ECJ judgments

The ECJ has ruled on the VAT consequences of the indemnity paid on expropriation

C‑182/23. – Makowit | It is decisive in the VAT treatment of indemnity paid on expropriation whether the property was utilised for business purposes.

The plaintiff in this case is J. S. who has carried out breeding of dairy cattle and purchased meadows from non-taxable persons to expand his farm. For the purpose of a state road construction project, the Polish authorities expropriated some parts of the plaintiff’s land for which compensation was paid. J. S. filed an application to the tax authority for a tax ruling to establish that the indemnity paid for the expropriation is not subject to VAT.

The tax authority disagreed with the plaintiff’s position claiming that J. S. was acting as a taxable person when transferred the ownership of his land parcels to the state treasury. The case was brought before the local administrative court and continued before the Supreme Administrative Court which referred the case for a preliminary ruling to the European Court of Justice. In its judgement C-182/23., the Court held that the expropriation of the property for compensation constitutes supply of goods under the VAT Directive.

In order for this transaction to be subject to VAT, three cumulative conditions must be satisfied; there has to be a transfer of a right to ownership, that transfer has to be made by an official decision of an authority or in pursuance of the law, and a compensation must be paid in return for the expropriation. The ECJ stressed that the person transferring the property to the authorities must act as a taxable person, otherwise the compensation will not be subject to VAT. In this regard, it is not relevant whether the owner of the land is engaged in the sales of immovable property or took steps to sell the parcels but is it decisive whether the property forms part of business assets. Therefore, if J. S. utilised the parcels subject to expropriation for the purposes of his agricultural activity, the compensation paid with respect to the expropriation is subject to VAT.

Full English text of the judgement

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