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Tax on civil law transactions

Tax on civil law transactions (TCLT) is a commonly paid tribute. Although VAT payers are often exempt from TCLT, there are numerous situations in which an entrepreneur will have to pay it.

Tax on civil law transactions is levied on:

1) the following civil law transactions:

a) contracts of sale and contracts of exchange of things and property rights;
b) borrowing agreements concerning money or things specified only by type;
c) contracts of donation – in part concerning taking over by a donee of debts and burdens or obligations of a donor;
d) contracts of annuity;
e) contracts of distribution of estate and contracts of cancellation of joint ownership – in part related to payments or additional payments;
f) establishment of a mortgage;
g) establishment of the usufruct for consideration, including irregular usufruct, and paid easement;
h) contracts of irregular deposit;
j) deeds of association;

2) amendments to contracts, agreements and deeds referred to in section 1, if they result in an increase of the taxable base in tax on civil law transactions;
3) adjudications of courts, including courts of arbitration and court settlements, if they bear the same legal effects as civil law transactions referred to in section 1 or 2.

Entrepreneurs keeping a tax book of revenue and expenditure will usually have to deal with the transactions listed in items a, b, g and j, as these are common within the framework of economic relations.

However, within the framework of professional relations, the transactions referred to in item a, b and g occur most frequently between active VAT payers, or taxable persons that benefit from VAT exemption based on the turnover criterion. That is why a very important provision in the TCLT Act is the one that excludes the following entities from the operation of the Act:

- civil law transactions other than a deed of association and its amendments, if at least one of the parties is subject to the following in respect of that transaction:
a) is subject to tax on goods and services,
b) is exempt from tax on goods and services, except for:
- contracts of sale and exchange whose subject is real property or its part, or the right of perpetual usufruct, cooperative ownership right to premises, the right to a single-family house in a housing cooperative, or the right to a parking space in a multi-user garage, or interest in such rights;
- contracts of sale of shares and stock in commercial companies.
The majority of transactions performed by entrepreneurs are thus excluded from the provisions of the TCLT Act.

Here are some examples

Adam buys commercial goods from a wholesale outlet. Because a wholesale outlet is a VAT payer due to its selling activity, the transaction is not subject to TCLT.

Henry borrows a certain amount of money from a limited liability company in which he holds interest. Since the company is a VAT payer in this transaction, it is not subject to TCLT; it does not matter here that the borrowings are statutorily exempt from VAT.

Ann leases a freezer from a company engaged in the supply of frozen food, for a fixed contractual amount. Because the company that owns the freezer is a VAT payer in the transaction, the contract will not be subject to TCLT.

And one more important exemption: TCLT-exempt are those transactions of sale of movable property, if the taxable base does not exceed 1000 PLN.

Determination of the taxable base

What is particularly important for the accuracy of tax settlements is the determination of the taxable base. The TCLT Act defines how the taxable base should be determined for each transaction subject to the tax.

Contract of sale

For a contract of sale, the taxable base is the market value of an item or a property right, which should be determined based on the average prices used in: trading in items of the same kind and type, taking into account their location, condition and wear, or trading in property rights of the same kind, as applicable on the transaction day, without deducting debts and burdens.
Indeed, disputes between taxable persons and tax authorities in the TCLT area are very often related to the determination of the taxable base. Many taxable persons were faced with the situation where a tax office considered that a car value stated in a car purchase agreement was understated compared to the market value. The TCLT Act provides for a special procedure to be followed in such situations.
If a taxable person fails to specify the value of an object in a civil law transaction, or the value specified by them does not correspond, in the opinion of a tax authority, to its market value, then the authority urges the taxable person to determine, increase or decrease such value. In a relevant notice, the tax authority will determine the time limit for fulfilling the request: it cannot be shorter than 14 days from the date when the notice was served. At the same time, the tax authority will give the proposed valuation of the transaction, as determined based on its own, preliminary assessment.

Here we have two alternatives to choose from: either to agree with the value specified by a tax official, or not. In the latter case, the tax authority will determine the market value taking into account an expert opinion or an appraiser's valuation submitted by the taxable person. If the tax authority appoints an expert, and the value determined based on their opinion differs by more than 33% from the value stipulated by the taxable person, then the latter bears the cost of opinion.

Contract of exchange

For a contract of exchange, the taxable base is:

a) in the case of residential premises constituting a separate property item or a cooperative ownership right to residential premises concerning the premises or the right to it – the difference between market values of the exchanged premises or rights to the premises;
b) in other cases – market value of a thing or a property right on which a higher tax applies;

Deeds of association

The taxable base is:

a) for conclusion of a deed – value of contributions to a partnership, or value of the share capital;
b) for payment or increase of contributions to a partnership, or an increase in the share capital - value of contributions that increase the partnership's assets, or the value by which the share capital has increased;
c) for capital injections – the amount of capital injections;
d) for a borrowing granted to a partnership/company by a partner/shareholder – the amount or value of the borrowing;
e) for transfer of things or property rights to a partnership/company for a free-of-charge use – the annual value of free use, which shall equal 4% of the market value of the thing or property right that has been transferred for a free-of-charge use;
f) upon business transformations or combinations – value of contributions to a partnership resulting from the transformation, or value of the share capital of a corporation resulting from the transformation or combination.

