RES projects and asbestos removal in local government units

Ministry of Finance general ruling: RES projects and asbestos removal in local government units  outside VAT, but also without retroactive adjustment of settlements

Following the judgments of the Court of Justice of the EU last year concerning municipal projects involving the installation of a RES system and the removal of asbestos from real estate (judgments in cases C-612/21 Gmina O and C-616/21 Gmina L), on 8 May this year the Minister of Finance issued a general ruling in this respect (ref. PT1.8101.1.2023).

Significantly, the approach presented in the general ruling based on the judgments of the CJEU is different from the practice previously applied by the local government units, as well as from the prevailing position of the tax authorities, further confirmed in the response of the MF to a parliamentary interpellation (letter of 10 March 2020 PT1.054.2.2020.24.3). However, since the CJEU held that the municipality, within the framework of the implemented RES and asbestos removal programs, does not carry out an economic activity within the meaning of the VAT legislation, therefore it should not settle output VAT.

The Minister of Finance was right to cut off ‘with a thick line’ the municipalities’ past settlements in this respect. Therefore, in relation to new projects of this type, local government units should:

  • not charge VAT (in relation to residents’ payments and subsidies received),
  • but at the same time they will not be entitled to deduct input VAT on the expenditures incurred in relation to such projects and the costs of servicing the projects,
  • in addition, revenues related to these projects should be treated as non-business revenues for the purposes of calculating the VAT coefficient.

Therefore, municipalities do not have to correct VAT settlements relating to previous projects, and the tax authorities will not question them. At the same time, municipalities that have accounted for the VAT due on residents’ payments and received subsidies may correct their VAT settlements.

However, the other side of the coin must be remembered. The absence of output tax means at the same time that there is no right to deduct input tax on the basis of invoices issued by companies installing RES installations or removing asbestos and possibly other costs related to the operation of these programs. In principle, in effect, this should turn out to be a zero-sum game and no overpayment will occur. These projects were in principle carried out without a margin, which was the main argument in the CJEU ruling. Furthermore, the adjustment should also take into account the impact of the projects on the VAT coefficient, which may result in an additional reduction in deducted VAT on general expenses. In addition, the VAT adjustment may also involve the need to correct settlements with the project financing institution.

Importantly, the MF has provided for an additional three-month transitional period for local authorities to adjust their VAT settlements to the guidelines resulting from the ruling. Local authorities should apply the general ruling after three months from the end of the month in which the interpretation was published.

Summary

The MF’s issuance of the general ruling, which allows municipalities to leave their existing VAT settlements unchanged on a ‘thick line’ basis, is a reasonable solution in view of the CJEU judgments, which have completely changed the approach used to date. An analogous formula has already been applied by the MF several times in the past, e.g. in the case of centralization of VAT settlements in municipalities, re-invoicing of insurance to the lessee, reprographic fees or bailiffs. At the same time, the MF’s ruling cannot prohibit an adjustment of VAT settlements should the municipality for some reason wish to make such an adjustment.

 

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Janina-Fornalik

Partner | Tax adviser

Tel.: +48 660 440 141