Briefing document & Podcast: ECJ C-604/19: Transformation of the right of perpetual usufruct into full immovable property ownership right

Subject: Interpretation of the VAT Directive (2006/112/EC) concerning the transformation of the right of perpetual usufruct into full immovable property ownership rights in Poland and the associated fees. Specifically, whether these transformations are considered a “supply of goods” and whether the municipality is acting as a taxable person or a public authority for VAT purposes.

Background:

This case concerns a request for a preliminary ruling from the Wojewódzki Sąd Administracyjny we Wrocławiu (Regional Administrative Court, Wrocław, Poland). The case arose from a dispute between the Municipality of Wrocław (Gmina Wrocław) and the Director of the National Tax Information Bureau (Dyrektor Krajowej Informacji Skarbowej) regarding the VAT treatment of fees collected by the municipality for the transformation of perpetual usufruct rights into full ownership rights. Under Polish law, perpetual usufruct allowed individuals or entities to use state or local authority land for an extended period (typically 99 years) in exchange for an annual fee. A 2018 law transformed these rights into full ownership, requiring the new owners to pay a transformation fee. The central question is whether these fees are subject to VAT, and if so, whether the municipality is acting as a taxable entity in collecting them.

Key Issues & Questions Referred:

The referring court posed three key questions to the CJEU:

Supply of Goods (Art. 14(2)(a) VAT Directive): “Does the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law … constitute a supply of goods within the meaning of Article 14(2)(a) of [the VAT Directive], read in conjunction with Article 2(1)(a) [of that directive]?”
Supply of Goods (Art. 14(1) VAT Directive): “If the answer to Question 1 is in the negative, does the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law constitute a supply of goods within the meaning of Article 14(1) of [the VAT Directive], read in conjunction with Article 2(1)(a) [of that directive]?”
Taxable Person vs. Public Authority (Arts. 9(1) & 13 VAT Directive): “Does a municipality that charges fees for the transformation of the right of perpetual usufruct into immovable property ownership rights by operation of law … act as a taxable person within the meaning of Article 9(1) of [the VAT Directive], read in conjunction with Article 2(1)(a) of that directive, or as a public authority within the meaning of Article 13 of that directive?”

Court’s Analysis & Key Findings:

The CJEU addressed the questions in turn, emphasizing the need for a uniform interpretation of EU law.

Question 1 & 2 (Supply of Goods): The Court concluded that the transformation does constitute a supply of goods under Article 14(2)(a) of the VAT Directive. This article pertains to “the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation.” The Court reasoned that:
- The transformation involved a transfer of ownership.
- The transfer was “in pursuance of the law” (the 2018 Polish law).
- The transformation fee constitutes “compensation.” The court stated, “it is necessary only to establish that the compensation at issue is directly linked to the transfer of ownership and that its payment has become effective, which it is for the national court to determine.” The court further stated that “the obligation to pay the transformation fee arises from the wording of the law on the day on which the transformation of the right of perpetual usufruct into full immovable property ownership rights takes place and that the amount of that fee is to be equivalent to the amount of the annual fee for perpetual usufruct on the day of that transformation.”
Because the court found the transformation to be a supply of goods under 14(2)(a), it did not need to answer the second question regarding whether it was also a supply under 14(1).
Question 3 (Taxable Person vs. Public Authority): The Court determined that the municipality generally acts as a taxable person (Art. 9(1) VAT Directive), not as a public authority (Art. 13(1) VAT Directive) when collecting the transformation fees.
- The Court first established that the activity is economic in nature. “Those factors, which it is for the referring court to verify, support the finding that the transformation of the right of perpetual usufruct into full immovable property ownership rights enables the Municipality of Wrocław to obtain income therefrom on a continuing basis and that, consequently, that transaction constitutes an economic activity within the meaning of Article 9(1) of the VAT Directive.” The fact that it takes place by operation of law does not negate this.
- Then it assessed whether the municipality was acting as a public authority. Article 13(1) of the VAT Directive provides that “States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities.” The court noted that for the non-taxable person rule to apply, two cumulative conditions must be satisfied: the activities must be carried out by a body governed by public law and that body must act as a public authority. It found the latter condition lacking. While the Municipality of Wrocław is a body governed by public law, in this specific context, “the role of the Municipality of Wrocław consists, in essence, in verifying the facts, issuing a certificate confirming the transformation of the right of perpetual usufruct into full immovable property ownership rights and informing the new owner of the obligation to pay a transformation fee.” It does not exercise significant decision-making power or powers conferred by public law in implementing the transformation.

Judgment:

The Court ruled:

“Article 14(2)(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the transformation of the right of perpetual usufruct into full immovable property ownership rights provided for by national legislation against payment of a fee constitutes a supply of goods within the meaning of that provision.”
“Directive 2006/112 must be interpreted as meaning that, where the transformation of the right of perpetual usufruct into full immovable property ownership rights provided for by national legislation takes place against payment of a fee to the municipality which owns the property, enabling it to obtain income therefrom on a continuing basis, that municipality, subject to the verifications to be made by the referring court, acts as a taxable person within the meaning of Article 9(1) of that directive, and not as a public authority for the purposes of Article 13(1) of that directive.”

Implications:

This ruling clarifies the VAT treatment of fees associated with the transformation of perpetual usufruct rights into full ownership in Poland. The judgment indicates that these fees are generally subject to VAT and that municipalities collecting these fees are considered taxable persons, not public authorities, for VAT purposes. This determination is subject to verification by the national court regarding specific facts. The ruling provides guidance on interpreting the concepts of “supply of goods” and “taxable person” within the framework of the VAT Directive in the context of such transformations. It also suggests that municipalities are generally not considered to be acting as public authorities when collecting these types of transformation fees, given their limited discretion and the lack of specific public law powers being exercised.