- The Minister of Finance issued a general interpretation regarding VAT on the transformation of the right of perpetual usufruct of land into the right of ownership.
- The interpretation adopted therein is the result of the judgment of the CJEU of February 25, 2021, file ref. C-604/19, which concerns the transformation of perpetual usufruct by operation of law, i.e. pursuant to the Act of July 20, 2018 on the transformation of the right of perpetual usufruct of land developed for housing purposes into the ownership right to such land.
- According to it, such a transformation carried out by operation of law constitutes a supply of goods for consideration, and therefore is subject to VAT.
- This means that the fees charged for the conversion of perpetual usufruct to real estate include VAT – irrespective of whether such use was established before or after May 1, 2004.
- According to the general interpretation, the tax obligation is to be recognized on a cash basis, which is beneficial for local governments.
The interpretation of the Minister of Finance is a consequence of the judgment of the Court of Justice of the European Union of February 25, 2021 in the case C-604/19 (Wrocław Commune against the Director of the National Tax Information). This ruling shows that the conversion of the right of perpetual usufruct to real estate by operation of law into the right of ownership in return for the payment of the fee constitutes a supply of goods for VAT purposes. In connection with this ruling, it was necessary to change the well-established line of interpretation of the tax authorities.
Current practice
In the legal state in force before May 1, 2004, the establishment of the right of perpetual usufruct was not an activity subject to VAT. This activity is now treated as subject to VAT (as a supply of goods).
According to the current line of interpretation of the tax authorities, the next activity, i.e. the transformation of the right of perpetual usufruct into ownership (based on a civil law agreement between the perpetual usufructuary and the land owner, or under the law – e.g. on the basis of the above-mentioned transformation act) did not constitute a separate supply of goods, but only the continuation of the original delivery (i.e. the act of establishing this right – putting the land in perpetual usufruct).
The consequence of this position was the lack of taxation of the act of conversion into ownership of the right of perpetual usufruct of land established before May 1, 2004 (which was not subject to VAT), since its establishment was not subject to VAT.
CJEU position
However, the judgment of the CJEU determined that the transformation of the right of perpetual usufruct of land into the right of ownership on the basis of the provisions of the so-called of the Transformation Act constitutes a supply of goods for the purposes of VAT taxation.
“The judgment of the CJEU means in practice that in the context of VAT taxation of activities related to perpetual usufruct, i.e. the overall settlement of VAT on this account, from the establishment of this right to its transformation into ownership by operation of law, two separate supplies of goods (land Firstly, the act of establishing perpetual usufruct, and secondly, the act of transforming the perpetual usufruct into ownership by operation of law, resulting in the transfer of legal ownership by the current land owner to the current perpetual usufruct user by operation of law. their separate nature, that they are not identical activities, cannot be regarded as a double delivery of the same commodity (land) “- explains Jan Sarnowski, Deputy Minister of Finance.
General interpretation
In order to meet the expectations of the local government, the Minister of Finance issued a general interpretation explaining the doubts in this matter.
It shows that the CJEU judgment does not have any practical effects – on the basis of VAT – on the activities of transforming, by virtue of the right of perpetual usufruct of land into ownership, established from May 1, 2004.
Despite the fact that the conversion of this right was not treated as a separate supply of goods (land), the conversion charges in such cases were previously considered to be subject to VAT.
However, it results in the necessity to change the method of treating, under VAT, the act of transforming, by virtue of the right of perpetual usufruct of land into ownership, established before May 1, 2004. The assumption that the conversion of this right into ownership constitutes a separate supply of goods means that such an act means in the light of the CJEU judgment, it is necessary to tax it with VAT.
The provisions of the VAT Act do not directly establish a specific tax point for such activities performed by operation of law.
However, taking into account the similar nature of the supply of goods performed by order of the authority and by operation of law, it should be considered that in the case of actions to transform the right of perpetual usufruct of land into the right of ownership, made on the basis of the Transformation Act (i.e. under the law), the tax obligation should arise in upon receipt of all or part of the conversion fee (in relation to the received amount).
“In order to eliminate all doubts, the relevant provisions of law were clarified from January 1, 2022. Changes in this regard were introduced under the Polish Order. It is a favorable method of VAT settlement for local governments, shifting the moment of tax obligation only until payment is received. individual interpretations or following established administrative practice that does not recognize the mere act of transforming the right of perpetual usufruct of land into ownership as a separate supply of goods, will be able to take advantage of the appropriate protection resulting from the provisions of the Tax Ordinance “- emphasizes Jan Sarnowski.
Source: gov.pl
