Important court verdict on transfer tax on asset deals

Polski

Verdict of the Polish Supreme Administrative Court (“SAC”) no. I FSK 892/18, dated 28.07.2023 - a transfer of operating commercial property can be classified as a transfer of a going concern, with no right to recover paid VAT and potentially subject to CLAT.

The case regards an acquisition of an operating shopping center conducted in 2016. The transaction was classified by the parties as a transfer of assets on a piecemeal basis, subject to 23% VAT payable by and recoverable for the buyer. The right to recover VAT was confirmed in an individual tax ruling obtained before the transaction (but, based on our understanding, the ruling did not explicitly cover the classification of the object of the transaction).

The recovery of VAT paid by the buyer was challenged by tax authorities on the grounds that the transaction covered a seller’s enterprise / organised part thereof (going concern) and should be out of VAT scope. The authorities raised i.a. that the object of the transaction is sufficient to perform business activities on a standalone basis by the buyer, with little or no additional actions / resources required from the buyer which simply continues the activities performed by the seller. The authorities disregarded the available individual tax ruling as incomplete.

Following the buyer’s appeal, the above standpoint was sustained by a District Administrative Court and the case was further appealed by the buyer to SAC.

SAC initially suspended the case and asked The Court of Justice of the European Union (“ECJ”) to assess if:

(i) a transfer of a going concern does not require for a buyer to be a legal successor of a seller;

(ii) to qualify as a going concern, the set of transferred items does not have to cover all assets held by a seller, provided that the transferred items are sufficient to conduct business activities on a standalone basis.

In its resolution no. C‑729/21, dated 16.01.2023 (mentioned in one of our previous alerts), ECJ confirmed both points and added that the domestic court should decide if in the case at hand a going concern was transferred.

In consequence, in its verdict SAC ultimately sustained the view of tax authorities and the lower-tier court, saying that the discussed transaction should have been out of VAT scope and the buyer has no right to recover paid VAT. At this stage no written justification is available. The case covers only VAT, thus it was not raised yet that the transaction should be subject to non-recoverable Civil Law Activities Tax (“CLAT”) payable by the buyer (2% on FMV of tangibles and 1% on FMV of intangibles), which is a transfer tax treatment of going concern deals.

Key takeaway

The SAC verdict recalls uncertainties regarding transfer tax treatment of commercial real estate deals in Poland (VAT vs. CLAT) which were observed in 2016 - 2018. This aspect was to a large extent clarified by official guidelines issued by the Polish Ministry of Finance in December 2018 which point towards VAT-able asset deals. Still, further developments at the level of tax authorities and administrative courts should be observed to determine impact on the current practice - i.e. whether the verdict will be deemed of limited importance as covering a pre-guidelines transaction or whether it will open the discussion on transfer tax treatment once again.

For the time being note that the guidelines have a formal protective power of an individual tax ruling but, due to their generic wording, the practical protection is rather limited. Therefore, it is strongly recommended to analyse the object of each commercial real estate transaction and confirm its transfer tax treatment in a detailed and complete individual tax ruling before closing.