VAT Deduction Rights for Municipal Expenditures: Court Ruling Clarifies Public vs. Business Activities

The case involves a municipality seeking a tax interpretation regarding VAT deductions for construction works on internal roads.
The municipality’s road management authority (ZDiUM) administers road A, where construction is planned, and part of the area will be rented for gastronomic purposes.
An underground parking lot, owned by the municipality and built under a concession, is also located beneath road A, and its operation is subject to VAT.
The municipality questioned its right to reduce VAT on construction and gardening works using a pre-proportional coefficient calculated by the city office.
ZDiUM has rental agreements that are chargeable and subject to VAT.
The municipality argued that due to the mixed nature of the works (partly taxable, partly exempt), it cannot separate VAT only from taxable activities.
The Director of KIS deemed the municipality’s position incorrect, stating VAT deduction is only allowed for goods and services used for the taxpayer’s business activities, including taxable activities.
The municipality’s public tasks, such as road construction and public space management, are considered public services, not business activities.
The Wrocław Administrative Court dismissed the municipality’s complaint, agreeing with KIS that there was no link between the expenses incurred and activities beyond the municipality’s own tasks or civil law agreements.
The court emphasized that the planned works are part of the municipality’s public duties and do not relate to business activities, thus denying the right to VAT deduction.
The ruling highlights the distinction between the municipality’s own tasks and its business activities, reaffirming that road renovation is a public duty unrelated to business operations.

Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.