1. Tax ruling has a protective force in case of sale of commercial real estate
2. Problems with VAT settlement in the construction industry
3. Related parties’ statement about the application of the market price may result in imposing a fine[
| 1. Tax ruling has a protective force in case of sale of commercial real estate |
According to the judgment of the Supreme Administrative Court of January 28th, 2019 (reference number I FSK 293/17), shareholding relations between parties involved in a transaction of sale of commercial real estate do not affect whether the transaction concerns an organized part of the enterprise or not. in the case at hand the tax authorities stated initially that such relations are relevant and tried to challenge the previously issued tax ruling concerning the questions (i) whether the sale of real estate is a sale of an organized part of the enterprise being subject to the tax on civil law transactions (TCLT), (ii) or it should be treated as a sale of an single asset being subject to VAT. In the application, the company accurately described the facts and the authority confirmed its standpoint that the transaction should be subject to VAT (and not to TCLT). The company’s problems began when the tax authority started tax audit triggered by VAT refund application. First of all, the tax authority accused the company that in the application for a tax ruling the company did not indicate that it is a related party to the seller and that the transferred lease agreements are crucial to the business activity as well as that the same providers will render property and asset management services after the sale transaction. In the first instance the regional administrative court (WSA) confirmed the statement of tax authorities, stating that the factual state presented in the application are significantly different from the factual transaction. However, the Supreme Administrative Court (NSA) was of the opposite opinion and stated that shareholder relations and post-transaction arrangemnts cannot affect the classification of transactions. Moreover, the Supreme Administrative Court emphasized that a tax ruling is primarily a protective function and the tax authorities should not direct their actions to challenge it. It is worth to mention that in the justification of the judgment, the court referred to the official explanations of Ministry of Finance regarding the supply of commercial real estate issued in December 2018.
| 2. Problems with VAT reverse charge mechanism settlement in the construction sector |
The latest judgments of administrative courts indicate that the reverse charge is an exception to the general rule of VAT taxation and the relevant rules should be interpreted strictly. However, court and tax rulings are not uniform in this respect. The crucial problems arise in the case of the reverse charge introduced for some categories of construction and assembly services, for which the investment process is often complicated and long-lasting. The VAT Act, unfortunately, does not define terms indicated in the regulations – such as a subcontractor or a main contractor. Doubts are also visible through numerous judgments of administrative courts. For example, on the basis of the judgment of the Voivodeship Administrative Court in Warsaw of September 28th, 2018 (reference number III SA / Wa 4095/17), it could be stated that if conservation work are rendered by external construction companies on the leased premises belonging to the landlord, then these construction services purchased in this regard, are purchased by the landlord in a dominant manner for its own benefit and on its own behalf. Hence, a separate remuneration from the tenant received by the landlord for conservation works constitutes a part of the rental service, i.e. the rental agreement will concern one service, which will also include the repairs of the lease premises. As a consequence, the company (landlord) does not perform any construction services in favor of tenants in accordance with the VAT Act and consequently m the external construction firms, ,whom the services are purchased from, cannot act as subcontractors and the VAT reverse charge mechanism is not applicable. In addition, the company owning the property cannot act as a general contractor, because it is an investor and as the contractor the external entity (construction firm) should be considered. Thus the status of a subcontractor cannot be derived from the legal fiction of the provisions of the VAT Act, without taking into account the actual nature of the works performed by him.
| 3. Related parties’ statement about the application of the market price may result in imposing a fine |
One of the changes introduced to the transfer pricing (TP) regulations in 2019 is the need to include in the statement on the preparation of transfer pricing documentation (TPD) that related parties have applied the market price during the transaction. TBased on the the amendments to the regulations, a statement the preparation of TP documentation by related parties are required to be submitted by the end of the ninth month after the end of the financial year – which in practice for entities with a calendar year means submitting a declaration by 30th of September. As stated above, in the statement it has to be indicated that the transaction was carried out on arm’s length terms. This issue has also been regulated since January 2019 by the provisions of the Penal Fiscal Code, because a failure to submit a statement, submission after deadline or confirmation of untrue information may result in a fine. The problem arises in case of verification of the financial figures given by the taxpayer and determination of the correctness of the calculation by a controller. Therefore, the amendment of the regulations in this area creates the risk of many disputes between the taxpayers and the tax authorities.