When does a company act as a private investor?

The rule under Polish tax law is a one-off tax levied on the same transaction, whereby – pursuant to Art. 2(4)(b) of the Act on Civil Law Transactions, the first to be analysed is the VAT treatment of transactions; and then – tax on civil law transactions (hereinafter: PCC). The assumption of the tax on civil law transactions actually is the taxation of private transactions, while the tax on goods and services – professional economic activity.

Judgment of the Supreme Administrative Court of 26 April 2023, ref. III FSK 1989/21

The case concerns a loan granted by a company – an active VAT taxpayer – to an entity from its capital group. The borrower declared and paid PCC, and then applied for a refund of an overpaid PCC, arguing that the transaction was in fact subject to the VAT Act and – as a cash loan service – was exempt under Article 43(1)(38) from VAT. According to the company, the prerequisites for applying the exemption were met – though the lender was not a financial institution, it was providing loans when its core operating activity generated a surplus with the potential to allocating it to such “additional” activities. Nevertheless, the loan itself was provided in the course of a professional activity and subject to payment (in the form of interests). Nor was it the only loan provided by the lender – the other was granted to another business entity.

The company as a private investor?

The position of the applicant was not shared by the tax authorities or the Voivodship Administrative Court. The transaction was refused to be considered as subject to VAT, thus – the application for overpayment in PCC was dismissed. Importantly, the authorities stipulated that it is not justified to apply a certain automatism according to which the repeated or one-off performance of a given service would determine its qualification as provided within the framework of its business activity or outside it. It is not the frequency that shall determine the professional nature of the transaction, but each individual analysis as to whether or not, with respect to a given transaction, the entity was acting as a VAT taxpayer, carrying out a professional activity.

The tax authorities concluded that the loan being the subject of the proceedings was provided outside the scope of the lender’s business activity. The reasoning behind was the “incidentality” of loans granted, the lack of connection with the core, organized activity of the taxpayer (confirmed by the notion of financial intermediation not being included in the National Court Register as the object of the taxpayer’s activity) and the lack of funds / resources separated strictly for the purpose of performing financial activities. Moreover, the loan was granted to an entity closely related to the lender and contained, among others, a provision indicating non-marketable conditions for the transaction (the lender’s right to withdraw from the agreement and demand an immediate repayment – which stands in contradiction with the essence of a loan agreement that is a borrower’s right to freely dispose of the borrowed money). On the basis of the facts thus established, the tax authorities considered that the disputed loan agreement was concluded within the framework of the company’s management of its own investment portfolio and was aimed at providing private support to a related entity.

The position of the Supreme Administrative Court

The Supreme Administrative Court also disagreed with the company’s position and dismissed its cassation complaint. In the verbal justification of the decision, he confirmed that the scope of the lender’s activity did not indicate that it may grant loans as a VAT taxpayer. Interestingly, the Supreme Administrative Court referred to the judgment of the CJEU of 14 November 2000 in case C-142/99 (Floridienne SA and Berginvest SA), according to which granting loans is subject to VAT only if it may be considered as economic activity within the meaning of the VAT Directive, or if it constitutes a direct, permanent and necessary extension of such activities, without being of an incidental nature. The provision of a loan such as the one which is the subject of the proceedings in question could constitute an economic activity consisting in lending its capital in a continuous and organized manner with the aim of making a profit, but only on condition that:

• loans of that kind would not be of an incidental nature and would not be limited solely to the management of one’s own investment portfolio correspondingly to a private investor,
• and the granting of such a loan would serve an economic purpose, i.e., be carried out with the intention of maximising profit in relation to the funds invested.

The disputed transaction was classified by the Supreme Administrative Court as exempt from the provisions of the VAT Act, and thus subject to PCC.

Conclusions

When a lender is a VAT taxpayer and providing loans is one of its core activities, then there is no doubt – money lending in exchange for valuable consideration (interests) constitutes a service against payment subject to VAT. Tax authorities usually also confirm that a loan granted by an entrepreneur from his company funds is subject to VAT and is not subject to PCC (regardless of whether it is provided as part of regular business activity or incidentally).

On the other hand, in line with the jurisprudence of the administrative courts, the provision of loans may not be subject to VAT if it is made outside the framework of the lender’s business activity. This approach is confirmed by the CJEU and requires each transaction to be examined whether it falls within the taxpayer’s business activity, while presuming that the loan is of a professional nature (e.g. judgment of the CJEU of 17 December 2020, ref. C-801/19, FRANCK d.d. Zagreb; judgment of the CJEU of 17 October 2019, ref. C 692/17, Paulo Nascimento).

It remains a philosophical question whether a limited liability company, the primary object of which is to conduct a business activity, may carry out activities classified as private / directed solely to support a related entity (isn’t such support ultimately to serve to increase the profit of the entire group?). May a company, being subject to commercial law, have any such thing as its own private interest that is separate from its functioning in the economic system?

Irrespective of answers to such general questions, the NSA judgment in question constitutes yet another (following the judgment of 27 October 2021, ref. III FSK 175/21, or of 24 April 2018, ref. II FSK 1105/16) indication for taxpayers, what premises they should follow when classifying their transactions as subject to VAT or PCC, which will allow them to avoid disputes with tax authorities and courts in the future.

Arguments for recognizing that a loan provided by a VAT taxpayer will be subject to the provisions of the VAT Act as a service exempt from VAT, and thus not subject to PCC, will be sound as long as current assets are involved and the terms of the transaction are market-based and revenue-oriented. At the same time, with large number of loans, it is also worth trying to formally prepare the company to enter into this type of transactions by amending the articles of association in such a way as to make its lending activities present in the National Court Register. Examining the nature of transactions in advance will help to avoid counterintuitive consequences in the form of long-term tax and court proceedings that may involve significant human, time and financial resources of the company.