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Exempting lessees from the obligation of restoring the lease subject to its original condition and the issue of VAT

Thanks to the efforts undertaken by our Tax Advisory Department, on March 14, 2018, we managed to obtain two favourable individual VAT rulings.

The rulings (0114-KDIP1-2.4012.701.2017.3.RD, 0114-KDIP1-2.4012.140.2018.1.RD, 0114-KDIP1-2.4012.46.2018.2.RD) at issue pertained to two questions:

  1. Whether a situation in which a lessor exempts the lessee from the obligation of restoring the lease subject to its original condition in exchange for specified remuneration is covered by the definition of a service set out in Article 8, Paragraph 1, Subparagraph 1 of the VAT Act.
  2. Whether the lessee has the right to deduct VAT from the invoices which they received and that document the performance of construction and installation works set out in Appendix 14 to the VAT Act, acquired with the aim of restoring the lease subject to its original condition.

Factual circumstances

Pursuant to the provisions of lease contracts, each Lessee (after the end of the lease) is required to surrender the lease subject in a non-deteriorated condition, allowing for its normal wear and tear. Prior to the end of the lease and yielding up the lease subject, the Petitioner and the Lessee sign a memorandum, whose conditions oblige the Lessee to pay remuneration the Company for the Lessor taking over the Lessee’s obligation to restore the lease subject to its original condition. The value of the service provided by the Company is calculated based on the Lessee’s scope of works defined in the appendix to the memorandum. The method of determining the remuneration is by no means related to the petitioner’s obligation to perform said works. Therefore, the performance of the works can take place under the partial or complete restoration of the lease subject to its original condition immediately after the Lessee yield up the lease subject or under the process of preparing the leasable area for a new Lessee. Alternatively, the works may remain unperformed.

The tax authority agreed with our position, confirming that:

Re 1 Exempting the Lessee from the obligation to restore the lease subject to its original condition in exchange for  remuneration constitutes tolerating a certain situation, which is equivalent to performing services defined in Article 8, Paragraph 1 of the Act, and is subject to taxation. It was argued that under the presented factual circumstances mutual consideration took place that was both direct and equivalent. The lessee was the beneficiary of the consideration, and in exchange for specified remuneration they will not be required to restore the surrendered lease subject to its original condition.

Re 2 The conditions for eligibility to deduct input tax have been met, as the services purchased by the lessor are related to the taxable activities performed. Additionally, the lessor does not act in the capacity of a “general contractor.”

In summary, exempting the Lessee from the obligation to restore the lease subject to its original condition in exchange for remuneration constitutes performing services defined in Article 8, Paragraph 1 of the VAT Act. Moreover, should a Lessor upon executing such a memorandum decide to purchase construction and installation services under the restoration of the premises to their original condition, they will not act in the capacity of a general contractor.

Monika Smaga
Senior tax specialist

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