Taxable person status when a private individual sells a plot of land

Anyone taking active steps comparable to those of a trader becomes a taxable person. The Grzera judgment makes clear that a private individual may also have those steps taken by an agent.

Background

Article 9 of the VAT Directive provides that a person is a taxable person where they independently carry out an economic activity. That concept is very broad and covers all activities of producers, traders and persons supplying services. Where a person takes active steps by deploying resources comparable to those used by a producer, trader or supplier of services, for example by servicing land for development or using established marketing techniques, they become a taxable person. That follows from the 2011 judgment in Słaby and Kuć.

Taking active steps can change the VAT classification of an asset from private to business assets, so that its sale is in principle subject to 21% VAT. The test serves to distinguish supplies by a private individual (not economic) from supplies by a business (economic). Where building land is concerned, the supply is in principle subject to 21% VAT and the acquisition is exempt from transfer tax.

The Grzera judgment

E.T. and her husband W.T. became owners of plots of agricultural land in 1989. In 2011 they decided to sell and concluded an agency agreement with a third party. That third party was authorised to organise the division into smaller plots, take the steps needed to amend the land registry entries, change the designation in the local zoning plan from agricultural to building land, connect the plots to utilities, remove trees and shrubs, advertise the plots to prospective buyers and prepare the documents for the notarial deeds of sale. The plots were sold in 2017 and 2021.

The Polish tax authorities considered that there was an economic activity, because the agricultural land was converted into building land before sale and an additional plot was bought to lay internal and access roads. They also took the view that each spouse was separately liable for VAT, attributing half the sale value to each. The couple argued that this was simply the management of personal assets.

Two questions were referred to the Court of Justice of the EU:

• Does a person independently carry out an economic activity where they transfer immovable property not previously used for an economic activity and entrust the preparation of the sale to a professional, who then, as their agent, carries out a series of organised steps to divide the property and sell it at a higher price?
• Should spouses acting jointly be regarded as independently carrying out an economic activity?

The Court held that the spouses qualify as taxable persons, because the agent took active steps on their instructions and deployed resources of the kind used by a producer, trader or supplier of services.

Because the spouses bear the economic risk of the sale and the agent acted in their name and on their behalf, they can be treated as taxable persons. That the agent also runs an economic risk, namely a commission based on the sale price, does not change this: the ultimate risk of failing to sell lies with the spouses.

To determine who is the taxable person, the spouses individually or their statutory community of property, one must ask who carried out the activity independently. The test of independence concerns which specific person or entity the transaction is to be attributed to: does that person carry out the activity in their own name, on their own behalf and under their own responsibility, and do they bear the economic risk? According to the Court, the statutory community is the taxable person where the spouses made the sale together and the community bears the economic risk.

Why this matters in practice

Dutch practice applies the same active steps test. Where a private individual takes steps comparable to those of a developer or trader, they are treated as acting as a taxable person.

Grzera shows that the individual need not take those steps personally. Someone who has an agent do so also sells the building land as a taxable person. The chance that a private individual sells building land as a taxable person, and therefore owes 21% VAT, has increased as a result.

Private individuals wishing to sell private land as building land, and those advising them such as estate agents, advisers and notaries, should check carefully whether taxable person status arises. That the land falls within box 3 for income tax purposes does not mean it is also a private asset for VAT. Anyone who sold building land without VAT between 2020 and the present in the belief that they were not a taxable person because they took no active steps themselves should check whether there is a risk of an assessment.