The service is provided to an EU taxpayer exempt from VAT

A typical situation involves intra-EU transactions with active VAT payers. In this case, there is no doubt as to the method of settling the value added tax, as the provisions of the Polish VAT Act and the EU directive clearly define when and where the tax obligation arises. Doubts arise when a Polish entrepreneur who is an active VAT payer provides a service to an EU taxpayer who benefits from the exemption from value added tax. In today's article, we will present the tax consequences of such a transaction.

Entities exempt from VAT

The Act on Value Added Tax provides for two types of VAT exemption. It is a subjective exemption (Article 43 of the Act), which is due due to the type of activities performed, and a subjective exemption (Article 113 of the Act) for taxpayers whose turnover did not exceed the limit of PLN 200,000.

As is commonly known, the Polish Act on Value Added Tax is based on the EU Council Directive 2006/112 / EC on VAT. This act is valid throughout the European Union and all member states were obliged to adjust their laws to EU regulations. As a consequence, various types of VAT exemptions may also occur in other countries. Therefore, the question arises how to determine the place of benefit for non-VAT payers from the EU and how to properly account for the tax due.

Basic rules for determining the place of service provision

The tax obligation in VAT arises in the country where, according to the regulations, we are dealing with the place of supply of services. In this regard, we can distinguish two basic rules.

The first of them is regulated in Art. 28b of the VAT Act. In the light of this standard, the place of supply of services in the case of provision of services to the taxpayer is the place where the taxpayer who is the recipient of the service has his registered office. Next, the content of Art. 28c of the Act, which states that the place of providing services to non-taxable entities is the place where the service provider has his registered office.

The presented provisions show that the criterion for determining the place of supply depends on the status of the recipient. If the person to whom we provide services is a taxpayer, the place of taxation of such an activity is the country of that taxpayer. If there is a service provided to an EU taxpayer who benefits from VAT exemption, the tax on such sales is payable in the country of the entrepreneur's seat.

Example 1.

The Polish taxpayer provides legal services to the German taxpayer. Taking into account the fact that the customer is a VAT payer, the output tax will be settled in the customer's country, i.e. in Germany.

Example 2.

A taxpayer from Poland provides legal services to a natural person who does not conduct business activity and lives in France. Taking into account the fact that the customer is not a VAT payer, the output tax will be settled in the country of the service provider, i.e. in France.

The service is provided to an EU taxpayer exempt from VAT

We have learned two basic ways of determining the place of performance. Next, it is necessary to consider which group should be assigned to taxpayers from other countries that benefit from VAT exemption.

The answer to this question can be found in Art. 28a of the VAT Act. This provision introduces an autonomous definition of a taxpayer solely for the purposes of applying and interpreting the provisions of the chapter on the place of supply of services. The aforementioned article indicates that whenever a taxpayer is mentioned, it means:

• entities that independently conduct the economic activity referred to in art. 15 sec. 2, or economic activity corresponding to this activity, regardless of the purpose or result of such activity,
• a non-taxable legal person pursuant to point (a) and, which is identified or required to be identified for the purposes of tax or value added tax;
• a taxpayer who also conducts business or conducts transactions that are not considered taxable supplies of goods or services in accordance with art. 5 sec. 1, shall be considered a taxable person in respect of all services provided to him.

Start a free 30-day trial period with no strings attached! As a consequence, under the provisions of value added tax, entrepreneurs from other EU countries who have non-VAT status due to the exemption, are considered taxpayers. As a result, such entities are subject to Art. 28b of the VAT Act.

The above was confirmed by the Director of the Tax Chamber in Łódź in the individual ruling of May 29, 2016, file ref. 1061-IPTPP2.4512.102.2016.2.KW:

However, according to Art. 28b, the place of supply of services in the case of the supply of services to the taxpayer is the place where the taxpayer who is the recipient of the service has his registered office, permanent place of business, or permanent residence or habitual residence. Therefore, the provision of services for taxpayers from the European Union, and not registered for VAT purposes, is not subject to taxation in Poland, but the buyer of the service is obliged to settle the tax. Therefore, this transaction should be shown in the VAT-7 declaration under the item The supply of goods and the provision of services outside the territory of the country, including the provision of services referred to in art. 100 sec. 1 point 4 of the Act, and should not be included in the VAT-UE summary information due to the lack of the NIP number.

Summarizing the above, the service provided to the EU taxpayer exempt from VAT will be taxed in the country of the service recipient's seat. As a result, the Polish taxpayer will issue an invoice for the recipient with the reverse charge, while the foreign non-VAT payer will import services. As a result, the rules of taxation and invoicing are identical, regardless of whether the service is provided to an active VAT taxpayer or to a VAT-exempt taxpayer established in another EU country.