VAT implications of converting perpetual usufruct of land into ownership

The subject of perpetual usufruct may be land owned by the State Treasury and local government units. The perpetual usufructuary may trade the right of perpetual usufruct, but the scope of his rights to the land is more limited than in the case of ownership (in particular, perpetual usufruct is established for a limited period of time). In principle, the establishment of perpetual usufruct is subject to VAT as an activity equated with the supply of land. However, perpetual usufruct established before Poland’s accession to the European Union, i.e. before May 1, 2004, is not subject to VAT (as a result, perpetual usufruct fees accrued after that date are not subject to VAT either).

Modes of transformation of perpetual usufruct into ownership
In practice, perpetual usufruct is often transformed into ownership, as a result of which perpetual usufruct expires and the previous perpetual usufructuary becomes the owner of the land in exchange for payment to the previous owner of a certain fee (“transformation”).

The transformation of perpetual usufruct into ownership may occur:

  • by operation of law (e.g., pursuant to the Act of July 20, 2018 on transformation of the right of perpetual usufruct of land developed for residential purposes into ownership of such land);
  • by means of a contract for the sale of land ownership to the perpetual usufructuary;
  • by an administrative decision.

Depending on the mode of transformation and also the date of establishment of perpetual usufruct, the VAT consequences of such an action may vary.

Conversion of perpetual usufruct by operation of law
The question of the VAT implications of this mode is not in much doubt at the moment, due to the judgment of the Court of Justice of the European Union (“CJEU”) on February 25, 2021 in the case C-604/19 Municipality of Wroclaw and the subsequent general interpretation of the Minister of Finance dated December 22, 2021, PT1.8101.2.2021. In their light, the act of converting perpetual usufruct under the aforementioned July 20, 2018 Act constitutes a supply of goods, separate from the establishment of perpetual usufruct, subject to VAT, regardless of the date on which perpetual usufruct was established (i.e., it also applies to perpetual usufruct established before May 1, 2004).

Conversion of perpetual usufruct by administrative decision
It seems that the theses expressed in the above-mentioned CJEU judgment and general interpretation could apply in this case, so that this type of transformation would be subject to VAT regardless of the date on which the perpetual usufruct was established.

Nevertheless, in the interpretations issued, the Director of National Tax Information does not, for the time being, apply the above approach, treating this case analogously to transformation by means of a sales contract (as a result, the transformation of perpetual usufruct established before May 1, 2004 would not be subject to VAT). It appears that this position, although favorable to taxpayers, may change over time under the influence of the aforementioned CJEU judgment, or possibly the rulings of the Supreme Administrative Court, which are to be expected in the future in this regard (especially since, as mentioned above, the Supreme Administrative Court refers to the concept contained in the aforementioned CJEU judgment in more explicit cases of transformation by means of a sales contract).

This raises the possibility that taxpayers may be able to obtain a favorable tax interpretation with regard to the conversion, by administrative decision, of perpetual usufruct established before May 1, 2004.