Closing down a business is a complex process that needs particular care when it comes to VAT. Business owners who are winding up a company must remember the obligation to carry out a physical stocktaking (spis z natury) and to pay VAT under the closing stocktaking rules (remanent likwidacyjny). Expenditure on fixed assets owned by someone else can be especially problematic, as it does not always follow the standard rules of taxation on closure.
Adjusting VAT on investments in third-party fixed assets when a business closes is one of the more complicated areas of tax law. Business owners are often unaware that they need to make the relevant adjustments, which can lead to problems with the tax authorities. A proper understanding of the closing stocktaking rules and of the rules for adjusting input VAT is key to closing a business correctly.
Legal basis of the closing stocktaking
The closing stocktaking is a special form of VAT taxation that applies when a business stops operating. Under the VAT Act (ustawa o VAT), taxpayers must charge VAT on the goods held by the business on the closure date. The purpose of this mechanism is to ensure that VAT is paid on all assets for which input VAT was previously deducted.
Article 14(1) of the VAT Act provides that goods of own production and goods which, after purchase, were not the subject of a supply of goods are subject to VAT. This applies to the dissolution of a civil-law partnership or a commercial partnership without legal personality (point 1) and to a taxpayer who is a natural person ceasing to perform taxable activities and being obliged to notify the head of the tax office (urząd skarbowy) of the closure (point 2)
The key condition for applying the closing stocktaking rules is that the right to deduct VAT on the assets concerned was previously available. Article 14(4) of the VAT Act states clearly that these rules apply only to goods in respect of which the taxpayer was entitled to reduce output VAT by input VAT. This means that assets whose purchase did not give a right to deduct VAT are not taxed under the closing stocktaking.
Preparing the physical stocktaking is an essential part of closing a business. Taxpayers must draw up an accurate list of all goods held by the business on the date the partnership is dissolved or taxable activities cease. The list must contain detailed information on the value of each asset and a calculation of the output VAT due.
The tax point for the closing stocktaking arises on the day the partnership is dissolved or taxable activities cease. The taxable amount is the value of the goods covered by the stocktaking, i.e. their purchase price (or, if there is none, their production cost) determined on the closure date (Article 14(8) in conjunction with Article 29a(2)). Information on the stocktaking, the value of the goods and the output VAT must be filed no later than on the day you file the VAT return for the period that includes the closure date (Article 14(5))
The closing stocktaking covers all goods within the meaning of the VAT Act, i.e. things and their parts, as well as all forms of energy. In practice this means that fixed assets as well as trading goods, materials, raw materials and finished products are taxed. The condition, however, is that the right to deduct VAT was available when they were purchased or produced.
Definition and features of investments in third-party fixed assets
Investments in third-party fixed assets are a special category of expenditure that needs separate treatment under the VAT rules. Although the VAT Act does not define this concept expressis verbis, in business practice and case law they are understood as expenditure incurred by a taxpayer on fixed assets they do not own. This can include work aimed at improving a third-party fixed asset by rebuilding, extending, reconstructing, adapting or modernising it.
A classic example of an investment in a third-party fixed asset is the fit-out of rented commercial premises for the needs of the business. A business owner who rents office or retail space often has to spend considerable amounts adapting it to the specific needs of their industry. This may include construction, installation and finishing work, or fitting specialist equipment permanently attached to the property.
Investments in third-party fixed assets are characterised by the fact that they increase the usable or functional value of a fixed asset belonging to another person. This expenditure is capitalised in the accounting books as a separate non-current asset, depreciated over its useful economic life or over the term of the lease
An important feature of investments in third-party fixed assets is their lasting nature and their link with the business. The expenditure must serve the taxpayer's business purposes and be used to generate revenue subject to VAT. In premises rented for business purposes, these investments often include electrical and plumbing installations, air-conditioning systems, lighting or specialist finishes.
The distinction between an investment in a third-party fixed asset and the fixed asset itself is fundamental for applying the tax rules correctly. The investment is a separate asset with its own depreciation and VAT adjustment rules. Expenditure on fitting out rented premises cannot be equated with the property itself, as these are different legal and accounting categories.
The practical importance of this distinction is particularly clear in the context of VAT adjustment periods. While the adjustment period for real estate is 10 years, the standard 5-year adjustment period applies to investments in third-party fixed assets. This distinction is crucial when calculating any adjustments of input VAT if the use of a given asset changes.
Taxation rules under the closing stocktaking
The closing stocktaking mechanism rests on the fundamental principle that only goods within the meaning of the VAT Act are taxed. The definition of goods in Article 2(6) of the Act covers things and their parts, as well as all forms of energy. This seemingly broad definition has its limits, however, and these are crucial for the treatment of investments in third-party fixed assets.
Expenditure on investments in third-party fixed assets does not meet the statutory definition of goods, which means that its value is not taxed under the closing stocktaking. In individual tax rulings (KIS), the tax authorities state that expenditure incurred on someone else's property is not, in itself, goods, so it is not included in the physical stocktaking prepared under Article 14 of the VAT Act.
