VAT treatment of commercial real estate sales

Dec. 21, 2018 Poland

The Ministry of Finance has published guidelines on the VAT treatment applicable to the sale of commercial real estate (the “Guidelines”)

This follows public consultations, which have been on-going since September 2018. The Guidelines aim to clarify the difference between the sale of assets, which is subject to VAT and the sale of an enterprise or of an organized part of an enterprise („OPE”), which is not subject to VAT. There have been many disputes between taxpayers and the tax authorities questioning whether a given sale should be interpreted as the sale of an enterprise or of an OPE for VAT purposes. In practice, even a small difference may trigger substantial tax consequences and the obligation to pay output VAT or tax on civil law transactions. On the purchaser’s side a contrary interpretation could jeopardize the purchaser’s right to deduct input VAT.

Compliance with the new Guidelines gives formal protection to a taxpayer similar to the protection afforded by tax rulings. The Guidelines aim to answer the question concerning the conditions which must be met to classify a transaction as an enterprise sale. According to the Ministry the supply of commercial real estate is classified as the sale of an enterprise or an OPE if the following conditions are jointly met at the time of the transaction:

  • the intention of the purchaser is to continue the activities carried out previously by the seller using the assets being the subject of the transaction, and
  • the transferred assets allow the purchaser to continue the business activities carried out by the supplier.

In order to assess whether the assets transferred to the purchaser allow the purchaser to continue the seller’s activity, apart from the standard components of real estate supply such as land, buildings, technical infrastructure and rights and obligations related to lease agreements, the following elements must be also included in the transaction:

  • financing agreements related to the purchased real estate, if such agreements were concluded by the seller,
  • property management agreement,
  • asset management agreement,
  • revenue streams connected with the transferred real estate.

Generally, if some of the above items are not transferred to the purchaser, then the transaction should not be classified as the sale of an enterprise or an OPE. However, there can be exceptions and the Ministry notes that not all of the above elements are necessary to continue the business in every case. In this respect the Guidelines are not fully clear and conclusive.

However, we may summarize generally, that the result of the new Guidelines is that, going forward, most sales of commercial real estate will be classified as being subject to VAT. Please note that individual tax rulings issued before publication of the Guidelines will not be questioned by the tax authorities. Nonetheless, in practice the Guidelines will likely be taken into account by the tax authorities during the audit of transactions carried out before the date the Guidelines were published.

Please contact our tax experts if you need further advice about the tax treatment of commercial real estate sales.