The sale of shares in a real estate company is only the beginning, as the seller must face the VAT consequences of the transaction. Is the sale of shares in real estate companies treated differently under VAT than the sale of shares in other companies? Is this correct? And what can be done about it?
The sale of shares in a real estate company is usually exempt from VAT…
If the seller does not conduct professional securities trading, then the sale of shares in a real estate company is a manifestation of the exercise of the ownership rights over the shares. In that case, the sale of shares is not carried out as part of the business activity conducted by the seller, even if the seller otherwise conducts business activity and is a VAT payer on that account.
In such a situation, the sale of shares is not subject to VAT at all.
…although there are exceptions
However, the tax practice indicates that the sale of shares should be considered to be carried out as part of business activity, and consequently subject to VAT, when:
- The ownership of shares in companies constitutes a direct, permanent and necessary extension of conducting business activity (Court of Justice in C-306/94, Régie dauphinoise).
- The shareholder participates in the management of the company if its participation in management entails carrying out transactions subject to VAT, in particular the provision of services to the company. If participation in the company’s management is not related to the provision of services to the company and constitutes mere performance of ownership functions related to the shareholder status, this condition will not apply (C-60/90, Polysar).
- The sale of shares is carried out in the course of professional brokerage activities (C-80/95, Harnas & Helm).
Sale of 100% of shares = disposal of business (i.e. VAT exclusion)
If the sale of shares is carried out in the course of business activity, but the transaction also involves 100% of the company’s shares, in tax practice the position may be encountered that the sale of a business has occurred, which is subject to exclusion from VAT pursuant to Art. 6(1) of the Polish VAT Act (see individual interpretation by the director of the National Revenue Information Centre of 2 October 2017, no. 0114-KDIP1-1.4012.448.2017.1.AO). This position is based on the assumption that the sale in a single transaction, to a single buyer, of 100% of the shares in a company may be equated with transfer of the entire enterprise of the company to the buyer.
Sale of a smaller number of shares—VAT exemption
On the other hand, if the sale performed in the course of business activities involves less than 100% of the company’s shares, then the sale of shares is subject to VAT exemption pursuant to Art. 43(1)(40a) of the VAT Act, as the performance of services the subject of which are shares in companies.
But it is different in real estate companies…
However, in Poland, pursuant to Art. 43(16)(4) of the VAT Act, the VAT exemption referred to in Art. 43(1)(40a) does not apply to services relating to rights and interests reflecting shares and other legal title giving their holder legal or de facto ownership or possession of real estate or parts thereof.
This exemption applies to the sale of shares in a real estate company, where the company’s principal asset is real estate. In effect, the transfer of shares in such a company will transfer ownership of the property (the company’s assets). In practice, this refers to cases where the price of the shares depends mainly on the value of the real estate constituting the company’s principal asset. However, there are no specific regulations concerning the value of the real estate or the company’s assets, the impact on the share price, etc. Referring by analogy to how real estate companies are regulated under the Corporate Income Tax Act, real estate or rights to real estate should account for at least 50% of the value of the company’s assets.
…which is incompatible with the VAT Directive
Pursuant to Art. 15(2) of the VAT Directive, EU member states may:
- Regard shares in real estate companies as tangible assets—in that situation, transactions transferring ownership of such shares should not enjoy a VAT exemption
- Not regard shares in real estate companies as tangible assets (including tacitly by the lack of specific regulations in this regard)—in that case, shares in real estate companies should be treated like shares in non-real estate companies, and thus transactions transferring ownership of such shares should enjoy a VAT exemption.
Poland has not recognised shares in real estate companies as tangible assets.
The VAT Act does not contain any provisions in this regard. In particular, the definition of a commodity does not indicate that a share in a company is to be considered a commodity.
Therefore, Poland should treat shares in real estate companies the same way as shares in non-real estate companies, which benefit from a VAT exemption pursuant to Art. 43(1)(40a) of the VAT Act. Despite this, pursuant to Art. 43(16)(4), Poland has excluded from the VAT exemption transactions involving the sale of shares in real estate companies.
