We review preliminary VAT apportionment, investment settlements and VAT adjustments for local government units and their organisational units.
Local government investment combines public responsibilities with different uses of assets. We review VAT accounting, preliminary apportionment and the scope for input tax deduction, organise documentation and help prepare adjustments and responses to the tax authority.
Tax advice for local government
A preliminary VAT apportionment ratio is calculated once using the formula in the regulation, then repeated every year. Investment in a water network, community centre or sports hall is accounted for without checking how the facility is actually used. This approach is still found in local government, although the rules allow more than one route.
We start by asking whether the ratio originally adopted still reflects how the assets are used. If it does, we say so clearly and do not propose further work.
When to recalculate
Ideally before an investment begins, because the method then shapes the treatment from the first invoice. Later, an adjustment remains possible, but requires more substantiation.
- the preliminary apportionment ratio follows the regulatory formula and no one has checked whether another method would be more representative
- the authority is undertaking an investment that will serve both its statutory tasks and activities for consideration
- the municipality has organisational units with very different activities, but a single ratio is used
- there is a question whether an activity is economic activity or an exercise of public authority
- a local government cultural institution or municipal company accounts for VAT without specialist support
- you plan to correct earlier years’ VAT settlements and need to substantiate the method
- the tax authority has challenged the deduction method adopted
Using one method without examining the characteristics of the units and investments may understate or overstate the deduction. It is worth starting by comparing the adopted method with the actual use of assets.
Preliminary VAT apportionment: the regulation is not the only answer
Deduction rules for purchases used both for economic and other activities follow from Article 86(2a)–(2h) of the VAT Act. The method for determining the ratio should best reflect the nature of the taxpayer’s activities and purchases.
The Regulation of the Minister of Finance of 17 December 2015 (Journal of Laws, item 2193) specifies a method for local government units, local and state cultural institutions, public universities and research institutes. Section 3 requires the ratio to be determined separately for each organisational unit.
Article 86(2h) of the VAT Act allows a different apportionment method where it is more representative of the activities and purchases concerned. For water and sewage infrastructure, this possibility is confirmed, among other authorities, by the Supreme Administrative Court’s judgment of 26 June 2018, I FSK 219/18. Selecting a method, including potentially different methods for different areas, requires assessment of the data in the particular case.
For purchases concerning water infrastructure, we check whether the deduction method reflects actual use of the network. Changing the method requires calculations, reasons and documentation.
The other side of the same rule is also worth checking. If the ratio did not exceed 2%, the unit may treat it as 0%, which can simplify rather than complicate VAT accounting for some organisational units.
Centralised VAT accounting and the boundary of economic activity
Since 1 January 2017, a local government unit and its organisational units have accounted for VAT as one taxpayer under the Act of 5 September 2016 on special rules for VAT settlements. However, the preliminary apportionment ratio is calculated separately for each unit. Confusion about this sometimes leads to a single ratio being used across an entire municipality.
Local government cultural institutions are outside centralised VAT accounting and remain separate taxpayers, even though the apportionment regulation covers them alongside local government units.
A separate question is when a unit acts as a taxpayer at all. Article 15(6) of the VAT Act excludes activities carried out as a public authority from taxation, and the boundary between public authority functions and economic activity differs for each task.
Municipal umbrella projects after the CJEU judgments
The CJEU judgments of 30 March 2023 in cases C-612/21 (Gmina O.) and C-616/21 (Gmina L.) concern renewable energy installation and asbestos removal projects. In the circumstances described, the municipality was not carrying out economic activity for VAT purposes. Each project must be compared with the criteria adopted in those judgments.
If a project falls outside economic activity, the assessment covers both output VAT on payments and grants and entitlement to deduct input VAT on purchases.
The Minister of Finance issued general tax ruling PT1.8101.1.2023 on this matter, accepting that units meeting the conditions for correcting their settlements may do so, but are not obliged to. For a particular municipality, this calls for a decision rather than an automatic adjustment, and that decision should be supported by calculations.
Adjustments and tax recovery
Deductions during the year are provisional because the preliminary ratio uses data from the preceding year. After year-end, an adjustment is made using actual data under Article 90c of the VAT Act.
