Do structures on land preclude it from being treated as undeveloped for VAT exemption purposes?

Supreme Administrative Court draws attention to the economic nature of land sale transactions

The Supreme Administrative Court (NSA), in a ruling of 23 August 2024 (ref. I FSK 1670/20), again addressed the issue of the application of the VAT exemption to the sale of undeveloped land. The ruling is in line with previous judgments of the Supreme Administrative Court (e.g. 8 April 2021, ref. I FSK 560/18), which indicate that when assessing whether land is undeveloped, in addition to an analysis of the facts, the economic nature of the transaction should also be taken into account, including whether the facilities erected on the land are of key importance in determining the nature of the land as developed land. Although the written reasons for the judgment have not yet been published, the Supreme Administrative Court has provided oral reasons for the ruling, which we rely on in this analysis.

Facts and arguments of the parties

The case concerned the sale of several plots of land by Polska Spółka Gazownictwa sp. z o.o.. The plots contained remnants of industrial structures, including parts of disused district heating and gas mains, as well as foundations of former structures. The company argued that the disused district heating network would not constitute the subject of the supply and sought an individual tax ruling, claiming that the plots qualifies as undeveloped land and therefore the sale should be exempt from VAT under Article 43(1)(9) of the VAT Act.

The Director of the National Tax Information (KIS) partially agreed with the company’s argument, holding that some of the plots of land were undeveloped and could benefit from the VAT exemption. On the other hand, in the case of plots of land on which there were active or inactive gas mains, he held that they did not meet the conditions for exemption as they were built-up areas. The company disagreed with this tax ruling and challenged it before the Provincial Administrative Court (WSA) in Krakow, which dismissed the complaint. The case was then referred to the Supreme Administrative Court.

Supreme Administrative Court on the economic aspect of the transaction

The Supreme Administrative Court, upheld the Company’s position and overturned the previous judgment and the individual tax ruling. The court confirmed that not only the factual state, but also the economic purpose of the transaction is of key importance for the classification of land as undeveloped. In a verbal justification, the court stated that the presence on the plots of land of the remnants of disused gas and district heating networks does not prejudge the classification of the land as developed. In the court’s view, if the facilities on the land are economically not significant in determining its character as built-up land, such land may be treated as undeveloped.

The Supreme Administrative Court also noted the inconsistency in the assessment made by the tax authority, which qualified plots of land with similar facts differently. The court stressed that if some of the plots of land were considered undeveloped, despite the fact that fragments of gas pipelines run through them, the same qualification should apply to the remaining plots of land with a similar factual state. Although this reasoning of the court may seem less relevant for taxpayers, the final weight of this position will be known after the publication of the written reasoning of the judgment.

Consequences of the judgment for other taxpayers selling real estate on which old structures are located

The Supreme Administrative Court’s judgment is in line with the existing line of rulings, according to which not every presence of technical infrastructure on land means that it is developed within the meaning of VAT regulations. In addition to the factual state, the economic purpose of the transaction and the actual significance of the facilities located on the property are important elements of the analysis. Therefore, entrepreneurs planning to sell land with residual structures should carefully analyse the nature of the residual structures and the purpose of the sale in order to properly classify the land as developed or undeveloped.

Our support

For years, we have been supporting our clients with regard to the VAT taxation of real estate transactions and issues concerning the application of VAT exemptions on the sale of real estate. The latest ruling of the Supreme Administrative Court provides additional arguments in favour of the economic consideration approach when classifying land as developed or undeveloped. If you have any doubts as to the appropriate approach in a particular case, please do not hesitate to contact us – we will be happy to assist you in analysing and determining the appropriate tax qualification when selling real estate.