VAT classification of sales of commercial real estate as the Organised Part of an Enterprise

Judgment of the Supreme Administrative Court of 28 July 2023 (ref. I FSK 892/18)

The recently announced judgment of the Supreme Administrative Court reopens the formerly hot-bottom issue of VAT taxation on the sales of commercial real estate. The essence of the dispute is the classification of these transactions as a sale of an organised part of an enterprise (ZCP) which then excludes VAT but is subject to tax on civil law transactions, or as a supply of goods (in this case a commercial building), which may be subject to VAT.

The Supreme Administrative Court, in its judgment of 28 July 2023 (ref. I FSK 892/18), addressed once again a contentious issue concerning VAT classification of commercial real estate sale transactions (the operative part of the judgment has already been published, but written grounds of judgement are still not available). The Supreme Administrative Court stated that the sale of a shopping centre should be treated as a sale transaction of a organized part of the enterprise, not entitling to VAT deduction and consequently subject to tax on civil law transactions.

The case concerned the sale in 2016 of a shopping centre, subject to VAT at the rate of 23%. Under the sale agreement, the seller transferred, among others, all rights and receivables under the lease agreements, collaterals for the lease agreements, unexpired construction guarantees and intellectual property agreements.

The tax authorities questioned the deduction of VAT applied by the purchaser, stating that the subject of the transaction was capable to continue further independent economic activity (in an unchanged form) and should therefore constitute an organised part of an enterprise. This position was upheld by the Voivodeship Administrative Court in its judgment of 10 October 2018 (ref. I SA/Łd 1031/17).

The arguments of the purchaser that the supply in question did not constitute an organised part of an enterprise was not accepted, as the rights under the property management agreement, including monitoring, the property insurance contract, the agreement for the supply of utilities and the ongoing administration of the project as well as the bank account agreement were not transferred. The favourable for the company tax ruling, confirming its right to deduct VAT from an invoice documenting the acquisition of the property, was also disregarded.

The judgment of the Supreme Administrative Court was based on the decision of the CJEU of 16 January 2023 in the W. sp. z o.o. case (ref. C-729/21), issued in reference to preliminary questions previously submitted to the CJEU, in order to clarify:

1. whether Poland has correctly implemented the provisions of the EU VAT Directive by exempting the supply of an organised part of an enterprise from VAT taxation without making the application of such an exemption conditional on the existence of a legal succession between the seller and the purchaser;
2. whether the application of VAT exemption is conditional upon the transfer of all the assets of such an organised part of an enterprise to the seller, and does a change in this respect (in particular the failure to take over the insurance and management agreements for the assets being sold) mean that there has been a VAT-taxable supply of goods?

According to the position of the CJEU, the domestic provisions regarding an organised part of an enterprise do not violate the EU VAT Directive. Quite the opposite, the failure to transfer assets such as a management agreement or insurance contract under the sale of the property is not sufficient to prevent the independent economic activity. However, the CJEU stressed that it is important that the total assets transferred be sufficient for the independent economic activity. At the same time, the purchaser of the organised part of an enterprise should have the intention to continue its operation (and not, for example, to liquidate it).

Consequently, in its judgement, the Supreme National Court dismissed the company’s cassation complaint and upheld the position of the tax authorities and the Voivodship Administrative Court, stating that the analysed sale of the property should be excluded from the scope of VAT and as a result, the purchaser is not entitled to deduct VAT.

The analysed judgment stands in contradiction to the current market practice formed based on the Tax Clarifications of 11 December 2018 published by the Minister of Finance regarding VAT treatment of commercial real estate sales. The clarifications precisely set a list of the criteria to be met in order for a transaction to be treated as a sale of commercial real estate subject to VAT and not as a disposal of an organised part of an enterprise.

In view of the above, the question arises as to whether the aforementioned judgement of The Supreme Administrative Court has the potential to affect the future tax practice in commercial real estate sale transactions, especially in view of the fact that it was issued after the answer to the preliminary questions referred to the CJEU being obtained.

It should be emphasized that formally, the tax explanations of the Minister of Finance give protective power to those taxpayers who comply with them under the provisions set out in Art. 14n(4) of the Tax Ordinance (as in the case of declaratory rulings). However, from a practical point of view, protective powers of the Tax Clarifications may be limited due to both, the complexity of commercial real estate sales transactions and their factual grounds that often deviate from the model situations outlined in the Tax Clarifications. Therefore, when planning a transaction involving the supply of commercial real estate it is still advisable to obtain an individual tax ruling in one’s own case securing against a sudden change in the interpretative line of the tax authorities – as shown by the case analysed, where such a change occurred.

It is worth noting that for the case analysed by the Supreme Administrative Court, there has been an individual tax ruling issued for the property’s purchaser. However, the tax authorities and the Supreme Administrative Court questioned the effectiveness of the protection resulting from it, as the ruling concerned only the right to deduct input tax and not the classification of the transaction as an organised part of an enterprise. The above illustrates the importance of correctly describing the facts and formulating correct questions in the application for an individual tax ruling.