunding platform, allowing Internet users (so-called patrons) to provide him with voluntary, monthly financial support. Each payment made was associated with a symbolic expression of gratitude to the patron – the higher the amount, the more personalized the thank-you. The expression of gratitude was not of a material nature, but it consisted, for example, in sending an e-mail or paper thank-you note, or an admission to a dedicated Facebook group. The applicant raised doubts as to whether, in such a situation, the payments from patrons would constitute payment for the supply of services and be subject to VAT.

How to define a service?

Answering this question requires revisiting the basic definition of “supply of services for consideration”, which in principle is subject to the provisions of the VAT Act, and then classifying (or not) the financial support provided to the applicant as the consideration for the supply of services.

The supply of services for consideration for VAT purposes has a significantly broader meaning than in the colloquial sense and includes activity, refraining from activity, and tolerating a given state of affairs. This service is taxable only under an obligation contract, whereby one party provides a service and the other party is its beneficiary and makes a payment, at the same time there being a direct causal connection between the service and the consideration received.

Referring the aforementioned rule to voluntary contributions on a crowdfunding platform, the authority found that in the situation described above, two essential elements necessary to qualify them as a payment for a service subject to VAT are missing:

• a legal relationship between the applicant and his online supporters, under which a mutual exchange of benefits would take place (patrons are not legally obliged and may stop to financially support him at any time. There is no price list on the basis of which the payment of a given amount would allow access to certain content. Similarly, the creator is not formally obliged to publish content on social media);
• a direct link between the payments and the content posted online by the applicant (he would do that anyway, even if no Internet user decided to support him).

Thus, the payments made are not subject to VAT.

The significance of the ruling

The aforementioned ruling is another voice of Polish tax authorities regarding the criteria to be assessed when verifying whether crowdfunding constitutes a payment for a service on the grounds of VAT or not. It should be borne in mind, though, that there are no specific regulations governing crowdfunding models and their taxation in Poland. Crowdfunding itself takes various forms and, depending on a specific platform, it may or may not be subject to VAT.

Depending on the operating model of a platform, the payment will be subject to VAT if a creator and a patron are connected by an obligation relationship, on the basis of which making a payment in a given amount is a condition for receiving access to the content published. In such a situation, the payment received is a consequence of providing a service and the amount of the payment determines the content to be published or for how long the recipient will have access to it (subscription model). If the creator refuses access to the agreed product – the patron is entitled to a refund / discount or other form of compensation. This is the operating model of, among others, the popular crowdfunding platform – www.patreon.com, within which creators pay VAT on each received amount of support. Creators should therefore analyze the operating rules of the platform they use to raise funds in each case, to determine the tax consequences of their activity.