Businesses often incur their first expenses before formally registering as active VAT taxpayers. This applies both to domestic entities starting their business activities and to foreign businesses preparing to carry out sales, investments or other activities in Poland.
Failure to register does not always result from overlooking the registration requirement itself. It may also be caused by a lack of awareness, an incorrect interpretation of the regulations or an incorrect assessment of the transaction model. In particular, in the case of cross-border activities, a taxpayer may initially assume that a transaction is not subject to VAT in Poland, that VAT should be accounted for by the counterparty or that the reverse charge mechanism applies.
Only a subsequent analysis, an internal review of tax settlements or a change in the way the business is conducted may reveal that the place of taxation of the transaction was in fact Poland and that the foreign supplier or purchaser should have registered here as an active VAT taxpayer.
In such cases, the registration requirement may be identified only after many months or, in some cases, even years. The taxpayer must then regularise its historical VAT settlements. This involves not only reporting output VAT on previous transactions, but also determining whether, and in what manner, VAT incurred on purchases made before registration may be deducted.
As a general rule, VAT shown on such invoices may also be deducted after registration. Registration itself does not create the right to deduct VAT. The decisive factors are whether the purchases were made by the taxpayer and whether they were intended to be used for taxable activities. Registration remains a formal condition for exercising that right.
Where the period for making a current deduction has already expired, input VAT should generally not be reported in the current JPK_V7 file. It may be necessary to submit or correct the VAT settlement for the relevant historical period.
Registration does not create the right to deduct VAT
Under Article 86(1) of the Polish VAT Act, a taxpayer may deduct input VAT to the extent that the goods and services purchased are used to carry out taxable activities.
The intended use of the purchases is therefore of primary importance. Where a business purchases goods or services with the intention of using them for taxable activities, the right to deduct VAT may arise even before formal VAT registration.
At the same time, Article 88(4) of the Polish VAT Act provides that the deduction does not apply to taxpayers who are not registered as active VAT taxpayers. However, this provision concerns the exercise of the right to deduct rather than the moment when that right arises. A taxpayer may therefore acquire the right to deduct VAT before registration, but should be registered no later than when it exercises that right by submitting the relevant JPK_V7 file.
This approach is consistent with the principle of VAT neutrality and the case law of the Court of Justice of the European Union.
In Case C-385/09 Nidera, the Court held that a taxpayer could not be deprived of the right to deduct VAT solely because it had not yet been formally registered for VAT when it made the purchases and carried out taxable transactions. A similar position follows from the judgment in Case C-280/10 Polski Trawertyn. The Court accepted that VAT on investment costs incurred by future shareholders before the company was incorporated and registered could be deducted where the expenses were incurred for the purpose of the company carrying out an economic activity.
What conditions must be met?
The deduction of VAT on purchases made before registration requires, first of all, evidence that there was a genuine intention to carry out taxable activities at the time the expenses were incurred.
The absence of sales during the period in which the expenses were incurred does not preclude the right to deduct VAT. For VAT purposes, an economic activity may also include preparatory activities, provided that the intention to commence the activity is genuine and appropriately documented.
The invoice should document a transaction that was actually carried out and should identify the correct purchaser. None of the circumstances excluding the right to deduct VAT under Article 88 of the Polish VAT Act may apply. These may concern, for example, transactions that were not actually carried out, were exempt from VAT or fell outside the scope of VAT.
In which period may VAT be deducted?
The right to deduct VAT generally arises in the period in which the VAT obligation arose for the supplier in relation to the relevant purchase, but not earlier than the period in which the invoice was received.
A taxpayer settling VAT on a monthly basis may deduct VAT:
- in the period in which the right to deduct arose, or
- in one of the following three settlement periods.
A taxpayer settling VAT on a quarterly basis may make the deduction in the period in which the right arose or in one of the following two settlement periods.
If these deadlines have expired, the right to deduct VAT does not automatically lapse. The taxpayer may make the deduction by correcting the VAT return for:
- the period in which the right to deduct arose, or
- one of the following three months or, in the case of quarterly settlements, one of the following two quarters.
The correction may be made no later than within five years, calculated from the beginning of the year in which the right to deduct arose.
Where the deadline for a current deduction has expired
Where several months or a longer period have elapsed since the invoice was received, the statutory deadlines for making a current deduction may already have expired.
In that case, the taxpayer should not report the invoice as a current purchase, for example in the JPK_V7 file submitted after registration. Input VAT should be reported in the historical settlement for the period in which the right to deduct arose or in one of the subsequent periods specified in Article 86(13) of the Polish VAT Act.
If JPK_V7 files were not previously submitted for those periods, it may be necessary to submit historical files. If the settlements have already been submitted, they should be corrected.
Deduction of VAT by a foreign entity
The rules governing the deduction of VAT on purchases made before registration also apply to foreign businesses.
A foreign entity may become a VAT taxpayer in Poland even if it does not have a registered office or a fixed establishment in Poland. The decisive factor is the nature of the activities carried out in Poland.
