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Supreme Administrative Court: commercial real property does not constitute an organised part of enterprise


The Supreme Administrative Court takes the side of tax payers in the dispute for VAT deduction in the case of acquisition of commercial real property

A written justification of the judgement of the Supreme Administrative Court of 24 November 2016, case file No. I FSK 1316/15, was published. By virtue of the judgement, the Court set aside the previous judgement of the province administrative court, finding tax authorities to be right in qualifying the sale of operating commercial real property as a disposal of an organised part of enterprise which is not VAT-taxable, and not – as originally assumed by taxpayers – as a VAT taxable supply of goods.

According to the Supreme Administrative Court:
• Real property alone does not constitute an entity capable of running independent business activity, unless they are separate in the structure of the seller in financial and organisational terms. Seller’s use of real property for lease, just as in the case of such use by the Buyer, is not indicative of the fact that a transaction concerns an organised part of enterprise.
• Circumstances such as capital or personal links between the parties to a transaction, employing the legal services of the same accounting and real property management entities, concluding service agreements by the buyer immediately after the transaction do not mean that what is being sold is an organised part of enterprise.

The case at hand differed from the transaction model used on the market in that the lease agreements were terminated prior to the sale and concluded with the same tenants. Nevertheless, the main reason for the Supreme Administrative Court’s decision was that real property, without being financially and structurally separate on the seller’s side (i.e. does not constitute an organised structure), cannot be treated as an organised part of enterprise.

All one can do is hope that such arguments will be accepted by tax authorities which have been for some time now challenging the right to deduct VAT in the case of real property transactions.


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