An unreliable tenant of service premises who uses it without a contract can be a real nuisance for the property owner. It can also be problematic in terms of value-added tax.
On June 24, 2022, the Director of the National Tax Information (KIS) issued an individual ruling (reference number 0111-KDIB3-1.4012.151.2022.2.MSO) on VAT taxation of compensation for non-contractual use of the premises.
Background
The housing association, an active VAT taxpayer, terminated the lease agreement of the tenant’s business premises, which delayed the rent payment for the use of the property for two consecutive settlement periods. Pursuant to the lease agreement, the owner (the Cooperative) exercised the right to terminate the agreement immediately without notice. Despite the termination of the contract and attempts to remove the tenant, he continued to use the premises. In accordance with the provisions of the contract, the Cooperative charged the tenant with costs for non-contractual use of the property.
Despite the attempts made, the premises were not handed over by the tenant and the activities conducted there were continued.
Pursuant to the provisions of the contract, in the event of refraining from passing the time of the business premises, the tenant is obliged to pay the rent together with compensation for non-contractual use of the property.
The housing association issued two invoices to the tenant. The first concerned rent with utilities, the second – compensation for non-contractual use of the premises. Both invoices showed VAT at 23% of the net amount. Invoices are issued monthly until the property is returned.
The taxpayer asked the Director of the National Clearing House whether his proceedings in the field of taxation and net compensation calculation are correct.
Position of the Director of the National Tax Information
Tax on goods and services tax is subject to the paid delivery of goods and the paid provision of services within the territory of the country (Article 5 (1) (1) of the VAT Act). Delivery of goods is understood to mean the transfer of the right to dispose of the goods as the owner (Article 7 (1)). The provision of services is understood as any provision (…) that does not constitute a supply of goods within the meaning of Article 7, including, inter alia, an obligation to refrain from performing an action or to tolerate an action or situation. Provision of services may also consist of omission (art. 353 par. 2 of the Civil Code).
There is no definition of what compensation actually is in the tax regulations. Accordance to the Civil Code, compensation depends on the occurrence of an event related to the obligation to repair the damage.
The key criterion for determining whether the presented event is subject to VAT is the consent, even informal, to use the premises.
In a situation where a dishonest tenant uses the premises without the consent of the owner, it is assumed that there is no legal relationship between the parties in which consideration would be provided. Such a service that is not legally sanctioned is not subject to VAT. And the amount of compensation is treated as compensation for the situation that has arisen.
However, if after the expiry of the contract the premises is still used with the consent of the owner, also if the consent is implicit and the obligation is regulated, as well as when the situation, despite the lack of legal sanction, is tolerated by the owner, it is considered that after the expiry of the period for using the premises or termination, the remuneration the use of the premises is subject to VAT (Article 674 of the Civil Code and Article 5 (1) (1) of the VAT Act)
In conclusion, each situation with an unreliable tenant should be analyzed in terms of taxation with the value-added tax on non-contractual use of the premises and possible compensation.
If you want to find out more, please contact our experts.
Anna Szafraniec
CEE VAT Compliance Director
E: aszafraniec@asbgroup.eu
Małgorzata Kasińska
VAT Consultant
E: mkasinska@asbgroup.eu