In the tax authorities' rulings it is accepted that expenditure on investments in third-party fixed assets does not constitute goods within the meaning of the VAT rules. As a result, the value of this expenditure is, as a rule, not included in the physical stocktaking prepared for the closing stocktaking. The assessment does, however, depend on the facts, so if in doubt it is worth applying for an individual tax ruling
The practical consequences of this position are very significant for business owners closing their businesses. Even substantial expenditure on fitting out rented premises, modernising someone else's property or other investments in third-party fixed assets does not increase the taxable amount under the closing stocktaking. The business owner therefore does not have to pay VAT on the value of these investments when closing the business.
It should be stressed, however, that leaving this expenditure out of the stocktaking does not mean there are no tax consequences at all. Closing a business changes the purpose for which assets are used, which may trigger an obligation to adjust input VAT deducted earlier. This aspect requires particular attention and correct settlement under the VAT adjustment rules.
The different treatment of individual assets on closure results from the different legal nature of goods and of investments in third-party fixed assets. Goods are assets that can be traded, whereas investments in third-party fixed assets are expenditure on someone else's property that cannot be sold or transferred on its own.
Input VAT adjustment mechanisms
Although investments in third-party fixed assets are not taxed under the closing stocktaking, closing a business may trigger an obligation to adjust input VAT deducted earlier. The legal basis for this mechanism is Article 91 of the VAT Act, which sets out the rules for adjusting input VAT when the use of assets changes.
Article 91(2) of the VAT Act lays down special adjustment rules for goods and services classified as depreciable fixed assets and intangible assets. For assets with an initial value exceeding PLN 15,000, input VAT is adjusted over 5 consecutive years from the year they were put into use. For real estate and rights of perpetual usufruct of land, this period is 10 years.
The distinction between investments in third-party fixed assets and the real estate itself is crucial for VAT adjustment periods. Investments in third-party fixed assets are separate assets to which the standard 5-year adjustment period applies. They cannot be equated with real estate, which is subject to a 10-year adjustment period
This position was confirmed in the judgment of the NSA (Supreme Administrative Court) of 13 December 2016, case no. I FSK 255/15, in which the court held that an investment in a third-party fixed asset consisting of the adaptation of a building is a fixed asset separate from the building. Consequently, the input VAT adjustment relating to such an asset should be made over a 5-year period under Article 91(2) of the VAT Act.
The adjustment mechanism is triggered when the use of an asset changes compared with the original purpose for which input VAT was deducted. Closing a business is a classic example of such a change, because the assets are no longer used in VAT-taxable activities.
Under Article 91(7) of the VAT Act, the adjustment rules apply accordingly where the taxpayer was entitled to reduce output VAT by the full amount of input VAT and did so, and the right to deduct VAT on that good or service subsequently changed. For fixed assets (including investments in third-party fixed assets) with an initial value exceeding PLN 15,000, this adjustment is settled under the rules of Article 91(2) and (3) (Article 91(7a)).
Calculating the adjustment in practice
Calculating the input VAT adjustment on investments in third-party fixed assets when closing a business requires several key elements to be taken into account. The calculation is based on the original amount of VAT deducted, the time that has passed since the investment was put into use, and the remaining adjustment period under the Act.
For investments in third-party fixed assets, a 5-year adjustment period applies, which means that each year represents 1/5 of the total period. If the business closes before the full adjustment period has ended, the taxpayer must repay part of the VAT deducted earlier in proportion to the remaining adjustment period.
The input VAT adjustment on closing a business is made once, for the entire remaining adjustment period. The calculation is the ratio of the number of remaining years to the total adjustment period, multiplied by the VAT originally deducted. When the business ends, the adjustment is made in the VAT return for the last settlement period (Article 91(3))
A practical example shows how the adjustment works. A general partnership (spółka jawna) that in January 2021 spent PLN 30,000 net (plus 23% VAT) on fitting out rented premises was wound up in January 2023. This means that 2 years of the 5-year adjustment period had passed since the investment was put into use, leaving 3 years.
The adjustment in this case is calculated as follows:
- VAT originally deducted: PLN 30,000 × 23% = PLN 6,900
- Remaining adjustment period: 3 years out of 5 years = 3/5
- Adjustment to be repaid: PLN 6,900 × 3/5 = PLN 4,140
| Calculation item | Value | Legal basis | Notes |
|---|---|---|---|
| Net value of the investment | PLN 30,000 | Source documents | Fit-out of the premises |
| VAT deducted | PLN 6,900 | VAT returns | 23% of the net value |
| Period of use | 2 years | Facts | From January 2021 to January 2023 |
| Remaining adjustment period | 3 years | Article 91(2) | 5 years minus 2 years of use |
| Adjustment amount | PLN 4,140 | 3/5 ratio | Repaid in the VAT return |
It is important that the adjustment is made in the VAT return for the last settlement period, i.e. the period in which the business was closed (Article 91(3) of the VAT Act). The adjustment cannot be spread over later periods, because the taxpayer stops carrying on VAT-taxable activities. The adjustment is one-off and covers the whole remaining adjustment period. For clients who use our accounting services, we also settle the final returns and VAT adjustments when they close their business.