Where a foreign business carries out activities in Poland that give rise to a registration requirement, it may, after registration, deduct VAT on earlier purchases connected with those activities. However, it must demonstrate that the purchases were intended from the outset for activities giving rise to the right to deduct VAT.
A situation in which a foreign entity commenced sales in Poland before registering requires particular analysis. In such a case, the registration and historical settlements should cover not only purchases, but also output VAT on taxable activities carried out before registration.
Registration in Poland or the foreign VAT refund procedure?
Not every foreign business that receives an invoice with Polish VAT should register in Poland solely to recover the tax.
Where a foreign entity does not have a registered office or a fixed establishment in Poland from which transactions were carried out and does not make sales in Poland, it may be able to recover VAT under the special refund procedure for foreign entities.
An entity established in another European Union Member State submits an electronic application through the tax administration of the country in which it is established under the VAT-REF procedure. The conditions include, among others, having VAT taxpayer status in the country of establishment and not carrying out sales in Poland, subject to the exceptions specified in the regulations.
The refund application must be submitted no later than 30 September of the year following the year to which it relates.
In the case of entities established outside the European Union, the possibility of obtaining a refund of Polish VAT is generally conditional upon compliance with the reciprocity principle.
The appropriate method of recovering VAT therefore depends on the circumstances of the foreign business:
- where it carries out activities in Poland that require registration, input VAT is generally accounted for in the JPK_V7 file;
- where it does not carry out sales in Poland and meets the conditions of the refund procedure, a foreign VAT refund application may be the appropriate solution;
- where the foreign entity carried out sales in Poland without the required registration, it may be necessary to regularise its historical VAT settlements.
The mere possession of an invoice containing Polish VAT does not therefore automatically mean that the foreign business should register in Poland.
Example – delayed registration of a foreign company
A German company began distributing goods from a warehouse located in Poland. In June, it incurred preparatory costs of PLN 100,000 net plus PLN 23,000 VAT, and it made its first domestic sale in August. However, it submitted its VAT-R registration form only in the following year.
Since the purchases were intended from the outset for taxable sales in Poland, the company may, in principle, deduct PLN 23,000 of input VAT. However, it should not report this amount as a current purchase after registration. Instead, it should report the VAT in the historical JPK_V7 file for June or one of the following three months, namely July, August or September.
At the same time, the company should account for output VAT on sales made from August onwards. The foreign VAT refund procedure would not be appropriate in this case because the company carried out domestic sales in Poland.
What does KSeF change?
KSeF, the Polish National e-Invoicing System, does not change the substantive principle under which VAT on purchases made before registration may be deducted. However, it affects the determination of when an invoice is received and how it is made available to the purchaser.
In the case of a Polish purchaser, a structured invoice is generally deemed to have been received on the date on which it is assigned a KSeF number. Logging into the system, downloading the document or forwarding it to the accounting department at a later date does not postpone the date of receipt.
Different rules may apply to foreign entities.
Where the purchaser does not have a registered office or a fixed establishment in Poland, or where its Polish fixed establishment does not participate in the purchase, the invoice is made available in a manner agreed with the supplier, for example as an electronic file. In such a case, the date of receipt is generally the date on which the foreign purchaser actually receives the invoice rather than the date on which the KSeF number is assigned.
The obligation of foreign entities to issue invoices through KSeF also does not depend solely on whether they are registered for VAT in Poland. A foreign entity is not required to issue invoices through KSeF if it does not have a registered office or a fixed establishment in Poland. The exclusion may also apply where the entity has a fixed establishment in Poland but that establishment does not participate in the specific transaction.
The mere possession of a Polish VAT number does not therefore mean that a foreign business must issue and receive all invoices exclusively through KSeF.
KSeF is also not used to report purchase invoices issued by foreign suppliers under the regulations of other countries.
Key conclusions
- VAT on purchases made before registration may be deducted if the purchases were connected from the outset with planned taxable activities and the other substantive conditions for deduction are met.
- This rule applies both to domestic taxpayers and to foreign entities registering for VAT purposes in Poland.
- Registration as an active VAT taxpayer should take place before the right to deduct is exercised. However, the fact that registration occurred after the purchase should not automatically deprive the taxpayer of the right to recover VAT.
- Where the deadlines for a current deduction have expired, the invoice should not be reported in the current JPK_V7 file. It is necessary to submit or correct the settlement for the appropriate historical period.
- In the case of foreign entities, it should additionally be determined whether VAT should be recovered through the Polish JPK_V7 settlement or under the special refund procedure for entities not established in Poland.
- KSeF does not change the scope of the right to deduct VAT, but it is relevant for determining the date on which an invoice is received. In the case of foreign purchasers, that date may depend on the actual delivery of the invoice outside KSeF rather than on the date on which the invoice is assigned a KSeF number.
Mikołaj Ratajczak
Partner
