Life annuity agreement - tax consequences of termination and return transfer of real estate in terms of tax on civil law transactions

A life annuity contract is one of the civil law institutions included in the Civil Code. Under it, the property owner transfers the property to a third party (s) in exchange for lifetime maintenance. Due to the fact that it is a civil law contract, it is subject to taxation pursuant to the provisions of the Act on tax on civil law transactions. Does the termination of such an agreement also have specific tax consequences? Answer below.

Life annuity agreement - effects resulting from the Civil Code

Pursuant to Art. 908 § 1 of the Civil Code, if, in exchange for the transfer of ownership of the real estate, the buyer undertook to provide the vendor with lifetime maintenance (contract for life imprisonment), he should, in the absence of a different agreement, accept the vendor as a household member, provide him with food, clothes, flat, light and fuel, provide him with appropriate help and nursing in case of illness, and arrange for him a funeral at his own expense in accordance with local customs.

An annuity agreement requires the property owner to undertake to transfer its ownership to the buyer, who in return undertakes to provide the seller or a person close to him with lifetime maintenance. Therefore, it is a mutual, bilaterally binding contract, and at the same time payable, which means that the performance of one party to the contract is equivalent in the performance of the other party. In the case of an annuity agreement, the seller of the real estate (life annuity) obtains a specific benefit that basically satisfies his needs in such a way that he does not have to contribute to acquiring funds to meet the necessary life requirements.

The content and scope of benefits due to the annuity is determined by the life contract, in this respect the principle of freedom of contracts (Article 3531 of the Civil Code) is not subject to any statutory limitation. In the absence of detailed arrangements in the contract, the scope of services is determined in accordance with Art. 908 § 1 of the Civil Code.

Importantly, and what should be remembered, the sale of real estate and the life annuity contract are two different contracts. The objectively important elements of the sale are the seller's commitment to transfer the ownership of the goods to the buyer and its delivery, and the buyer's obligation to pay the price. On the other hand, the life annuity contract requires the property owner to undertake the transfer of its ownership to the buyer, who undertakes to provide the seller or a close person with lifetime maintenance (the parties may define the scope of these obligations by contract).

As the Supreme Administrative Court points out in the judgment of March 14, 2013 (II FSK 1398/11): "In the case of an annuity contract, we are not dealing with a classic example of the equivalence of benefits as in a contract of sale, where the seller is provided with the payment of the price by the buyer.This does not mean, however, that the transfer of real estate ownership under a life sentence is gratuitous. In return for his benefit, the seller of real estate (life annuity) receives certain benefits to meet his needs in such a way that he does not have to contribute to obtaining funds to meet the necessary life requirements. The annuity benefit has its counterpart (equivalent) in the benefits of the property buyer. It is irrelevant for the issue of remuneration whether the buyer's performance corresponds exactly to the value of the property. The essence of the payment of an annuity agreement is that the seller, by making the contribution, does not do so at the expense of his own property, because he obtains an equivalent benefit, having a specific material dimension, manifesting itself, for example, in saving by the seller of the expenses that he would have to incur in connection with his own maintenance, if the contract on life imprisonment was not concluded. The benefits obtained by the annuity undoubtedly have a specific financial value, and thus it should be assumed that there is no gratuitous gain on the part of the seller at the expense of his own property.”.

Life annuity agreement - effects in the tax on civil law transactions

Pursuant to Art. 1 clause 1 point 1 lit. a-k of the Act on tax on civil law transactions, the tax is subject to, inter alia, the following civil law actions:

1. contracts for the sale and exchange of goods and property rights;

2. loan agreements for money or items labeled only as to the type;

3. donation agreements - in the part concerning the taking over by the recipient of debts and burdens or obligations of the donor;

4. life annuity contracts;

5. agreements on inheritance division and agreements on the dissolution of joint ownership - in the part concerning repayments or additional payments;

6. establishing a mortgage;

7. establishment of use for consideration, including incorrect use, and for consideration of servitude;

8. irregular deposit agreements;

9. articles of association.

The tax on civil law transactions is also subject to changes to the contracts referred to in Art. 1 clause 1 point 1 of the above-mentioned of the Act, if they increase the tax base with the tax on civil law transactions and court decisions, including amicable ones, and settlements, if they have the same legal effects.

It should be stated that the legislator introduced the principle of an exhaustive determination of activities subject to tax on civil law transactions.

Therefore, the detailed determination of the scope of the subject of taxation of the above-mentioned tax has specific legal consequences. This means that the legislator, by introducing this rule, excluded from taxation other similar activities that were not explicitly indicated in the provision in question. Thus, it should be stated that activities not listed in the statutory catalog are not subject to taxation even if they have economic effects the same or similar to those listed therein.

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Life annuity agreement - what are the effects of the termination of the tax on civil law transactions?

Example 1.

Ms Janina concluded a life annuity agreement with a married couple of persons unrelated to her in exchange for their commitment to provide life-long maintenance, bear the costs of electricity, heating and hot water, as well as discharge liquid waste and solid waste, supply it with food and clothing regardless of the place of residence, provide appropriate assistance and nursing in illness, transport to a doctor, church and organize a funeral for her at their own expense in accordance with local customs, and establish for her a lifetime servitude of the transferred apartment in the entire flat. The parties, on the basis of freedom of contract, would like to terminate the concluded contract of life annuity by means of a notarial deed, which would result in the transfer of ownership of the premises to Mrs Janina and release of the other party from the obligations covered by the right to life imprisonment. Is such an activity subject to tax on civil law transactions?

Pursuant to Art. 1 clause 1 point 1 lit. e of the Act on Tax on Civil Law Transactions, the acquisition as a life annuity contract is subject to tax on civil law transactions. On the other hand, the termination of the life annuity contract was not mentioned in the statutory catalog of activities that would result in the necessity to pay tax on civil law transactions.

As indicated by the Director of the National Tax Information in the individual ruling of May 21, 2021 (0111-KDIB2-2.4014.24.2021.4.DR), "legal action consisting in the termination of the contract of life annuity and the returnable transfer of property ownership to the annuity, as not listed in art. 1 clause 1 point 1 of the Act on tax on civil law transactions, will not be subject to tax on civil law transactions”.

In view of the above, due to the termination of the life annuity agreement and the return transfer of ownership of the real estate, the act of terminating the life annuity agreement by the parties will not be subject to tax on civil law transactions.

Since the action of terminating the life annuity agreement will not be subject to taxation, will the tax on civil law transactions be refunded?

Pursuant to Art. 11 sec. 1 point 1 of the Act on tax on civil law transactions, the tax is refunded if the legal effects of the declaration of will have been repealed (relative nullity).

If the life annuity contract was terminated on the basis of the parties' freedom to shape the legal relationship, i.e. under the agreement of the parties, the tax is not refundable.

As indicated by the Provincial Administrative Court in Gliwice in the judgment of 9 January 2008 (I SA / Gl 305/07): "The essence of PCC is its size and collection in the event of performing specific civil law actions. Withdrawal from the performance of the contract does not justify the return of correctly calculated and paid tax on civil law transactions. Similarly, the later termination of a validly concluded contract as a result of unanimous declarations of the parties does not give rise to the right to demand a refund of correctly calculated and paid tax.”.