Category: Tax

Category: Tax

VAT Taxation on rental of residential property. Warsaw, April 16, 2020

Rental of residential properties may be subject to three different VAT taxation regimes:

(a) exemption;
(b) the 23% VAT rate and
(c) the 8% VAT rate (so-called accommodation related services).

I. General comments

The purpose of the services provided is decisive for determining the applicable VAT rate.

The tenant’s actual use of the property should also be consistent with the intended purpose of the services.

For example, a short stay of a tourist or a businessman should be treated as non-residential stay.

Non-residential stay is typically offered by hotels, guesthouses, rooms offered for short-term rent.

The residential purpose excludes temporary stay and vice versa.

The residential purpose is related to satisfying the tenant’s vital needs.

In other words, the rental services can be exempted from VAT (e.g. renting an apartment) depending on whether the rented property satisfies the vital needs, regardless of the duration of the rental period.

II. Rental services exempted from VAT

Only a rental of real property for residential purposes is VAT-exempt.

In addition, rental services must be provided by the landlord acting on his own account.

The possibility of taking advantage of the VAT-exemption is therefore conditional upon the fulfilment of both objective and subjective criteria.

The property must be of a residential character (objective criterion) and the purpose of the rental agreement must be to satisfy the customer’s residential needs (subjective criterion).

The possibility of benefiting from a VAT exemption is therefore conditional and depends on meeting the specific requirements:

– the residential nature of the rented property and

– the purpose for which the property is used must also be residential.

As a consequence, the VAT-exemption does not apply to a rental of residential property for non-residential purposes.

The availability of the VAT exemption does not depend on the type and/or legal form of the service provider or the entity purchasing such services.

If the tenant is not a tourist, spa visitor, business traveler etc., but his/her intention is to permanently reside in a given place, then the provider of the rental services will qualify for the VAT-exemption.

Real property rental services are VAT-exempted provided that all the conditions regarding (a) the parties, (b) the object and (c) the purpose of the specific contract, are met.

Therefore, the VAT taxpayer will be able to take advantage of the VAT exemption if the lease agreement contains, inter alia, provisions clearly stipulating that it concerns residential premises and the premises may be used by the tenant only for his personal residential purposes.

III. Rental services taxed at the 23% VAT rate

A rental of residential premises by a person who does not personally provide accommodation services but provides such services, for example, to a company conducting business activities involving the provision of short-term accommodation services, is taxed at the rate of 23%.

In addition, any rental of residential property for business purposes is taxed at the rate of 23% VAT (e.g. office, company headquarters).

IV. Services taxed at the 8% VAT rate

In accordance with art. 41 section 2 of the VAT Act, the so-called accommodation-related services are subject to the 8% VAT rate.

The accommodation-related services include, among other things:

(a) accommodation and associated services provided by hotels, motels, boarding houses, wellness centers and other hotel facilities

and

(b) temporary or long-term accommodation in student hostels, boarding schools and dormitories, workers hotels, apartment houses.

The differences between a typical rental and the accommodation-related services include:

(1) the availability of auxiliary services (laundry and basic equipment for the rented premises are usually provided in addition to the accommodation services);

(2) the period of stay in the premises (usually shorter for accommodation-related services).

Where the taxpayer:

– runs a business of short-term rental of apartments for tourists and people traveling for business purposes,

– the apartments are not his /her property, but he/she manages them on the basis of separate contracts concluded with their owners,

– prepares offers and accepts reservations via online booking portals,

– responds to customers’ inquiries,

– makes sure the apartments are available to guests on time,

– provides fresh towels, linen and refreshments,

– is responsible for keeping apartments clean,

– is responsible for minor repairs, etc.

thus enabling the visitors to conveniently use the premises, then the VAT exemption will not apply.

However, such services as described above are subject to the 8% VAT rate.

V. Summary

The taxation regime for rental of real property depends on the objective purpose and manner of using the property by the tenant, as well as the subjective intentions of the parties to the lease agreement.

Bernard Łukomski
Legal counsel
Warsaw, April 16, 2020

Colloquial expressions (blank invoices, unreal transactions, artificial transaction chain) and the tax law. Warsaw, 17.01.2020.

Tax law imposes an obligation on tax authorities and administrative courts to express their opinions accurately and clearly.

Negative consequences for taxpayers cannot be drawn without precisely defining (in a legal sense) their actions and behaviour.

Naming the same events with different legal terms (e.g. transaction that did not take place at all, fraud, abuse) and terms typical for colloquial speech (e.g. blank invoices, unreal transactions, artificial chain of transactions), but devoid of legal significance seriously hinders taxpayers’ effective defence. This practice of tax authorities is also contrary to the recommendations formulated in the jurisprudence of the Supreme Administrative Court.

