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Is the transformation of perpetual usufruct into freehold subject to VAT?


In her opinion on the case no. C-604/19, Municipality of Wrocław against the Director of the National Revenue Information Service, Advocate General of the Court of Justice, Juliane Kokott, gave an affirmative response in her judgement.

The dispute emerged with respect to the application of the act on transformation of the right of perpetual usufruct of land developed for residential purposes into the ownership rights over of that land (‘Transformation Law’). On its basis, on January 1, 2019, the right of perpetual usufruct of land developed for residential purposes was transformed into the ownership rights over that land. In return, the former owners will receive an annual fee for a period of 20 years. The amount of the annual fee is equal to the amount of rent previously payable annually for perpetual usufruct.

In that respect, the municipality of Wrocław had doubts whether these fees are subject to VAT. In his individual ruling, the Director of the KIS (National Revenue Information Service) stated that such transformation is a continuation of the supply initiated by establishing a perpetual usufruct. Therefore, the fees share the changes in its legal status and hence are subject to taxation. However, the municipality was of the opinion that the perpetual usufructuary had already obtained the status similar to an owner at the establishment of the perpetual usufruct. Therefore, it filed a complaint with the court, arguing that the same land cannot be subject to supply twice. Moreover, it claimed that it had been acting as a public authority and therefore the transaction fell outside the scope of VAT taxation. The Regional Administrative Court in Wrocław referred to the CJEU for a preliminary ruling.

Advocate General stated that the transformation of perpetual usufruct into freehold should not be treated as a separate transaction, but as a continuation of supply. There is no doubt that the mere establishment of perpetual usufruct should be treated as a supply of goods, which means that annual fees are subject to taxation. They constitute counter performance for obtaining the right to dispose of the real property. The fact that the status of the owner is also transferred to the existing perpetual usufructuary does not change that. Therefore, the transformation fee follows the fate of monthly fees for perpetual usufruct.

The fees still pertain to the same supply of a real property. The former perpetual usufructuary continues to pay a fee for the acquisition of the right to use and dispose of the land as an owner. The structure of the fee also confirms that, as the amount is equal to the amount that would  be due on the perpetual usufruct in a given year. From the economic point of view, so significant for VAT taxation, the former perpetual usufructuary pays the same fee, but on changed terms. Thus, both the obligation to pay and the amount of the payment result from the original establishment of the perpetual usufruct and from the economic point of view it should be treated uniformly as a fee for this supply.

As regards acting as a public authority, however, Advocate General stated that the mere fact that Transformation Law imposes an obligation on the municipality to conduct administrative proceedings does not mean that such activity falls outside the scope of VAT taxation. The fee payable by the former perpetual usufructuaries is not established on the basis of the legal regime applicable in administrative proceedings, but rather that the municipality collects it as the former owner of the real estate. The mere delivery of municipal real estate as perpetual usufruct is based on civil law. Therefore, when collecting the fees, the municipality acted as a taxpayer. There is no reason to qualify the municipality's activity under Transformation Law differently than before.

Advocate General’s opinion does not constitute a final settlement of the case. However, the final rulings of the CJEU often coincide with such opinions in whole or in a substantial part. Thus construed regulations of the VAT Directive will have a substantial impact on tax settlements of local government units and existing perpetual usufructuaries.


Wojciech Jasiński, Tax Consultant, ATA Tax Sp. z o.o.

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