A contractual dissolution of joint ownership consisting in a division of a jointly owned thing is tantamount to a disposal of such thing. In the case when it is performed against a consideration, in accordance with the provisions on VAT it is tantamount to a delivery of goods. A free of charge dissolution of joint ownership is not subject to taxation.

The case concerned a joint perpetual user of a real property. As followed from the application to provide interpretation, the joint users intended to dissolve joint property via a physical division, based strictly on the size of the respective shares, including a payment to be effected in order to compensate for the expenses borne. The taxpayer specified that the joint right of perpetual usufruct and ownership right to the buildings and equipment entailed many complications, both factual and legal. Therefore, it was decided that separate rights would be more favourable than joint ownership. The application asked about the VAT impact of the dissolution of joint ownership.

The tax authorities stated that the delivery of shares executed as part of the joint ownership dissolution would be subject to VAT as the delivery of goods effected against a consideration.

The company challenged such interpretation, and the Province Administrative Court in Gliwice granted leave. The Supreme Administrative Court dismissed the cassation appeal of the tax authorities, although in the reasoning of its judgement it amended the position of the Province Administrative Court.

The Supreme Administrative Court analysed the provisions of the civil law and those on VAT. The Court did not agree with the Province Administrative Court that in the contested situation “one shall deal solely with the extension of the right to dispose of the goods”. In the opinion of the Court, such position does not take into account the fact that an agreement on dissolution of joint ownership will result in a division of the jointly owned thing which leads to a liquidation of the relationship of joint ownership through termination of a legal existence of the thing jointly owned (subject of joint ownership), identification (creation) of new things out of the base thing as well as acquisition thereof by the respective owners as exclusive property. In the case when such action is performed in the form of an agreement by and between the joint owners, from the VAT perspective it must be considered as a disposal of a jointly owned thing (good) by the joint owners in such a manner which makes it possible to divide the thing so as to enable each of them to acquire exclusive ownership right to the newly established good.

However, the Court is of the opinion that if such action is not connected with an extra payment effected in order to compensate for the value of the respective shares, the action is not considered to be performed against a consideration, also within the meaning of the provisions on VAT. New things established (without any additional payments) as a result of the joint ownership dissolution should correspond to the values of the respective shares. Thus, as a result of the action none of the joint owners obtains any (economic) benefits, but only the owner’s right to dispose of the new goods. Furthermore, the agreements on dissolution of joint ownership of things via physical division, account being taken solely of the joint owners’ shares, may not be considered tantamount to actions of conversion of shares into things or sale thereof. Therefore, a contractual free of charge dissolution of joint ownership of a thing is not subject to VAT.

Another situation occurs when such action is performed against a consideration, when the parties decide that in connection with the joint ownership dissolution one of the owners acquires ownership of a new thing of value lower than the value of its share in the jointly owned thing, and the other owner is obligated to compensate for such value in the form of a payment in cash (since the value of the new thing acquired is higher than the value of its former share). In such case one deals with a delivery of goods against a consideration within the meaning of Article 7 Item 1 of VAT Act, where the payment amount depends on the value of the consideration.

The Court noted that in the disputed situation the payment had been intended to compensate for the expenses borne. Although the application referred to a payment, it was not indicated that it was connected with a payment made as a result of the joint ownership dissolution but in view of the expenses borne. Such obligation is not of the same nature as the actions performed under the joint ownership dissolution. The Supreme Administrative Court concluded that in this case the dissolution of the joint ownership was free of charge, thus no VAT applied.

Judgement of the Supreme Administrative Court of 6 October 2016 (I SA/Gd 386/16).

Edited by: Aleksandra Tarka (RP).

Expert’s comment

Marta Ignasiak, tax consultant at FKA Furtek Komosa Aleksandrowicz

The joint ownership means that the ownership of the same thing is held, indivisibly, by several persons and it may be dissolved through a division of the jointly owned thing (e.g. division of a plot of land into two separate plots), sale of the thing or transfer of ownership to one of the owners with the obligation to make payments for the benefit of the other owners. In this case, the dispute pertained to whether the joint owners, entrepreneurs, performing a physical division, who in a way “exchanged” the right to the specific real properties, should have paid the VAT.

With this respect, the Supreme Administrative Court properly assumed that such operation may not be automatically equated with the actions consisting in the conversion of shares against things or sale of goods.

According to the Court, as long as the joint owners acquire ownership of the goods already subject to their disposal and none of them acquires any additional (economic) benefits above the value of their thus far shares, the dissolution of the joint ownership is not subject to VAT. In other words, the Court found that a disposal of a thing is identified when a joint owner acquires such thing and is obligated to make a payment, and the payment depends on the value of such consideration paid. Account being taken of the fact that similar problems occur usually as a result of a prior division of the assets of companies in liquidation, the position of the Supreme Administrative Court seems rational and should not entail excessive difficulties for those entrepreneurs who performed liquidation due to justified economic reasons.