Such practice has been questioned by the Supreme Administrative Court in a judgment of October 2019.

In its judgment, the Supreme Administrative Court also questioned the improper practice of tax authorities by “taking shortcuts” instead of gathering reliable and impartial evidence.

The Supreme Administrative Court also confirmed that it is inappropriate to question the taxpayer’s good faith solely by claiming that if it is proved that the transaction between the entities indicated on the invoice did not actually take place, it is obvious that the taxpayer was not acting in good faith and was aware of the violation rules for deducting input tax.

The above means that the use of only such arguments by courts and authorities is insufficient and defective.

Unfortunately, a fairly common practice of tax authorities is a very cursory examination of taxpayers’ good faith, without going much into the details of their activities.

Thanks to the NSA judgment of October 2019, taxpayers will be able to defend themselves against such actions more effectively.

Consequently, the taxpayer’s good faith cannot be examined (in principle) without hearing the parties to the transaction and (possibly) other persons involved in it. Good faith, understood as a “state of consciousness,” cannot be determined effectively without examining that consciousness by questioning the person.

It happens that the tax authorities only vaguely state that taxpayers should exercise due diligence, not only in terms of documenting expenses, but also in the collection of all documents illustrating business operations. Such opinions should be considered cursory and not sufficient.

This approach is not enough to properly assess taxpayers’ good faith.

Tax authorities should clearly indicate (in their decisions) what objective actions taxpayers should have taken to be considered reliable taxpayers.

Authorities should provide such objective circumstances for individual taxpayer transactions, taking into account his/her state of consciousness at the time of the transaction.

Tax authorities and courts cannot assess the taxpayer’s behaviour and conduct on the basis of circumstances established or disclosed later (e.g. at the stage of tax proceedings).

Bernard Łukomski
Legal Counsel
Warsaw, 17.01.2020

Tax – Overview, Purposes, Types of taxation and History

What is tax?

A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer (an individual or legal entity) by a governmental organisation in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. The first known taxation took place in Ancient Egypt around 3000–2800 BC.

Most countries have a tax system in place to pay for public, common or agreed national needs and government functions. Some levy a flat percentage rate of taxation on personal annual income, but most scale taxes based on annual income amounts. Most countries charge a tax on an individual’s income as well as on corporate income. Countries or subunits often also impose wealth taxes, inheritance taxes, estate taxes, gift taxes, property taxes, sales taxes, payroll taxes or tariffs.

In economic terms, taxation transfers wealth from households or businesses to the government. This has effects which can both increase and reduce economic growth and economic welfare. Consequently, taxation is a highly debated topic.

Overview

The legal definition, and the economic definition of taxes differ in some ways such as economists do not regard many transfers to governments as taxes. For example, some transfers to the public sector are comparable to prices. Examples include, tuition at public universities, and fees for utilities provided by local governments. Governments also obtain resources by “creating” money and coins (for example, by printing bills and by minting coins), through voluntary gifts (for example, contributions to public universities and museums), by imposing penalties (such as traffic fines), by borrowing, and also by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector, levied on a basis of predetermined criteria and without reference to specific benefit received.

In modern taxation systems, governments levy taxes in money; but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as the National Revenue Administration in Poland, the Internal Revenue Service (IRS) in the United States, Her Majesty’s Revenue and Customs (HMRC) in the United Kingdom or Federal Tax Service in Russia. When taxes are not fully paid, the state may impose civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) on the non-paying entity or individual.

Purposes of taxation

The levying of taxes aims to raise revenue to fund governing or to alter prices in order to affect demand. States and their functional equivalents throughout history have used money provided by taxation to carry out many functions. Some of these include expenditures on economic infrastructure (roads, public transportation, sanitation, legal systems, public safety, education, health-care systems), military, scientific research, culture and the arts, public works, distribution, data collection and dissemination, public insurance, and the operation of government itself. A government’s ability to raise taxes is called its fiscal capacity.

When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts. Governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities.

When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts. Governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities.

Governments use different kinds of taxes and vary the tax rates. They do this in order to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as the business sector, or to redistribute resources between individuals or classes in the population. Historically, taxes on the poor supported the nobility; modern social-security systems aim to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of the economy (a government’s strategy for doing this is called its fiscal policy), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

A state’s tax system often reflects its communal values and the values of those in current political power. To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing or administering the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may reflect more closely the values of those in power.

Types of taxation

The Organisation for Economic Co-operation and Development (OECD) publishes an analysis of the tax systems of member countries. As part of such analysis, OECD has developed a definition and system of classification of internal taxes, generally followed below. In addition, many countries impose taxes (tariffs) on the import of goods.

