Poland: In-Kind Contributions Of Enterprises Vs. Succession Of Rights And Obligations On The Grounds Of VAT Regulations

Ruling description

On October 21, 2015 the Supreme Administrative Court handed down a judgment in case no. I FSK 1459/14 finding that a company which acquired an enterprise and continues to run it may benefit from the rights vested with the entity it acquired the enterprise from.

The case considered by the Court concerned a company which in 2011 acquired an enterprise owned by a natural person in the form of a non-monetary contribution. The enterprise comprised, among other things, vehicles used by the natural person under an operating lease agreement for the use of vehicles officially classified as lorries, meeting the conditions set out in Article 6(1) of the Act of December 16, 2010 and Amendments to the VAT Act and the Road Transport Act. The natural person at issue registered the lease agreement with the competent tax office, thus acquiring the right to the full VAT deductions for the vehicles, in accordance with the rules in place in 2010 and on condition that the lease agreement will not change. The natural person thus deducted 100% of the VAT shown on the lease invoices, without applying the 60% ceiling on VAT deductions introduced with subsequently promulgated regulations.

Upon acquiring the enterprise, the company assumed the rights and obligations under the lease agreement, to which the lessor consented in writing. The company applied for a tax ruling to confirm that it may deduct all of the VAT shown on invoices issued by the leasing company under the mentioned lease agreement. The Director of the Tax Chamber found against the company, arguing that an in-kind contribution of an enterprise to a company being a legal person triggers an amendment of the agreement made with the lessor. The Provincial Administrative Court in Warsaw also disagreed with the position proposed by the company, adding that there can be no tax succession in this case as there is nothing in the Tax Ordinance to suggest that a company, once it acquires an enterprise from a natural person, has the right to continue deducting the VAT shown in the lease invoices as the natural person was entitled to do.

The Supreme Administrative Court disagreed with the position taken by the Provincial Administrative Court in Warsaw and set aside the judgment of this trial court and the tax ruling issued by the tax authority. The Supreme Administrative Court emphasized that specific solutions are provided for in the VAT Act of March 11, 2004 in addition to the general rules of tax succession regulating the rights and obligations of legal successors in cases when an enterprise is transferred to a company as an inkind contribution. Therefore, a taxpayer that acquires an enterprise and continues to run it may benefit from the right to deduct VAT originally vested with the seller of the enterprise. The provisions of the VAT Act and Directive 2006/112/EU are specific regulations and thus take precedence over the provisions of the Tax Ordinance.

Comment

The judgment of the Supreme Administrative Court confirms that the rules of VAT deduction applicable to the seller of an enterprise pass to the entity acquiring the business. While the judgment concerns a specific case and the rules for deducting VAT shown on leasing invoices, the conclusions drawn by the Court may be seen as having a universal character and may impact other rulings. One consequence of assuming that the entity acquiring an enterprise may benefit from the VAT deduction rights enjoyed by the seller of the enterprise is that the acquiring entity has the right to deduct the VAT shown on invoices made out to the seller without having to correct the invoices. Till now, the Supreme Administrative Court was of the view that entities acquiring an enterprise may not deduct the VAT shown on invoices issued to the seller of the enterprise (cf. e.g. the judgment of March 21, 2012 in case no. I FSK 806/11). It remains to hope that the judgment considered here will lead to a change in this position. We recommend that our clients proceed as before and monitor developments for any changes in the approach of administrative courts to the issue.

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