This publication regards the VAT on sale and rent of private flats and commercial space. The assumption is that the taxpayer is a company with legal personality, that is an active VAT payer in Poland.
The following questions have been answered below:
- Which VAT rate should be applied?
- What about rental? If the company or subsidiary will rent space and flats, how is the VAT settled?
- What in case of sale, is there a VAT on the notarial deed? How is the VAT settled?
- Is there any VAT that cannot be deducted from commercial activities (rent, sale)?
- What is the settlement of VAT during construction (no or low sales)?
- How does the VAT settlement between 23% (such as paid to the general contractor) and 8% (sale to a private person) look like?
Ad. A. Which VAT rate should be applied?
The legislator in art. 41 paragraph 12-12c of the VAT Act, granted the right to apply a reduced VAT rate of 8%, among others for the supply of residential buildings or parts thereof included in the social housing program, with the exception of commercial spaces. Residential buildings are buildings with at least half of the total usable floor area used for living purposes.
The aforementioned residential buildings covered by the social housing program, for which one may apply a reduced VAT rate of 8%, include:
- Residential buildings (or parts thereof), excluding commercial spaces classified in section 12 of PKOB (Polish Classification of Facilities).
- Buildings of health care institutions providing accommodation services with medical and nurse care, especially for the elderly and the disabled.
Pursuant to art. 41 paragraph 12b of the Act, the social housing program (referred to in paragraph 12a), does not include:
- single-family residential buildings with a usable floor area exceeding 300 m2;
- flats with a usable floor area exceeding 150 m2.
In practice – if a single-family house has a larger area, two rates are applied for construction works: 8% and 23% – and the 8% rate applies only to the part of the tax base that corresponds to the share of usable area qualifying for housing covered by the social housing program (300 m2) in the total usable area ( Article 41 (12c) of the VAT Act).
Therefore, in the case of construction, finishing or renovation works carried out in single-family buildings or in flats with an area exceeding the aforementioned limits – contractors must issue invoices with two rates: 8% and 23%.
To sum up – the VAT rate reduced to 8% covers the sale of the following categories of buildings:
- Single-family housing (up to 300 m2);
- Two-apartment and multi-apartment (up to 150 m2);
- Collective residence (up to 150 m2).
To all of the above objects, therefore, the 8% VAT rate can be applied.
The definition indicated above indicates that this does not apply to sale of facilities that constitute commercial spaces and the basic rate of 23% must be applied then.
Ad. B. What about rental? If the company or subsidiary will rent space and flats, how is the VAT settled?
Commercial space is rented at the basic rate, i.e. 23% VAT, in accordance with Art. 41 paragraph 1 of the VAT Act – these are premises intended solely for the purposes of running a business.
However, with regard to tenants who are natural persons and do not conduct business activity, two situations should be distinguished:
- If tenants transfer their life interests to the rented place, the tenancy meets the definition of renting premises for residential purposes. Thus, the taxpayer will be entitled to benefit from the VAT exemption (pursuant to Article 43 (1) (36) of the VAT Act) – so then there is no VAT.
- On the other hand, if there is a short-term accommodation service, without the tenants transferring their life interests to the the rented place, then the short-term accommodation service (not for housing purposes) takes place, at the rate of 8% VAT (pursuant to Art. 41 par. 2 of the VAT Act – these are services covered by the above-mentioned rate in accordance with Annex 3 to the VAT Act, item 163).
VAT exemption will apply only if three conditions are met:
- The subject of rent is a residential housing or a part of it.
- The rental agreement was concluded for the taxpayer’s own account. This means that the rental cannot be entrusted to a specialized entity that will deal with all matters related to the rental for its client – then there will be no tax exemption.
- The purpose of the rent is not other than residential.
In a situation where the tenant intends to conduct business activity in the rented apartment, there are no grounds for applying the VAT exemption. The apartment is not used for housing purposes, but for business purposes then, and a 23% rate must be applied.
The tax obligation arises at the moment of issuing the invoice (art. 19a section 5 point 4 of the VAT Act). This deadline applies when the invoice is issued in accordance with the rental rules, i.e. on the date of payment for the rental at the latest.
It happens that the landlord will not issue an invoice – in such a situation, when should the VAT on the rent be accounted for? There may be for example situations, when the landlord may not issue an invoice for the rental services, despite the obligation to issue an invoice, because the landlord mistakenly failed to do so. In such situations, the tax obligation arises on the date of the payment deadline.
Additionally, an invoice for rental services may be issued earlier, even more than 30 days before the service is provided (it is stated in Art 106i paragraph 8 of the Act). In such a situation, the invoice must specify the period covered by the invoice.
Ad. C. What in case of sale, is there a VAT on the notarial deed? How is the VAT settled?
The tax obligation in relation to the sale of real estate will arise upon the transfer of the right to dispose of it as the owner. If the signing of the notarial deed transferring the ownership of the property takes place earlier than the actual handover of the subject of the contract, the tax obligation for the sale transaction will arise on the date of signing the notarial deed.
