The amendments to the Polish VAT Act, binding since January 1 2017, introduced new regulations regarding the reverse charge mechanism applicable to domestic supplies between two VAT payers consisting of construction works. However, additional specific conditions should be met, which in practice create a number of interpretation problems.
The legislator introduced two main conditions for the application of the reverse charge mechanism, which must be fulfilled jointly:
1) Subjective condition – the reverse charge mechanism should be applied only on the construction works listed in Annex 14 to the VAT Act; and
2) Objective condition – regarding the status of the parties to the transaction, i.e.:
- the service provider is not exempt from VAT;
- the service recipient should be registered as an active VAT payer; and
- the service provider should act as a subcontractor.
In regards to the subjective condition, it is not always clear if the scope of activities covered by the contract should be classified as the construction works mentioned in Annex 14 to the VAT Act. VAT treatment of the composite supplies could be one of the controversial issues (separate supplies vs. one single supply and determining the main supply).
In regards to the objective condition, the meaning of the term "subcontractor" is problematic in view of various practical situations, since it is not defined in the VAT Act, nor can it be found in any other tax regulations. The Ministry of Finance stated that the literary interpretation of this word should be understood from the dictionary definition, i.e. "subcontractor" should be considered to a person or a firm that performs works commissioned by the main contractor. It should be, therefore, assumed that if the service provider acts as a main contractor directly for the benefit of the investor (for whom the construction permit was issued), it should not be considered as a subcontractor and the reverse charge mechanism will be not applicable. The problem arises e.g. where the construction works are rendered by the members of the consortium or where they are recharged to another entity.
Application of the appropriate VAT rules to the construction services performed since January 1 2017 is very important. The services provider who performs construction works acting as a subcontractor is obliged to issue VAT invoices without VAT. This is the service recipient who should account for VAT under the reverse-charge mechanism. Then, the main contractor should issue an invoice to the investor on the general rules charging output VAT. This means that the subcontractor will be in the permanent VAT refund position which significantly influences the cash flow.
Incorrect settlement of the VAT on the construction works might have substantial VAT consequences. If the subcontractor issues the invoice to the main contractor with VAT, the main contractor will not be entitled to deduct input VAT from such an invoice. On the other hand, the main contractor will be obliged to settle output VAT on the construction services acquired under reverse charge rules. Thus, the main contractor will have to pay VAT twice. In case the main contractor fails to account for output VAT, the penalties for the breach of this obligation will be imposed, including 30% sanction.
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