Fixed assets are also subject to the multi-year adjustment under Article 91 of the VAT Act.
| Asset type | Adjustment period |
|---|---|
| Fixed assets and intangible assets worth more than PLN 15,000 | 5 years |
| Real estate and perpetual usufruct rights to land | 10 years |
| Other purchases | a one-off adjustment after year-end |
The adjustment mechanism works in both directions. The possibility of correcting earlier periods depends on the deduction rules, applicable adjustment deadlines and the limitation period for the tax liability. We calculate this separately for each investment.
Municipal companies and cultural institutions
A municipal company is generally a VAT taxpayer separate from the local government unit, but its settlements have sector-specific features: municipal subsidies and compensation, entrusted statutory tasks, assets contributed in kind and supplies to the parent authority. Each requires an assessment of whether there is consideration for a supply or a transfer outside VAT.
Cultural institutions and non-governmental organisations undertake substantial unpaid activities and receive income that is not turnover. Tickets, sponsorship, publications and grants each receive different treatment, while preliminary apportionment is sometimes applied mechanically because there is no in-house tax support.
What Tax Legal Partner’s support covers
We work with local government units, municipal companies, cultural institutions and non-governmental organisations.
- reviewing a unit’s VAT settlements, including assessment of its preliminary apportionment method
- developing a more representative method and the reasons supporting it for the tax authority
- classifying tasks as economic activity or exercises of public authority
- VAT accounting for mixed-use investments, starting at the expenditure planning stage
- VAT treatment of EU-funded projects, prepared to withstand scrutiny during the durability period as well
- annual and multi-year adjustments and corrections for earlier years
- applications for individual tax rulings where they can protect the adopted treatment within the statutory scope
- advice for municipal companies, cultural institutions and non-governmental organisations
- representation in audits, tax proceedings and before administrative courts
- training for the unit’s finance staff
If the authority challenges the method adopted, we continue handling the case through our tax audits and disputes practice.
How we work together
Review and initial assessment. We analyse the existing method, the structure of organisational units and the largest investments. At this stage, we explain whether we see scope for change and do not propose further work if there is none.
Method and substantiation. We develop the apportionment method together with supporting documentation and, where significant amounts are involved, propose protecting the position with an application for an individual tax ruling.
Implementation and defence. We introduce the method into VAT accounting, prepare adjustments and handle the case if the authority raises objections.
How to start the discussion
Tell us which unit is involved and how its preliminary VAT apportionment ratio is currently calculated. During the first discussion, we will establish whether another method is worth examining and what the scope of work would be. If you need a proposal for a public procurement procedure or a request for quotations, we will prepare it in the required format.
Michał Piegdoń handles VAT settlements for local government units, municipal companies and cultural institutions. Przemysław Szot is responsible for matters that also require defending the position before an authority or administrative court.
Frequently asked questions
No. Article 86(2h) of the VAT Act allows a different apportionment method where it is more representative of the activity concerned. Choosing a different method requires justification, which we prepare alongside the calculations.
Under appropriate conditions, yes. Case law permits selecting a method suited to a particular type of activity where it better reflects actual use of purchases. This does not, however, allow a separate allocation key for every investment simply because it produces a higher deduction. Each method must be justified by data and shown to be more representative. The preliminary ratio is also determined separately for each organisational unit.
The assessment depends on the conditions of the particular project. CJEU judgments C-612/21 and C-616/21 and general ruling PT1.8101.1.2023 require output and input VAT to be considered together. A correction may be permissible in certain situations, so we calculate both sides before a decision is made.
The possibility of correction depends on the right to deduct, the relevant adjustment periods and limitation. We calculate the ratio and substantiate a more representative method for the particular investment.
Five years for fixed assets worth more than PLN 15,000 and ten years for real estate, under Article 91 of the VAT Act. There is also the annual adjustment under Article 90c, made after year-end using actual data.
When it acts as a public authority, as excluded by Article 15(6) of the VAT Act. The assessment must refer to the specific task because the same unit can be a taxpayer in one area and outside VAT in another.
Have a question that is not covered here? Write to us. We will agree on the scope of an initial assessment.
Partner | Attorney-at-law | Licensed tax advisor
tel: +48 502 775 425