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Monika Bartosiewicz

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The Court of Justice of the European Union (CJEU) issued its judgement in the case of Kozuba Premium Selection sp. z o.o. vs the Director of the Tax Chamber in Warsaw (C-308/16) on 16 November 2017. In its judgement the CJEU held that the definition of "first occupation" in the Polish Value Added Tax Act of 11 March 2004 (consolidated text in Journal of Laws of 2017, item 1221, as amended, the "VAT Act") was incompatible with the EU laws. That CJEU's ruling is important because the definition of "first occupation" is crucial for the availability of the VAT exemption on real property sale.

The case concerned a limited liability company to which a real property (a residential building dated 1992) was contributed in kind in 2005. The building was adapted to the company's business needs in 2006. The company's expenditures totalled about 55% of the building's initial value. The company recognised the building as a fixed asset on 31 July 2007 and later sold it on 15 January 2009. 

The tax inspection authorities concluded that the company did wrong by not disclosing the sale of enterprise in the VAT records and in the VAT return, thus understating the due tax. The authorities claimed that the sale of the real property could not enjoy the exemption available to supplies of buildings, structures or their parts, because it was done in the course of the "first occupation" of the building. The authorities claimed that the "first occupation" of the building took place not when it started to be used for the company's business needs in 2007 but when it was sold in 2009, the latter being the first taxable transaction. Pursuant to the VAT Act, the "first occupation" means release for use of buildings, civil engineering works or their parts, in performance of taxable activities, to the first customer or user, following their

  • erection, or
  • upgrade, if the expenditure incurred for the upgrade, as defined in the regulations on income tax, constituted at least 30% of the initial value.

During the judicial review the Supreme Administrative Court became concerned about the compatibility of the Polish laws with the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ("VAT Directive") and sent a request for preliminary ruling to the CJEU.

Broader scope of exemption

The CJEU found the Polish definition of the "first occupation" to be incompatible with the VAT Directive as it limited the exemption too much. The CJEU stated that the Polish legislature's error in the implementation of the Community laws was to make the exemption conditional upon requiring the supply of the buildings, civil engineering works or their parts to be done in performance of taxable transactions. Polish legislation excludes from exemption not only new buildings or civil engineering works but also old buildings which after erection or upgrade done by a taxable person to put them into use, were not involved in a VATable transaction (supply of goods or services), even though they were in fact occupied.

Furthermore, the CJEU referred to the concept of "upgrade" which is included in the definition of the "first occupation" in the VAT Act. The CJEU was of the opinion that "upgrade" as defined in the VAT Act should be interpreted in the same way as that of conversion in the VAT Directive, namely as meaning that the building concerned must have been subject to substantial modifications intended to modify the use or alter considerably the conditions of occupation. The CJEU stressed that in addition to determining the percentage share of expenditures on the "upgrade" in the initial value of the buildings or civil engineering works the tax authorities should each time investigate to what extent that "upgrade" has considerably altered the structure in line with the above guidelines.

Reopening of discontinued proceedings

The CJEU's judgement may affect future real property sales as well as tax proceedings already closed. It makes it possible reopen proceedings concluded with a final decision. A request for reopening of the proceedings must be submitted within a month of the judgement's publication in the Official Journal of the European Union (the judgement has not been published as of the date of this article yet). 

We are at your service if you are interested in Rödl & Partner's expert assistance in the assessment of the implication of this judgement.

We will be glad to assist you in this regard and provide you with tax advice in Poland on CIT, PIT, VAT advisory in Poland. Our tax advisers working in Rödl & Partner offices in Gdansk, Gliwice, Cracow, Poznan, Warsaw and Wroclaw will also answer other tax-related questions that you may have.

11.12.2017