The seller is responsible for tax when selling real estate. The contract for the sale of real estate is concluded only in the form of a notarial deed, and the VAT payer is always a notary. As part of the notarial activity, he will collect the tax and transfer it to the account of the competent tax office.
Ad. D. Is there any VAT that cannot be deducted from commercial activities (rent, sale)?
There are no restrictions with regard to the deduction of input VAT in case of sale, since sale is always subjet to VAT (8% or 23%).
The investor will be entitled to a full input tax deduction if all construction costs are classified as for taxable activities – provided that it is rented for commercial purposes (not for residential purposes). If it turns out in the future that the intended use of the building / part of the building, has been changed and it has been finally used for VAT-exempt activities (such as rent for residential purposes) – this will result in the need to verify the prior deduction of input tax.
Therefore, if the purchases during construction, renovation or for example equipment, will be related to the rental, which is subject to VAT, then under the general principles of art. 86 sec. 1 of the VAT Act, the taxpayer will have the right to deduct VAT. When the purchases are related to exempt activities (such as rent for residential purposes), the deduction of input tax will not be possible.
For purchases related to mixed activities, i.e. taxed and exempt from VAT, when it is not possible to assign individual purchases to a given type of activity, the taxpayer deducts the input tax proportionally.
If the deduction of input tax is not possible (in case of rent for residential purposes), the VAT payer receiving the purchase invoice in this case has the right to include it in tax deductible costs for the income tax calculation, because he has no legal possibility to deduct the input tax.
Dates of VAT deductions from rent
The general rules also apply to the deduction of VAT on the rent. According to Art. 86 sec. 10 of the VAT Act, You will have the right to reduce the amount of VAT due (from rent) by the amount of input VAT (from Your purchases) in the settlement (VAT declaration) for that period, in which the seller has a tax obligation in connection with the service or goods purchased by You. Additionally, it is obligatory for You to receive a VAT invoice from the seller, as a condition to make the VAT deduction.
The VAT Act in Art. 86 sec. 11 also states that a taxpayer who has not deducted the input VAT in the month he is entitled to, has the right to benefit from the reduction of the output tax in tax declarations for one of the next two tax periods (months or sometimes quarters).
Ad. E. What is the settlement of VAT during construction (no or low sales)?
If all construction costs are classified as for taxable activities – provided that the building is to be sold or to be rented for commercial purposes (not for residential purposes), the expenses related to the construction (mainly materials and services) will be indicated in the VAT register: “Purchase of fixed assets related only to taxable activities”.
At the same time, after its construction, the taxpayer will adapt the premises and equip them in accordance with the intended use. The taxpayer will be entitled then to deduct any expenses incurred for the construction and equipment of the property, bearing in mind that these will be all expenses incurred for the construction and furnishing of the property intended for the taxpayer’s taxable activities.
It should be noted that the taxpayer may not obtain sales revenues, however, the first revenues would appear after the investment is commissioned. In such case, there will be no deduction of the input tax from the tax due, but there will be a tax refund. According to Art. 87 sec. 1 of the VAT Act, where the amount of input tax referred to in art. 86 sec. 2, is in the tax period higher than the amount of tax due, the taxpayer has the right to reduce the amount of tax due for the next periods or to refund the difference to the bank account.
The legislator provides for different deadlines for the return of the excess input tax over the due tax:
- Basic deadline – 60 days from the date of submission of the VAT declaration.
- Extended deadline – 180 days from the date of submission of the VAT declaration.
If the taxpayer does not obtain sales revenues (even tax-free) in a given settlement period, but only purchases (i.e. there is no output tax, only input tax), the tax authority has the right to extend the VAT refund period to 180 days.
Pursuant to Art. 87 sec. 5a of the Act, if the taxpayer did not perform taxable activities in the territory of the country in the tax period, on his justified request submitted together with the tax return, the taxpayer is entitled to a refund of the amount of input tax, within 180 days from the date of submission of the tax return. It should be demonstrated in this justified request, that the purchase was made for the purpose of using it as part of taxable activity.
However, the taxpayer may submit a tax refund application for a refund within 60 days. Along with the application, a security should be submitted to the tax office in the amount corresponding to the input tax.
The tax authority may extend the tax refund deadline if the legitimacy of the refund is verified by the tax authority in any form (verification activities, tax proceedings, tax inspections).
Ad. F. How does the VAT settlement between 23% (such as paid to the general contractor) and 8% (sale to a private person) look like?
If You receive an invoice from a general contractor with a VAT rate of 23% and You issue an invoice with 8% VAT for the sale of residential buildings, assuming that the conditions for a preferential 8% rate are met, this situation allows the tax difference to be refunded to Your bank account. If the input VAT on the purchases made exceeds the amount of tax due on sales, then as active VAT payer You will benefit from such situation. It is the general rule – if the amount of input tax in the settlement period is higher than the amount of tax due, the taxpayer has the right to reduce the amount of tax due for this period or two next periods by this difference or to ask the tax authorities to refund the difference to the bank account.
The dates of the refund of the surplus of tax due over the input tax were discussed in the answer to question E above.