What is subject to VAT taxation? About the rules worth knowing and exceptions that confirm the rule

When it comes to taxes – including VAT – one of the fundamental questions that taxpayers often ask themselves is “what is subject to taxation?” On the VAT ground, the subject of VAT taxation is defined, among other things, in Article 5 of the Polish VAT Act. According to this regulation, the following activities are subject to VAT taxation:

• the supply of goods and services in exchange for a consideration in the territory of the country; (IMPORTANT! These types of transactions will be described in this post);
• the export of goods;
• the import of goods into the territory of the country;
• the intra-Community acquisition of goods in exchange for a consideration in the territory of the country;
• the intra-Community supply of goods.

In this post, we will focus on the activities mentioned in point 1, which is the supply of goods and services in exchange for a consideration. Other transactions will be described in subsequent posts, with an explanation of their specifics.

For clarity, it should be noted that (i) goods of one’s own production and (ii) goods which, after acquisition, were not the object of the supply of goods (i.e. when after the purchase of a particular good, it was not further sold), are also subject to the VAT taxation. So, what needs to be done in order to comply with the regulations and avoid tax consequences? According to the rules, one will have to pay VAT on the goods indicated above in only three cases:

• the winding up of an unincorporated civil law or commercial partnership;
• the cessation by a taxpayer who is a natural person of performance of activities subject to VAT taxation;
• the expiry of the succession administration or the right to appoint a succession administrator.

Since VAT is a tax closely related to the economic realities and the actual transactions carried out, the VAT Act emphasizes the factual rather than the formal aspect of the activities undertaken. It means that the transactions mentioned above are subject to VAT taxation regardless of whether they were carried out in accordance with the conditions and forms specified by the law. So if – for example – an entity dealing professionally with the sale of real estate, enters into agreements with a contractor in a form other than a notarial deed, thinking that in this way it will avoid paying VAT, then he is unfortunately mistaken. He has sold the goods = he must pay VAT. Thus, VAT is dominated by the “excess of (real) matter over (legal) form,” and this is closely related to the principle of universality of VAT taxation, which stipulates that every phase of the trade of goods should be subject to VAT.

However, the legislator has provided for exceptions to the above rule. Thus, the following are not subject to VAT:

• transactions involving the disposal of an enterprise or the organised part of an enterprise (nonetheless, they are subject to tax on civil law transactions);
• activities that cannot be the subject of a legally effective agreement. This includes the unlawful supply of goods – e.g. prostitution, drug trafficking or trafficking in human organs, human trafficking.

Importantly, illegally sold goods that can normally be traded, will be subject to VAT taxation. Consequently, for example, sales of the so-called “fakes” or smuggled alcohol will be subject to VAT. Clothing or alcohol per se, nor the sale of such goods – are, after all, not prohibited by law, while – for example – drugs and the placing of such goods on the market, are illegal.

To summarize the above:

• illegal supply of goods = no VAT
• legitimate goods that are normally the subject of a legally effective transaction, but are sold illegally = VAT

Supply of goods

The concept of supply of goods on VAT ground is much wider than the civilist concept of sale. On the VAT terms it shall be understood as the transfer of the right to dispose of the goods as an owner. It is worth noting the construction of this sentence – due to the fact that the legislator used the phrase “as an owner” in it, then VAT taxation will apply to activities involving the transfer of actual, economic possession of the goods. This means that the supply of goods takes place even if there is no transfer of ownership. What is extremely crucial – the supply of goods and the provision of services for consideration on the territory of the country are subject to VAT taxation. However, consideration is not always the receipt of cash remuneration. Thus, a supply of goods for consideration will also be, for example, an exchange of goods or an exchange of goods for a service.

As it happens – of course, there are some exceptions. Namely, sometimes a free of charge supply of goods shall be considered as a supply of goods for consideration. Accordingly, VAT will be payable when:

• the VAT taxpayer makes a free of charge transfer of goods belonging to his enterprise for his own personal (i.e. private) purposes or for the personal (i.e. private) purposes of his employees and other entities listed in the Polish VAT Act,
• the VAT taxpayer will make the donation,

BUT only if the VAT taxpayer had the right to deduct VAT on the purchase of the above goods (the right to deduct VAT will be discussed in another post).

There are also free of charge supplies of goods that are not subject to VAT. An exception to the above-described exception is a free of charge supply of certain categories of goods – that is, gifts of small value and samples, provided that the taxpayer transfers these goods in connection with conducted by him business activity.

We will write about small-value gifts and samples in our next post. Stay tuned to the blog! 🙂

Provision of services

The legislator has defined the “provision of services” quite enigmatically, which can cause numerous problems in determining what is meant by a “service”. According to the statutory definition, a service is any provision that does not constitute a supply of goods. A provision of services is therefore everything that is not a supply of goods. However, the condition for arising of VAT liability is the occurrence of a specific, concrete, “tangible” provision on the side of the service provider, supplied to the service recipient. Accordingly, for example, damages or contractual penalties are not subject to VAT taxation. The reason for this is that the receipt of such a “benefit” is strictly related to a compensation for the damage/loss incurred, and not to the provision of any service.

Finally, it is worth mentioning that, just as in the case of the supply of goods for consideration, sometimes services provided free of charge shall also be understood as “provision of services for consideration”. Hence, the provision of services for consideration – and therefore being subject to VAT – includes:

• the use (but not consumption!) of goods that are part of the VAT taxpayer’s enterprise, for purposes unrelated to the VAT taxpayer’s business activity, and therefore for personal (i.e. private) purposes of the VAT taxpayer or his employees (and other persons listed in the Polish VAT Act), if the VAT taxpayer was entitled to deduct VAT on the purchase of these goods. Examples: free of charge transfer of “old” telephones, laptops or fitness facility cards to employees;

• free of charge provision of services for personal (i.e. private) purposes of the VAT taxpayer or its employees (as well as other entities listed in the Polish VAT Act) and any other free of charge provision of services for purposes other than the VAT taxpayer’s business activity.

Example: The VAT taxpayer runs a company/business of renovations. The entrepreneur is an active VAT taxpayer and employs employees.

A friend of entrepreneur has asked for help with painting the ceilings in his apartment. This friend provides the paints, rollers and other equipment. The entrepreneur delegates his employee to the friend to help him. He doesn’t get paid for the service provided, but for VAT purposes, as an entrepreneur (VAT taxpayer), he should determine the value of the service provided and tax it.

The rules are tough, but you have to follow them to avoid getting into trouble 😊.