On 29 December 2021, the Ministry of Finance published a general interpretation regarding VAT taxation of transformation of perpetual usufruct into ownership by operation of law. According to the thesis of the interpretation, the fee paid in connection with transformation of perpetual usufruct into ownership is subject to VAT regardless of whether the usufruct was established before 1 May 2004 or after that date, and the local authority collecting the fee acted as a VAT payer. The interpretation was issued due to the judgment of the CJEU of 25 February 2021 in the case of Wrocław Municipality (C-604/19).
Subject of the interpretation
The dispute over the subject matter of the interpretation arose due to the Act on transformation of the right of perpetual usufruct, which, as of 1 January 2019, transformed the right of perpetual usufruct of land developed for residential purposes into ownership of such land. Doubts arose about the VAT taxation on the part of local governments. Taxpayers maintained that the fees should not be subject to VAT because the supply for consideration had already taken place earlier, at the time of establishing the right of perpetual usufruct. Additionally, it was argued that establishment of the right of perpetual usufruct should not be an activity subject to VAT before 1 May 2004, i.e. before the entry into force of the VAT Act currently in force.
Previous taxation method
According to the interpretation applied by tax authorities before the CJEU judgment, the transformation of the perpetual usufruct right into ownership did not constitute a separate supply of goods, but the continuation of the original supply. As a consequence, the transformation of the perpetual usufruct right into ownership of land was not taxed if it was established before 1 May 2004, whereas fees for the transformation of the perpetual usufruct right established as of 1 May 2004 were deemed to increase the tax base of the established perpetual usufruct right, and therefore were subject to VAT.
CJEU Decision
The case was referred to the CJEU, which resolved it by recognising the transformation of the perpetual usufruct right to real property into ownership right, as provided for under Polish law in exchange for payment of a fee, as a supply of goods for consideration. Moreover, the CJEU stated that in such a chargeable transformation of the perpetual usufruct right to real property into ownership right, the Municipality acts as a VAT payer, and not as a public authority, and therefore is a VAT payer on this account.
Consequences
As a consequence of the CJEU ruling, it is necessary to change the manner of treating actions for transformation of perpetual usufruct of land into ownership established prior to 1 May 2004, i.e. after their recognition as a separate supply of goods, which actions were not regarded as subject to VAT prior to the ruling. In the general interpretation, the Minister of Finance indicated that these fees as remuneration for the act of transformation of perpetual usufruct of land into ownership are subject to VAT under the general rules.
The general interpretation was issued in this respect to eliminate interpretation doubts and to ensure uniform interpretation of regulations by tax authorities. This is also due to the fact that the CJEU ruling did not cover all possible factual situations. The purpose of a general interpretation is to set out such boundaries, which also allow reference to other, more complicated situations. Applying the interpretation will allow taxpayers to obtain protection.