VAT Group

Starting from 1 July 2022, a new facility will be introduced to the Polish VAT system, i.e. VAT grouping. This mechanism will streamline VAT settlements and reduce administrative burdens between related parties from different industries. In many cases, VAT groups will improve financial liquidity.

What is a VAT group?

A VAT group is in fact a legal fiction for VAT purposes, in which the economic element is of major importance rather than the legal form. Eligible entities forming a VAT group remain legally separate but are treated as a single taxable entity for VAT purposes.

Who can form a VAT group?

VAT group treatment is an arrangement that allows corporate bodies to account for VAT as a single taxable entity. A VAT group may be created by Polish tax residents and non-residents that operate in Poland thorough a Polish branch. The composition of a VAT group may be freely changed by, for example, adding several entities from a single capital group. Members of a VAT group retain their separate legal and tax identity other than for VAT purposes.

The legal provisions do not provide for any industrial restrictions for creating a VAT group. Nevertheless, it seems that VAT grouping may be specifically favourable for financial, insurance or healthcare industries, as they are not entitled to deduct VAT.

Assumptions for VAT grouping

1. Members of a VAT group cease to be an independent taxable entity separately identified for VAT purposes.
2. Bodies corporate forming a VAT group act as a single taxable entity in transactions with clients from outside the group and before tax authorities.
3. Supplies of goods and services among members of a VAT group are not subject to VAT, whereas taxable transactions made by any VAT group member to entities from outside the group are treated as made by the VAT group.
4. A VAT group has a single VAT identification number.

What are the advantages and disadvantages of VAT grouping?

Being a member of a VAT group can confer many advantages in terms of VAT settlements. This can clearly be seen in the situation where one taxpayer in a VAT group pays large amounts of output tax, whereas others have an excess of input over output tax and are entitled to a refund. Being in a VAT group, members may make consolidated settlements whereby they settle VAT quickly and efficiently.

In addition, as has already been mentioned, members of a VAT group do not exchange invoices for the supply of goods or services, since such transactions are not subject to VAT.

The joint and several liability of VAT group members for VAT liabilities seems to be a major drawback of this solution. The liability lasts for certain limitation periods after the loss of the status of a single taxable entity by the VAT group.

What links the members of the group?

Pursuant to Article 11 of the EU VAT Directive, members of a VAT group must be closely bound to one another by:

• economic,
• financial and
• organisational links.

The Member States have a different approach to these requirements and interpret the importance of these links in a different manner.

What’s next?

To address the question of whether it is the best solution for a given group of companies, it is necessary to examine the specific nature of their activities, links, transactions and other legal issues involving accounting for VAT as a single (group) taxable entity.