Other transactions

For a contract of donation, the taxable base is the value of debts and burdens or obligations taken over by a donee; upon establishment of the usufruct for consideration, including irregular usufruct, and paid easement – value of performances of a user or a person for which/whom the easement was established, for the period for which the rights have been established; and for a borrowing agreement and a contract of irregular deposit – the amount or value of the borrowing or deposit.

Amount of TCLT

Percentage rates of the tax are specified in the TCLT Act. In case of transactions that are most commonly performed by entrepreneurs, the applicable rates are:

1) on a contract of sale:

a) of real property, movable property, right of perpetual usufruct, cooperative ownership right to residential premises, cooperative right to commercial premises, and the following pursuant to the cooperative law: the right to a single-family house and the right to premises in a small residential house ­ 2%;
b) other property rights – 1%;

2) on contracts of exchange, contracts of annuity, contracts of distribution of estate, contracts of cancellation of joint ownership, and contracts of donation:

a) upon transfer of title to real property, movable property, right of perpetual usufruct, cooperative ownership right to residential premises, cooperative right to commercial premises, and the following pursuant to the cooperative law: the right to a single-family house and the right to premises in a small residential house ­ 2%;
b) transfer of title to other property rights - 1%;

3) on a contract of establishment of usufruct for consideration, including irregular usufruct, and paid easement - 1%;
4) on a borrowing agreement and a contract of irregular deposit – 2%;

5) on establishment of a mortgage:

a) to secure an existing debt - on the amount of secured debt – 0.1%;
b) to secure a debt of unknown amount – 19 PLN;

6) on a deed of association – 0.5 %.

Who has to pay the tax?

A civil law transaction usually involves two or more parties. It is therefore necessary to determine who is responsible for payment of the tax (the party obliged must be the one to record the tax in their tax book of revenue and expenditure). The Act resolves this problem.

The tax obligation is imposed on:

1) for a contract of sale – on the buyer;
2) for a contract of exchange – on parties to the transaction;
3) for a contract of donation – on the donee;
4) upon establishment of the usufruct for consideration, including irregular usufruct, and paid easement - on the user or party acquiring the easement;
5) for a borrowing agreement and a contract of irregular deposit – on the borrower or keeper;
6) in a deed of a civil partnership – on partners, and in other deeds of association – on the partnership/company.

Now it is time to deal with some specific situations that will appear in an entrepreneurs' daily business. Beware: The TCLT Act provides for many exemptions, exclusions, exceptions and deviations from these rules, so it is worth taking your time and reading it carefully at length. It is because I have only discussed here some frequent and typical situations.

Purchase of movable property from individuals who are not engaged in a business activity

If we are engaged in a business activity, we often buy all sorts of things from individuals who are not entrepreneurs. Because an exemption does not apply in respect of the VAT obligation on the side of the seller, and the buyer's (entrepreneur's) obligation will usually not arise at all (except in some specific cases set out in the VAT Act), the buyer (entrepreneur) will have to determine the value of the transaction and pay the relevant amount of TCLT. However, if the taxable base for the transaction does not exceed 1000 PLN, the transaction is tax-exempt. However, what if we buy from one person on the same day different things whose unit value does not exceed 1000 PLN, but the aggregate value actually does?

Please pay attention to the following provision of the TCLT Act: the tax applies to contracts of sale. So we can conclude that in order to determine whether a tax obligation arises or not, we should check whether a single contract exceeds the threshold. Therefore, if we conclude several separate purchase transactions, we must take into account the value of each contract separately in order to determine whether TCLT is payable.

Example

1. We buy four chests of drawers at an online auction with the intent to resell. Each cost 500 PLN, but the purchase was made in a single auction. So we have concluded one contract only, and thus we will have to pay the tax of 40 PLN (2% on 2000 PLN).
2. We buy the same four chests of drawers for 500 PLN, but this time each of them was auctioned off separately. So we have concluded 4 contracts, each worth 500 PLN. Consequently, no TCLT obligation will arise.

Does this mean that if we buy several things at a flea market from the same person and at the same time with an intent to resell, we should consider likewise that we have concluded several contracts? In our opinion, yes - in this particular situation, each thing has been negotiated separately and we could modify terms of the contract for each thing (for example, as regards the time to return, warranty period, etc.). Beware: the Tax Code defines situations in which a tax authority may consider that taxable persons' activities were only meant to circumvent law (apparent legal acts were performed to minimise the taxable base). In the event of such a dispute, a taxable person will have to demonstrate that they have entered into separate contracts.

Tax scale for personal income tax

 

Income up to 85 528,00zl – 18% minus the tax reduing amount 556zl 02gr

 

Income above 85 528,00 zł - 14 839 zł 02 gr + 32% surplus over 85 528 zł

 

Minimum employee wage 2015r.

 

1 750,00 zł

 

Important deadlines

 

On the 15th day of each month – immovable property tax payment by legal persons

 

On the 20th day of each month – income tax advance payment by employers and their employees, income tax advance payment by legal persons

 

On the 25th day of each month – VAT declaration submittal, VAT payment

 

On the 30th of each April – annual income tax return submittal, tax payment