NSA confirms: Lack of VAT on purchase precludes VAT exemption on sale

The Supreme Administrative Court (NSA) has reaffirmed its stance on the VAT exemption on the sale of real estate acquired from private individuals without VAT being charged. In its judgement of 7 February 2025 (I FSK 1566/21), it confirmed that the exemption under Article 43(1)(2) of the VAT Act does not apply if the lack of VAT deduction on purchase is due to the fact that the transaction was not subject to VAT.

Background

A company primarily engaged in VAT-exempt financial services invested capital in the purchase of undeveloped plots from natural persons not engaged in business activities. The transaction was not subject to VAT, meaning no VAT was charged on the purchase that the company could have otherwise deducted.

When planning to sell the property, the company applied for an individual tax ruling to confirm that it could apply for a VAT exemption under Article 43(1)(2) of the VAT Act.

Position of the authority and rulings of the WSA and NSA

The Director of the National Revenue Information Service did not agree with the company’s position regarding the VAT exemption on the sale of the property. The Voivodeship Administrative Court in Warsaw upheld this decision and rejected the company’s appeal. The company appealed against this judgement and referred the case to the Supreme Administrative Court.

The Supreme Administrative Court also rejected the company’s appeal, upholding the previous decisions. Two key arguments emerged from the oral justification of the judgement:

1) the condition of the absence of the right to deduct VAT cannot result from the fact that a given activity was not subject to VAT at all or when the taxpayer, despite having the right to deduct input VAT, chose not to exercise it;

2) the condition of using the purchased goods for the purposes of exempted activities applies to a situation in which the goods are intended for a specific use within the taxpayer’s business and not for resale to third parties.

No right to deduct

The Supreme Administrative Court emphasised that the exemption in Article 43(1)(2) of the VAT Act transposes Article 136(a) of the VAT Directive. In the court’s opinion, the conditions for benefitting from this exemption are only met if the taxpayer is not entitled to deduct tax due to the restrictions and prohibitions provided for in the VAT Directive or in the VAT Act.

However, this condition is not satisfied if the inability to deduct VAT in the prior stage of the transaction is due to the fact that the given activity was not subject to VAT at all or if the taxpayer, having the right to deduct input tax, did not exercise this right. In this regard, the NSA referred to the case law of the CJEU, including the judgement of 8 December 2005 in the case of Jyske Finans A/S (C-280/04).

Moreover, in the court’s opinion, this position does not violate the principle of neutrality, because the supply of the property was not subject to VAT at all, so that the company did not bear the burden of VAT associated with its acquisition.

Use of the purchased goods exclusively for the purposes of exempted activities

In the opinion of the Supreme Administrative Court, the condition that the acquired property be related to the company’s exempt activity was also not met. In this respect, the court referred to the CJEU judgment of 9 March 2023 in the Generali Seguros SA case (ref. C-42/22). According to this judgement, the term ‘used for’ in Article 136(a) of the VAT Directive refers to the fact that the goods are intended for a specific use (in the case of the aforementioned judgement: for use in the activity of effecting insurance transactions). This does not apply to goods acquired by a taxpayer for resale rather than for use within their business operations as part of their business activity, but – without using them – to resell them in an unaltered condition to third parties.

The Supreme Administrative Court (NSA) found that the facts of the case under consideration were similar to the circumstances previously examined by the Court of Justice of the European Union (CJEU). The court emphasised that the resale of goods in an unchanged state to third parties means that they were not used in an exempted activity, i.e. in insurance activities (in the case of the case considered by the CJEU) or financial activities (in the case considered by the NSA).

Conclusion

The NSA judgement is in line with previous case law (including NSA judgements I FSK 627/12 and I FSK 307/16). In the analysed judgement, the principles arising from CJEU case law played a key role in two aspects:

1. Condition regarding the absence of the right to deduct VAT – does not include situations where the transaction was not subject to VAT at all.
2. Condition concerning the use of goods solely for VAT-exempt activities – does not include the resale of real estate in an unchanged state (without using it in activities).

At the same time, we recognise the need for a similar ruling with regard to Article 43(10a)(a) of the VAT Act. This provision states that one of the conditions for the VAT exemption of the delivery of buildings, structures or parts thereof is that the seller was not entitled to deduct VAT on the purchase of these objects. Despite the semantic similarities between the conditions of the taxpayer’s lack of entitlement to reduce the amount of output tax by the amount of input tax resulting from Article 43(1)(10a) of the VAT Act and Article 43(1)(2) of the VAT Act, numerous interpretative disputes arise in this field.

Our support

We have many years of experience in analysing the VAT consequences of property sales. Given the high value of such transactions, we strongly recommend a thorough VAT qualification analysis for each case. If you have any questions regarding VAT settlement in connection with the sale or purchase of real estate, please do not hesitate to contact us.