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Launching a production line. Supply of goods or provision of services?


Implementing a major investment project, such as the preparation and launch of a production line, is not only an organisational and logistics challenge. The investors and contractors must also face the requirement of proper qualification of the undertaking for tax purposes.

This lesson has been learnt by a Polish company, which obtained such a contract from a business partner from the United States. The investment aims to help meet the requirements of an order for the production and assembly of aircraft parts and accessories for the ordering party.

The contract will involve activities consisting in drafting and updating project documentation, modernisation of a production hall, developing equipment for production purposes, quality control and project implementation management. The ordering party expects the project to ensure full production readiness. It is not interested in any particular works (e.g. the modernisation of the production hall itself) should they constitute separate performances.

In a performance of this kind it is not possible to identify a single, most important element. The primary goal is to achieve the final result of the works performed - i.e. facilitation of production. The several elements of the performance, if treated separately, are irrelevant from the ordering party’s perspective as they would not separately meet the above condition. Considering the ordering party’s expectations, all the activities involved in the performance of the task make up a system of interrelated elements. Although they are capable of being separated theoretically, this would not be justified in business terms. This is also reflected in the manner of calculation of the remuneration, which comprises all activities performed at each stage (milestone), the costs of specific materials, goods or services not being separated.

The production line will not be an integral part of the building (production hall). Fixing and stabilising the particular elements of the line in the floor is required for technological reasons and serves specifically to ensure the safety of the entire process. However, the elements will not be fixed in the building permanently. The line is capable of being dismounted and the hall can be used for other purposes.

In so outlined and complex a description of the intended activities, the company had doubts as to whether the set of activities described above can be deemed provision of a comprehensive service for the purposes of VAT Act. Furthermore, establishing the place of performance proved difficult as well. On the one hand, the general principle under Art. 28b of VAT Act can be applied whereby the service is taxable at the place where the ordering party has its seat (i.e. the USA). On the other hand, a service of this type can be potentially deemed as strictly connected with the property – then, under Art. 28e of the VAT Act, it would be taxable at the place where the production hall is situated, i.e. in Poland.

Head of the National Revenue Information Service found in a tax ruling of 29 June 2021 (case no. 0113-KDIPT1-2. 4012. 119. 2021. 2. KW) that the activities planned by the Company constitute a comprehensive service. This is because if several activities are so strictly interrelated as to form an objective unity from the economic perspective, whose separation would only be artificial, then they make up a single performance for VAT purposes.  The authority stressed that the elements of a performance should be interrelated from the purchaser’s point of view. It is important to establish whether the several activities, if separated, will be of substantial, practical and expected value to the purchaser.

As regards the place of performance of such a comprehensive service, Head of KIS held that the specific principle under Art. 28e of the VAT Act only concerns services performed in relation to a specific real estate. A service of little connection with a given real estate cannot be deemed as such. The performance would only be taxable in Poland if it were directly related to a property being a central point of the service or if it aimed at changing its legal or factual status. Such a close relationship between the production line and the hall is absent from the intended investment.

The tax ruling contains important guidelines for enterprises intending to carry out similar transactions. However, it should be remembered that the tax-law qualification of different circumstances may vary significantly. The discrepancies may concern such issues, relevant from the taxability point of view, as the type of activity and place of its taxation, which have direct impact upon the entity obliged to settle the tax. Given that investments of this kind involve substantial financial outlay, it is worth subjecting them to a prior detailed analysis for tax implications.


Agnieszka Jasica-Skalbmierska, Tax Advisor, ATA Tax Sp. z o.o.

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