This act constitutes an incorrect implementation of the VAT Directive, as Poland cannot limit application of the VAT exemption for shares in real estate companies, as it has not recognised such shares as tangible assets. Therefore, the exclusion set forth in Art. 43(16)(4) of the VAT Act is inconsistent with Art. 135(1)(f) in conjunction with Art. 15(2) of the VAT Directive.
What can sellers of shares in real estate companies do?
Accordingly, the sellers of shares in real estate companies can:
- Refuse to apply the exclusion from the VAT exemption set forth in Art.(43)(16)(4) of the VAT Act as contrary to the VAT Directive. As a result, the sale of shares in a real estate company will benefit from the VAT exemption under Art. 43(1)(40a) of the VAT Act. In our view, this solution is more often adopted in practice. Nonetheless, the VAT-exempt sale of shares should not affect the seller’s input tax deduction, provided that the turnover of shares is ancillary to the seller’s core business activity and the proceeds from the sale of shares are not a direct, permanent and necessary supplement to the seller’s activity. However, there may be doubts about the extent of input tax deduction by a seller which is a holding company, in particular if trading in shares of subsidiaries is not incidental.
- Apply the exclusion from the VAT exemption set forth in Art.(43)(16)(4) of the VAT Act as contrary to the VAT Directive. In that case, it seems that the transaction of the sale of shares in a real estate company will still be treated as provision of services, the object of which is the shares, and not as a supply of goods. Indeed, there is no basis for assuming that these shares are goods under the VAT Act. For this reason, in such a case, the sale of shares would be subject to VAT at a 23% VAT rate. Then the seller’s right to deduct input tax on goods and services purchased directly or indirectly in connection with the sale of the shares should not be questioned.
Sale of shares in a real estate company and the place of VAT taxation
As for the place of taxation, the sale of shares in a real estate company to a VAT payer is subject to VAT under the general rules indicated in Art. 28b(1) of the VAT Act, i.e. at the place where the buyer has its registered office.
The disposal of shares in a real estate company does not constitute a real estate service. Therefore, it is not subject to VAT at the place where the property is located in accordance with Art. 28e of the VAT Act (see individual interpretation by the director of the National Revenue Information Centre of 8 December 2017, no. 0115-KDIT1-2.4012.588.2017.2.AGW).
This conclusion is based on the following considerations:
- The purpose of the transaction is the sale of shares and not the sale of real estate constituting the company’s assets (since the seller is not selling a single asset, but the rights to all the company’s assets represented by the shares held by the seller). The purpose of this transaction is reflected in the agreement concluded between the seller and the buyer and in the accepted principles of the seller’s consideration for the shares, not for the real estate. In this situation, it cannot be considered that the seller’s activities focus only on the real estate constituting the company’s assets.
- The sale of shares does not affect in any way the legal or factual status of the real estate. In the sale, there is no change in the owner of the real estate, but a change in the owner of the shares of the entity that owns the property. In turn, the company whose shares are the subject of the transaction is an independent economic entity with legal personality. Therefore, trading in the shares of a company that owns real estate is indifferent to the legal or factual status of the real estate, which does not change as part of the transaction. Therefore, disposal of shares is not directly related to the real estate.
- The sale of shares in a real estate company is not listed as a real estate service in Art. 28e of the VAT Act or the implementing measures for the VAT Directive.
Civil transactions tax
When analysing taxation of the sale of shares, it is important to keep in mind that a sale of shares that is VAT-exempt or not subject to VAT will be subject to the tax on civil transactions at 1% of the market value of the shares. In this case, the entity liable to pay the tax is the buyer.
Certainly, determining the VAT consequences of disposing of shares in a real estate company is still challenging and requires a detailed analysis of the circumstances of the transaction.
Mateusz Rowiński, Tax practice, Wardyński & Partners