The acceptance protocol and the moment of arising of VAT liability for the provision of a service

Judgment of the Voivodship Administrative Court in Warsaw of April 18, 2024, ref. III SA/Wa 8/24

It would seem that the topic of the importance of the acceptance protocol for determining the moment when VAT liability arises for the provision of a service is quite clear and straightforward, as it has often been the subject of rulings by Polish administrative courts, as well as rulings by the CJEU. However, nothing could be more wrong – this issue still raises many doubts for taxpayers, but also for Tax Authorities.

Such a situation occurred in a case resolved by a judgment of the Voivodship Administrative Court [hereinafter: VAC] in Warsaw, on April 18, 2024 (ref. III SA/Wa 8/24). The Polish Company providing electroenergy services [hereinafter: Applicant or the Company] owns the transmission infrastructure which it uses for its business activity, and enters into contracts with customers/contractors for the provision of electroenergy services. An entity interested in receiving the aforementioned services or receiving electricity has to obtain connection of its equipment, installations, etc. to the Company’s transmission infrastructure.

A connection of such facilities to the Company’s transmission infrastructure is carried out on the basis of a connection agreement, concluded by the Company and the contractor, after fulfillment of the connection conditions set by the Company. The connection agreement regulates the rules for the implementation of the connection to the system, the rules and technical requirements to be met by the object to be connected, in order to confirm its status as “connected to the system,” and the rules for the settlement of the connection fee. Thus, simply physical connection of the facilities to be connected to the system does not prejudge their connection. According to the agreement provisions, the connection service is considered to be completed only at the moment of signing a written protocol on the completion of the facility connection. The signed protocol constitutes a document confirming the completion of the connection service and the proper realization of the subject of the agreement, and is drawn up within 30 days from the date of receipt of the required simulation results and test reports from the contractor confirming that the facility meets the requirements of the agreement, as well as the Energy Law [1].

A connection fee is determined on the basis of the actual expenses incurred by the Company in providing the service. Therefore, on the day the contract is concluded, it is unknown how high the final remuneration for the provision of the electroenergy service will be.

Importantly, the contractor is obliged to make a prepayment for the anticipated connection fee, in two parts. Each part of the prepayment is documented by invoices. After signing the protocol, the Company makes a settlement of the connection fee, taking into account the prepayments made earlier, and issues a final invoice.

On the basis of such presented facts, on the Company’s side a doubt arose regarding the moment of arising of VAT liability for the provision of its services. As a result, the Company applied to the Dyrektor Krajowej Informacji Skarbowej [hereinafter: DKIS] for an individual interpretation, in which it asked when the VAT liability arises for the provision of the service of connecting the contractor’s facility to the company’s system (electroenergy service)?

According to the Applicant, the moment when the service is completed is the moment when the protocol is signed. At the same time, due to the fact that the contractor is obliged to make two prepayments for the provision of the above-mentioned services, with regard to these payments received by the Company before the date of signing the protocol, it should be assumed that the VAT liability will arise when these payments are received.

Standpoint of DKIS

DKIS, in an issued interpretation[2], found the Applicant’s position on:

• recognizing that the VAT liability for the provision of the service of connecting the contractor’s facility to the Company’s system will arise at the time the protocol is signed as incorrect,
• recognizing that the VAT liability in connection with the receipt of a prepayment will arise at the time of its receipt with respect to the amount received as correct.

The Company appealed against the above interpretation (to the extent that its position was considered to be incorrect) to the VAC in Warsaw.

Standpoint of the court

The court agreed with the Company and overruled the interpretation in the appealed part. It pointed out that both sides of the dispute used highly valid arguments. However, the court eventually decided to agree with the Company.

The court emphasized that the preparation of the protocol in this factual state is an “inseparable element of the provision of the disputed service.” The court considered it to be an essential element, as it determines whether the service in question was provided at all. The subject of the disputed service is not only works of a purely construction-technical nature, which are performed by the Applicant. A whole series of testing activities, as well as activities that are purely formal in nature, are crucial in the factual state in question. The performance of these activities enables the connection to be used as intended. The service provided by the Company is formalized, and separate provisions of the Energy Law specify in detail how such services are to be performed. Before the definitive connection to the system, specific tests must be carried out, and all of this work must be approved by a protocol, so it should be considered that the VAT liability will arise when the protocol is signed.

Relevance in VAT

The issue of the impact of (1) acceptance, (2) handover, (3) approval and (4) similar protocols on the determination of the moment of arising of VAT liability for the provision of services, has more than once “caused sleepless nights” for taxpayers. Despite the fact that it has often been the subject of rulings of Tax Authorities, administrative courts and the CJEU, it can still be described as more uncertain than established.

Although the law provides the parties with a freedom to enter into contracts [3], it should be noted that contractual provisions on the recognition of a given service as completed cannot unambiguously determine the moment when VAT liability arises, for the provision of such services. This is because there is a certain risk that in some (extreme) cases, the parties of a contract may – by appropriately shaping the contractual provisions – seek to ensure that a given service is never considered to have been completed, and thus prejudge that the VAT liability on the provision of such services will never arise.

Therefore, if doubts arise regarding the impact of the protocol on the issue of recognizing a given service as completed – and thus on the moment when VAT liability arises – it is worth paying attention (as the Company did in its argumentation in the submitted application for an individual interpretation) to the CJEU judgment of May 2, 2019 in the case C-224/18 (Budimex). Although this judgment was issued in a case concerning construction/building services, theses stated therein can be considered as universal. So, this judgment can be – in a way –  considered as a “signpost” in the subject of protocols and provision of services. The CJEU stated in it that the VAT Directive does not preclude the formal acceptance of a service (e.g. by signing a protocol) from being considered as the moment when the service has been completed, provided that:

• firstly, the formalities for (1) receiving the service and (2) determining its value, are agreed upon by the parties in a contract, the provisions of which reflect the economic and commercial reality in the field in which the service is provided,
• secondly, this formality constitutes the material completion of the service and finally establishes the amount of the consideration due (i.e. for example – remuneration).

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[1] Act of April 10,1997 – Energy Law (consolidated text: Journal of Laws 2024, pos. 266, as amended).

[2] The individual interpretation of DKIS from November 3, 2023 (ref. 0114-KDIP4-3.4012.359.2023.3.RK).

[3] See article 353¹  of the Act of April 23, 1964 – Civil Code (consolidated text: Journal of Laws 2024, pos. 1061, as amended).