The Polish tax system

The Polish tax system distinguishes 12 types of taxes, including:

Nine direct taxes:

  • corporate income tax (CIT),
  • personal income tax (PIT),
  • tax on civil law transactions,
  • real estate tax,
  • tax on means of transport,
  • inheritance and donations tax,
  • agricultural tax,
  • forestry tax,
  • tax on dogs

Three indirect taxes:

  • tax on goods and services (VAT),
  • excise duty,
  • game tax.

Income tax

Many jurisdictions tax the income of individuals and business entities, including corporations. Generally, the authorities impose tax on net profits from a business, on net gains, and on other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which may be modified or replaced by tax-law principles in the jurisdiction. The incidence of taxation varies by system, and some systems may be viewed as progressive or regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other non-business reductions to taxable income, although business deductions tend to be favored over personal deductions.

Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government to those who have overpaid. Income-tax systems will often have deductions available that reduces the total tax liability by reducing total taxable income. They may allow losses from one type of income to count against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years.

Capital gains tax

Most jurisdictions imposing an income tax treat capital gains as part of income subject to tax. Capital gain is generally a gain on sale of capital assets—that is, those assets not held for sale in the ordinary course of business. Capital assets include personal assets in many jurisdictions. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some jurisdictions impose different rates or levels of capital-gains taxation based on the length of time the asset was held. Because tax rates are often much lower for capital gains than for ordinary income, there is widespread controversy and dispute about the proper definition of capital.

Corporate tax

Corporate tax refers to income tax, capital tax, net-worth tax or other taxes imposed on corporations. Rates of tax and the taxable base for corporations may differ from those for individuals or for other taxable persons.

Social-security contributions

Many countries provide publicly funded retirement or health-care systems. In connection with these systems, the country typically requires employers and/or employees to make compulsory payments. These payments are often computed by reference to wages or earnings from self-employment. Tax rates are generally fixed, but a different rate may be imposed on employers than on employees. Some systems provide an upper limit on earnings subject to the tax. A few systems provide that the tax is payable only on wages above a particular amount. Such upper or lower limits may apply for retirement but not for health-care components of the tax.

Payroll tax

Unemployment and similar taxes are often imposed on employers based on total payroll. These taxes may be imposed in both the country and sub-country levels.

Wealth tax

A wealth tax is a levy on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. Typically liabilities (primarily mortgages and other loans) are deducted, hence it is sometimes called a net wealth tax.

Property

Recurrent property taxes may be imposed on immovable property (real property) and on some classes of movable property. In addition, recurrent taxes may be imposed on the net wealth of individuals or corporations. Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or at the time of gift transfer. Some jurisdictions impose taxes on financial or capital transactions.

Property taxes

A property tax is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property. There are three general varieties of property: land, improvements to land (immovable man-made things, e.g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land.

Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property. For a period of over 150 years from 1695 the government of England levied a window tax, with the result that one can still see listed buildings with windows bricked up in order to save their owners money. A similar tax on hearths existed in France and elsewhere, with similar results. The two most common types of event-driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which many countries impose on the estates of the deceased.

Inheritance tax

Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.

Expatriation tax

An expatriation tax is a tax on individuals who renounce their citizenship or residence. The tax is often imposed based on a deemed disposition of all the individual’s property. One example is the United States under the American Jobs Creation Act, where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate.

Transfer tax

Historically, in many countries, a contract needs to have a stamp affixed to make it valid. The charge for the stamp is either a fixed amount or a percentage of the value of the transaction. In most countries, the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land. Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the United States, transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents.

Wealth tax

Some countries’ governments will require declaration of the tax payers’ balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on “natural” or “legal persons.”

Value added tax

A value added tax (VAT), also known as Goods and Services Tax (G.S.T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the “value added” (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.

VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority.

Other forms of tax

Other forms of tax exist such as Sales tax, Excise, Customs, Consumption tax etc. These are not discussed within this article.

History

The first known system of taxation was in Ancient Egypt around 3000–2800 BC in the First Dynasty of Egypt of the Old Kingdom of Egypt. The earliest and most widespread form of taxation was the corvée and tithe. The corvée was forced labour provided to the state by peasants too poor to pay other forms of taxation (labour in ancient Egyptian is a synonym for taxes). Records from the time document that the Pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary receipts on limestone flakes and papyrus. Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 – the New International Version), it states “But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children”. Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax (in this case, a special rather than an ordinary tax, as it was gathered against an expected famine) The stock made by was returned and equally shared with the people of Egypt and traded with the surrounding nations thus saving and elevating Egypt.