Upon termination of a lease, it is necessary to reach an agreement regarding the settlement of the lessee's expenditures on the leased property. The lessee may either dispose of the improvements or retain them for a fee. Does retaining the improvements by the lessor have any VAT consequences?
VAT applies to the provision of services and the supply of goods. A supply of goods is the transfer of the right to dispose of goods as an owner. A supply of services, on the other hand, is any performance that is not a supply of goods. Therefore, is the lessor's retention of a building erected by a lessee a supply of goods or a supply of services? This has significant implications for VAT. If it is a supply of services, the payment made to the lessee will be subject to VAT. However, if it is a supply of goods, then (subject to statutory conditions) VAT exemptions may apply.
According to Article 48 of the Civil Code, a building is a component of the land. The lessor, as the owner of the land, is therefore also the owner of the building. Therefore, the right to dispose of the goods as an owner cannot be transferred, as the entity to which the transfer would be made is already the owner. In such a case, it would constitute a service, which would mean mandatory VAT. This position has also been expressed by the Director of the National Tax Information Service in published interpretations, including:
– 0115-KDST2-2.4012.10.2019.1.ACE of December 6, 2019, or
– 0111-KDIB3-1.4012.809.2023.2.AB of January 8, 2024.
This position, however, is incorrect. According to the judgment of the Supreme Administrative Court of September 27, 2024, file reference I FSK 95/21: "If the lessor decides, after the lease ends, to retain the improvements in exchange for paying the former lessee for the improvements left on the leased property, and such improvements fall within the definition of goods within the meaning of Article 2 item 6 of the VAT Act – which is undoubtedly the case in the case of a building – we are dealing with a supply of goods under Article 7 paragraph 1 of the VAT Act." The Court noted that the phrase "disposing of goods as an owner" used in the VAT Act is not the same as ownership rights under civil law. What matters for disposing of goods as an owner is not the legal aspect, but the factual and economic aspect. Since the lessee incurred the costs of constructing the building and used it during the lease period, this means that they disposed of it as an owner. Upon termination of the lease, this right may be transferred to the lessor, which will constitute a delivery of goods.
This position is also confirmed by the case law of the Court of Justice of the European Union. In Case C-320/88, the Court found that the term "supply of goods" within the meaning of Article 5(1) of the Sixth Directive (now Article 14(1) of Directive 112) also means a transfer of the right to dispose of goods as an owner, even if there is no legal transfer of ownership. In its judgment of 21 March 2007 in Case C-111/05, the Court confirmed that the concept of "supply of goods" is not directly linked to the right of ownership.
In summary, a tenant's abandonment of buildings constructed on leased land will constitute a supply of goods. This means that a tax exemption for the supply of buildings is possible if the conditions specified in the VAT Act are met.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of October 18, 2025.
Author/Editor of the series:
