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Polish Order – VAT Group

Another change under the “Polish Order” is the introduction of a new institution, the so-called VAT Group. It is intended to create the possibility of joint settlement for a VAT group, similarly to corporate income tax – Tax Capital Group (polish Polska Grupa Kapitałowa – PGK). In the following article, we will focus on the analysis of the “Polish Order” in the part referring specifically to the VAT Group.

Nature of the VAT Group

This institution assumes that transactions for the supply of goods and services between VAT Group entities are not to be subject to VAT. On the other hand, in transactions with entities outside the VAT group, the VAT group will be regarded as a single taxpayer, without division into its constituent entities. Therefore, the purchase of services or goods by an entity from the group will be the purchase of these services or goods by the VAT group – will be treated as internal transactions (within one VAT taxpayer). The same principle will apply to sales. In practice, this means tax neutrality between group members concerning both output and input tax.

The attempt to regulate this matter should be assessed rather positively; the practice of other countries shows that this type of institution can significantly simplify VAT settlements within related parties and reduce their administrative costs. In addition, it may constitute a simplification for tax authorities, as it may significantly reduce the number of documents and transactions to be verified.

However, according to the “Polish Order”, the VAT Group will also be able to make purchases of goods and services related to mixed sales. In this case, it will have to – as a whole group – determine a proportion for the group, which proportion, expressed approximately, will be agreed with the head of the tax office. Thus, it will be necessary to determine two proportions – for individual entities forming the VAT group and – if separation is not possible – for the VAT group itself.

Conditions for setting up a VAT Group

As in the case of PGK, the establishment of a VAT Group will require the fulfillment of certain prerequisites, which are assessed rather strictly (but not as strictly as in the case of PGK). In practice, this may lead to some difficulties in setting up a VAT Group, which may result in a small number of interested entrepreneurs.

A VAT group will be able to be formed by entities with or without a registered office in the national territory, to the extent that they conduct their economic activity in the national territory through a branch located in the national territory.

First of all, a group of entities wishing to set up such a group will need to be financially, economically, and organisationally linked. The various links are understood as follows:

financial links – occur when one of the entities in the group owns:

  • directly more than 50% of shares in the share capital or
  • more than 50% of the voting rights in the controlling, constituting or management body, or
  • more than 50% of the right to share in the profits of each of the other taxpayers that are members of the group,

economic links – will occur when:

  • the principal activity of the members of the VAT group is of the same nature, or
  • the activities of the Members of the VAT group are complementary and interdependent, or
  • a member of the VAT group carries out activities that benefit wholly or mainly other members of the VAT group

organizational links – will occur if:  

  • in law or in fact, directly or indirectly, are under the common direction, or
  • organize their actions in whole or in part in the concert.

Importantly, these links between the members of a VAT group must be fulfilled uninterruptedly for the duration of the group’s status as a taxable person.

In addition, taxpayers forming a VAT group will have to conclude a written agreement on the formation of such a group, which will have to contain, among other things, the identification of the group’s representative, the identification of the taxpayers, and the period for which the agreement on the formation of the group will be concluded – which cannot be shorter than 3 years.

A VAT group shall become a taxable person for VAT on the date specified in the agreement, but not earlier than on the date of its registration by the competent head of the tax office.

Members of the VAT Group

A VAT Group will not be able to be a member of another VAT Group, and each entity will be able to be a member of only one VAT Group. What is more, the legislation contains quite rigid regulations in terms of changing the composition of the group – according to the draft of the “Polish Order” – a VAT Group cannot be expanded or reduced in size by the members that are part of it. In practice, this may realistically limit the possibility of cooperation for entities that would benefit from a single VAT settlement.

The VAT Group will be represented by a ‘VAT Group Representative’. – the entity representing the Group, within the scope of its duties, on which the jurisdiction of the tax authority for the entire VAT Group will depend. The VAT Group Representative will be obliged, in particular, to:

  • submitting the registration application of the VAT Group to the competent tax office together with the agreement on the formation of the VAT Group,
  • to report to the head of the tax office the changes in factual or legal status concerning the given VAT Group, resulting in the breach of conditions for recognizing the VAT Group as a taxpayer of VAT – within 14 days from the occurrence of these circumstances
  • fulfillment of the VAT Group’s obligations, including submission of returns,
  • correcting settlements of VAT Group (also after its dissolution),
  • to collect from the head of the tax office the amount of surplus of input tax overdue tax resulting from the VAT Group’s declaration.

Moreover, entities which form a VAT group will be jointly and severally liable for VAT, i.e. for VAT obligations during the time the group is operational. This liability will continue even after the group has ceased to exist.

Advantages and disadvantages of the VAT Group.

In summary, the positively evaluated proposals related to the VAT Group include:

  • non-taxation of supplies of goods and services by entities belonging to a VAT Group,
  • theoretically less documentation for VAT,
  • no split payment mechanism for intra-group transactions,
  • voluntary nature,

In contrast, negative proposals related to the VAT Group include:

  • the joint and several liabilities of the Members of the VAT Group,
  • the impossibility to change the composition of the VAT group during its existence,
  • The setting, in principle, is a separate deduction proportion for each entity,
  • adapting the current solutions for tax settlements for VAT Group purposes.

Although the above balance is positive, only time will tell how the settlements of individual VAT groups will function in practice and whether individual entities will be interested in the establishment of such a group at all, taking into account many prerequisites to be fulfilled to establish a VAT group. However, it is worth considering this issue in individual cases because, as we have indicated in this article, the establishment of a VAT Group may generate many advantages.