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Are perpetual usufruct rights going to be treated in the same way as goods? The Treasury is currently working on new VAT legislation

Amongst those anxiously awaiting the outcome of this process are: local authorities - being VAT payers due to their function of handing over land for perpetual usufruct purposes; the perpetual usufructors themselves; and those who sell perpetual usufruct rights. At the moment, the VAT situation for perpetual usufructs is that they are not recognized as goods, and as a result, tax offices treat the perpetual usufruct as a service. According to the Treasury, a perpetual usufruct does not allow for the usufructor to dispose of land in the same way as an owner does. 

Who pays VAT?
However, it is unclear who in fact shall pay VAT - local authorities or perpetual usufructors. The Treasury\'s position is that unless the contract specifies that the perpetual usufruct fee is expressed as a net amount, then the fee includes VAT, and thus the local government is liable for the tax. A different view is held by the Regional Administrative Court in Warsaw. In a judgment dated  October 5th 2005, it stated that VAT on perpetual usufruct is to be paid by the usufructor, and that perpetual usufruct fees should not be expressed as a gross amount. The Regional Administrative Court in Warsaw also ruled that self-governing authorities, who settled perpetual usufruct fees before 1st May 2004, shall also not be burdened with VAT. However, on  February 10th, the Supreme Court repealed this judgement on formal grounds.
In taxation literature on this subject, we can also find a different view - real estate transactions for perpetual usufruct purposes should be treated in the same way as the supply of the goods, because it entitles the perpetual usufructor to dispose of the real estate in the same way as the owner is (e.g. Michalik Tomasz: VAT - commentary, C.H. Beck 2005, str. 85-86, Martini Jerzy (Red.): VAT Legislation - commentary, Difin 2005, page 96). The authors holding this view refer to the jurisdiction of the European Court of Justice, according to which in VAT interpretation the economical and not the civil law aspect of a given transaction shall have priority; this means that it is more important to obtain the right to dispose of a property than to transfer the ownership right. In the case -320/88 Shipping and Forwarding Enterprise Safe B.V. (Holland), the European Court of Justice ruled that the definition \'supply of goods\' also covers the transfer of the right to dispose of the property, even if no ownership transfer in the legal sense has taken place. In the opinion of several supporters of this doctrine, this definition of the \'supply of goods\' (determined both in the VI Directive and in Polish VAT law) itself has the consequence that by establishing a perpetual usufruct on a plot of land, the actual control over the real estate - i.e. economic ownership - is being transferred. Therefore, any additional regulation on the basis of which the right of perpetual usufruct is to be equated with that of material goods, is not necessary.

Goods or not goods
The VI Council Directive on the common VAT policy in the European Union contains regulations permitting member states to regard as material goods the property rights allowing for the use of real estate. The Treasury, having not treated dealing with perpetual usufruct as supply of goods so far, intents to refer to these regulations and to incorporate perpetual usufruct of real estate into the definition of supply of goods in the new VAT Act.
The planned assimilation of perpetual usufruct rights with laws covering the supply of the goods is of importance not only due to the problem of the VAT burden. This regulation would also lead to a  merging of the regulations regarding the taxation of rent, tenancy and the lease of buildings located on real estate subject to a  perpetual usufruct, and of the regulations on transactions over such real estate.
According to the interpretation of the Treasury, the taxpayer should treat deals for the right of perpetual usufruct different from deals over the buildings erected on the same plot. For example, in some lease agreements the transfer of the building will be treated as a supply of the goods and will be subject to VAT, but the perpetual usufruct on the plot on which the building is erected, will be treated as a service.

Time for taxation
In addition to this, a further problem should be taken in consideration: when does tax liability arise when the right of perpetual usufruct is changing hands? Since February 15th, the executive enactment to the VAT Act is no longer in effect. According to this regulation, the tax liability arises at the moment when the payment period for the perpetual usufruct fee elapses. Since this regulation has been removed, in this context the general rules determined in Art. 19 of the VAT Act need to be applied. However, at this point doubts may arise as to whether the service of establishing the perpetual usufruct on the land is entirely performed and charged VAT at the moment it is established, or is it - as constant service - subject to continuous taxation according to the payment schedule? At present, in the case of the sale of a building located on land subject to a perpetual usufruct, the value of this right will not increase the turnover resulting from the sale of the building - other than in the case of real estate - but will be treated as separate turnover resulting from supply of services.
According to the VAT legislation as it stands, regarding the supply of buildings and structures fixed to or in the ground, the value of the land is not to be excluded from the taxable base. The tax authorities commonly recognize, however, that in the case of the supply of buildings and structures, perpetual usufruct does not increase the taxable base. This  is  due to the fact that for buildings and perpetual usufructs, tax liability arises at different points in time.
To summarize, it may be said that the actual differences in taxation over the supply of land and on the right of perpetual usufruct  are incongruous. Thus, the proposed amendment of the law in this regard would definitely be for the benefit of the taxpayers and would eliminate all doubts.

Christian Schnell
The author is a partner in the law office  BSJP Brockhuis Schnell Jurczak Prusak