Real estate rented in another EU Member State does not constitute a fixed establishment for VAT purposes

From the article you will learn:

• when a property rented in a Member State is not a fixed establishment?
• how disputes about Fixed Establishment in the case of renting real estate have been resolved in Poland so far.
• what are the most important conclusions that can be drawn from the CJEU judgment?

The decision of a foreign entrepreneur to purchase and use real estate located in Poland may, in some cases, lead to the creation of a fixed establishment for VAT purposes (FE). The analysis of the case law of the Court of Justice of the European Union (CJEU) leads to the conclusion that the establishment of an FE will not occur automatically in every case.

On 3 June 2021, the CJEU issued a ruling in case C-931/19, regarding the potential existence of FE in the case of owning and renting real estate in a Member State other than the country of residence of the taxpayer. According to the Court, a property that does not have any human resources enabling it to operate independently clearly does not meet the criteria for being considered a fixed establishment within the meaning of the VAT Directive.

Why is this judgment important for foreign taxpayers owning real estate in Poland? It means that tax authorities should not require a taxpayer to pay VAT in Poland solely because of owning or renting real estate in Poland. This also applies to situations in which the taxpayer reserves the right to make important decisions regarding this rental.

Titanium Ltd case (reference number C-931/19)

Facts: why was the way of doing business controversial in terms of VAT?

The Court examined the case of Titanium Ltd from Jersey. It operated in the field of real estate, property, apartment and lodging management and was the owner of two properties in Austria, which got leased by it.

The lease transactions were the only transactions of Titanium Ltd in Austria. The Jersey company has authorized a local Austrian property management company to mediate relationships with service providers and suppliers, invoice rent and operating costs, and maintain commercial registers and prepare VAT settlements data. These services were performed by an attorney in premises other than premises belonging to Titanium Ltd.

Titanium Ltd retained the decision-making rights to conclude and terminate lease agreements, determine the economic and legal conditions of lease agreements, make investments and repairs, as well as organize their financing, select third parties to provide other services at an earlier stage of trading, as well as select, appoint and supervise the property management company itself.

Titanium Ltd found that, due to the fact that it did not have a fixed establishment in Austria, it was not obliged to pay Austrian VAT. However, the Austrian tax authority found that the rented property constituted such a fixed establishment and consequently determined the amount of VAT that the company should have paid.

The company filed a complaint against the authority's decision, arguing that since it did not involve its own staff in the leasing process, the property in question cannot be considered a fixed establishment.

However, the Austrian tax authority stuck to its interpretation of the regulations. They emphasised that if a foreign entrepreneur owns real estate in Austria and rents it out subject to VAT, he should be treated as a domestic entrepreneur. Thus, the officials maintained that it is not the recipient of the benefit who is obliged to pay tax on this transaction. To sum up, the authority found that in the case of renting real estate, there will always be a fixed establishment.

Resolution of the dispute, i.e. the judgment of the CJEU on business activities in the field of real estate management

The CJEU disagreed with the Austrian tax authorities and ruled that Titanium Ltd did not have a FE in Austria. 

The CJEU conclusions in this regard are as follows:

• FE requires the constant presence of human and technical resources necessary to provide specific services;
• FE is characterised in particular by "an appropriate structure in terms of personnel and technical resources";
• The fact that Titanium Ltd authorised persons from the Austrian company to perform certain management tasks, subject to important decisions regarding the rental of real estate in the country of establishment, does not prejudge the existence of an FE;
• A property rented in a Member State does not constitute a fixed establishment if the owner of the property does not have its own staff to provide rental services.

Disputes over the Fixed Establishment in Poland

It is worth mentioning the judgment of the Provincial Administrative Court in Szczecin of 6 April 2022, ref. no. I SA/Sz 64/22, in which the court resolved a dispute between a German taxpayer and the Polish tax authorities. 

The first-instance authority stated that the German company had a FE in Poland due to: the purchase of real estate in Poland, leasing it for a period of several years to a subsidiary and equipping that company with competences entitling it to supervise this facility. The supervision of the Polish company excluded the need for the German company to have the staff necessary to maintain and use the real estate for the purposes of rental services provided by the German taxpayer. 

Based on the facts established in this way, the Polish court indicated that the fact of being the owner of real estate cannot prove the possession of FE in Poland. 

As practice shows, foreign taxpayers owning real estate in Poland can easily be involved in disputes over FE. The CJEU judgment mentioned in the article may therefore be an important argument in discussions with tax authorities. 

Let us remember that having human resources is one of the necessary conditions for the existence of FE. In a situation where the personnel resources are made available by another entity, this condition may still be considered met (judgment of the CJEU in case C-605/12 Welmory of 16 October 2014). It is therefore necessary to analyse the actual situation each time, including the scope of activities to which the entity in Poland is authorized by the taxpayer.