Payments to the rightful owners of real estate taken over without legal grounds by the State Treasury or local governmental unit are subject to personal income tax as income “from other sources.” Whether the payments are subject to VAT depends on the specific circumstances.
Non-contractual use of property occurs when a third party without legal grounds encroaches on the owner’s property rights, so that the rightful owner is deprived of actual control over the property or the possibility of benefitting from the property. This situation often arises in reprivatisation cases, involving real estate taken over by the State Treasury or local governmental units on the basis of nationalisation decisions (in the case of takeover by the State Treasury) or communalisation decisions (in the case of takeover by local governmental units). A finding of the defectiveness of such decisions means they are removed from legal circulation with the same effect as if they had never been issued. This means that the owner from the time before issuance of the defective decision continued at all times to hold the right of ownership of the real estate.
In such situations, the rightful owners seeking to cure the unlawful status of the property may file suit against the unlawful holders to regain the property and to receive payment e.g. for non-contractual use of the real estate.
The payment for non-contractual use of real estate is essentially the fee for use of the property which the holder would have had to pay if its possession had been founded on an existent legal basis. In other words, it is a way to settle the books between the owner and the unlawful holder of possession by awarding the owner the benefits it would normally have received if it had delivered the property to the possessor on a specified legal basis (e.g. under a lease).
Personal income tax
The tax authorities and the administrative courts in tax proceedings take the position that payments for non-contractual use of real estate cannot be equated with damages. The Personal Income Tax Act of 26 July 1991 does not define the concept of “damages” for tax purposes, and thus it is reasonable to refer to the civil law. Art. 224 §2 of the Civil Code governs claims supplementary to a claim for delivery of possession. These claims include a claim for payment for non-contractual use of property, a claim for wear and tear, deterioration or loss of property, a claim for return of unconsumed benefits, and a claim for payment of the value of consumed benefits. This enumeration itself, according to the tax authorities and the courts, clearly indicates that the lawmakers distinguished payments for non-contractual use of real estate from damages. Both the existence of the claim for the payment and the amount do not depend on whether the owner actually suffered a loss and the unlawful possessor received a benefit. The amount of the payment owed to the owner is determined by market rates for use of the given type of property and the duration of the possession by the defendant (unlawful possessor). Because the payment lacks the nature of damages, it does not enjoy any of the exemptions provided in the PIT Act for damages (Supreme Administrative Court judgment of 22 January 2010, Case II FSK 1327/08, and Province Administrative Court in Warsaw judgment of 23 October 2014, Case III SA/Wa 1666/14).
The PIT Act does not expressly mention payment for non-contractual use of real estate as income falling within any of the sources listed in Art. 10(1) of the act. In the view of the tax authorities and the administrative courts, it constitutes income from “other sources” as referred to in Art. 10(1)(9) and 20(1) (Province Administrative Court in Szczecin judgment of 13 May 2015, Case I SA/Sz 1216/14, and Province Administrative Court in Łódź judgment of 24 September 2015, Case I SA/Łd 1151/14). Art. 20 of the PIT Act contains a list of types of income subject to personal income tax. Under the well-established view, the phrase “in particular” used in this provision means that the definition of income from other sources is open-ended and there is nothing preventing this category from extending to types of income not expressly mentioned in this section. Anytime a material benefit is obtained, there is income from another source. Such income is subject to taxation under general rules pursuant to Art. 27(1) of the PIT Act, i.e. according to the tax scale. Such income must be reported in the annual tax return for the year in which the income is received.
Significantly, the payment for non-contractual use of real estate may be reduced by the costs incurred in connection with obtaining it. This is particularly important in the case of the often complex disputes with the State Treasury or local government, extending for many years, involving significant costs for legal advice and expenses incurred in connection with conducting court cases (court costs). The general rules for revenue-earning costs provided for in the PIT Act apply to income from other sources. Under Art. 22(1), revenue-earning costs are costs incurred in order to obtain, maintain or secure a source of income. The law does not set forth a fixed catalogue of expenses which can be qualified as revenue-earning costs. They may include any rational and economically justified expenses connected with obtaining income.
In resolving doubts whether non-contractual use of real estate is subject to VAT as a fee for providing a service under Art. 5(1)(1) of the VAT Act of 11 March 2004, the specific circumstances will always be decisive.
Under Art. 5(1)(1) of the VAT Act, supply of goods or services for consideration in Poland are subject to VAT. Under Art. 7(1), supply of goods is understood to mean the transfer of the right to dispose of tangible property as the owner, and under Art. 8(1), supply of services is understood to mean any transaction with a natural or legal person or organisational unit without legal personality which does not constitute the supply of goods.
But not every transaction can be regarded as a service within the meaning of the VAT Act. For that to be the case, there must be a direct causal connection between the service performed and the consideration received. This connection is evident in the amount received as actual payment for the service performed within a defined legal relationship. In other words, the payment received should be the consequence of performance of the specific transaction by a person acting as a VAT payer.
According to the tax authorities and the administrative courts, the key is whether the rightful owner consents (even implicitly) to use of the real estate by the unlawful possessor, or takes steps to regain the property upon learning that it is being used without legal grounds. If after disclosure of the lack of a legal basis for use of the property by a third party, the owner continues to allow (even implicitly) the person’s use of the property, then the payment received by the owner for non-contractual use of the real estate constitutes payment for the supply of services within the meaning of Art. 8(1) of the VAT Act. Conversely, if upon learning of non-contractual use of the property by a third party the owner takes steps to regain the property, the payment for non-contractual use of the property is not subject to VAT (Supreme Administrative Court judgments of 2 April 2014, Case I FSK 689/13, and 15 January 2015, Case I FSK 1980/13, and Province Administrative Court in Warsaw judgment of 24 July 2015, Case III SA/Wa 231/15).
Tomasz Piejak, Private Client Practice, Wardyński & Partners