Procedures and documentation requirements
Properly documenting the closure of a business for VAT purposes requires particular care and compliance with set procedures. Taxpayers must remember a number of formal obligations that are crucial for correctly settling both the closing stocktaking and any input VAT adjustments.
The basic obligation is to carry out a physical stocktaking of all goods held by the business on the closure date. The stocktaking must be detailed and contain accurate information on the type, quantity and value of each asset. Investments in third-party fixed assets, which are not taxed under the closing stocktaking, should be clearly separated, and the reasons for excluding them from taxation should be documented.
The closure documentation must clearly distinguish between assets covered by the closing stocktaking and investments in third-party fixed assets. A separate record of expenditure on third-party fixed assets must be prepared, together with a calculation of any input VAT adjustments. All documents must be kept in line with the rules on tax records
Particular attention should be paid to calculating input VAT adjustments on investments in third-party fixed assets. The documentation should include:
- A list of all investments in third-party fixed assets with the dates they were put into use
- A calculation of the VAT originally deducted on each investment
- A calculation of the remaining adjustment period for each asset
- A detailed calculation of the adjustment amounts to be repaid
- A justification of the VAT rates and adjustment periods applied
The documentation process should also include preparing appropriate explanations and justifications for the tax authorities. In a tax audit, the taxpayer must be able to show that they classified individual assets correctly and applied the relevant rules on the closing stocktaking and VAT adjustment.
A trading company operated in rented premises for 3 years and spent considerable amounts fitting them out. When the company was wound up, its accountants correctly identified this expenditure as investments in a third-party fixed asset and excluded it from the closing stocktaking, but took into account the need to adjust VAT for the remaining 2 years of the adjustment period. Thanks to proper documentation, they avoided problems during the tax audit.
The deadlines for filing documents and VAT returns connected with closing a business are strictly set by law. Information on the physical stocktaking, the value of the goods and the output VAT must be filed no later than on the day you file the VAT return for the period in which the business was closed (Article 14(5) of the VAT Act). Input VAT adjustments on investments in third-party fixed assets are settled in the VAT return for the last settlement period (Article 91(3)).
Case law and tax rulings
The adjustment of VAT on investments in third-party fixed assets on closure of a business has been the subject of numerous administrative court judgments and tax rulings. Analysing this case law gives a better understanding of how the rules are applied in practice and helps identify the most common interpretation problems.
Of key importance is the NSA judgment of 13 December 2016 (I FSK 255/15) mentioned above, in which the court clearly held that investments in third-party fixed assets are separate assets subject to a 5-year VAT adjustment period. The judgment settled the dispute over the correct adjustment period and confirmed that investments cannot be equated with real estate.
Administrative court case law confirms that, for VAT purposes, investments in third-party fixed assets are separate from the real estate itself. This position is fundamental for determining the correct adjustment periods and for calculating any tax liabilities on closure of a business
Individual tax rulings are another important element of interpretation. In them, the tax authorities state that expenditure on someone else's property is not goods and is therefore not taxed under the closing stocktaking – although the outcome always depends on the facts described.
Tax authority practice points to several of the most common interpretation problems:
- Correctly classifying expenditure as an investment in a third-party fixed asset
- Distinguishing between investments and ordinary running costs
- Establishing when the investment was put into use
- Calculating the adjustment ratio where the asset is used partly for mixed activities
- Documenting the link between the investment and VAT-taxable activities
An analysis of individual rulings shows that the tax authorities consistently apply a literal interpretation of the rules, focusing on whether the formal conditions set out in the VAT Act are met. They pay particular attention to proper documentation of the nature of the expenditure and its link with the taxpayer's business.
Practical tips and best practice
Preparing properly for closing a business from a VAT perspective requires a systematic approach and planning ahead. Business owners should start preparing well in advance to avoid mistakes and problems with the tax authorities.
The first step should be a complete inventory of all assets, clearly distinguishing between goods covered by the stocktaking and investments in third-party fixed assets. This categorisation is crucial for calculating tax liabilities correctly and avoiding errors in VAT returns.
Managing the closure effectively requires a detailed record of all investments in third-party fixed assets to be prepared in advance, documenting the dates they were put into use and the amounts of VAT deducted. This allows the adjustments to be calculated precisely and costly errors in tax settlements to be avoided
The key preparatory steps include:
- Reviewing all fixed assets
- Identifying investments in third-party fixed assets
- Checking the documentation on VAT deduction
- Calculating the adjustment periods for individual assets
- Preparing draft input VAT adjustments
- Consulting tax advisers on disputed issues
Particular attention should be paid to documentation supporting the classification of individual items of expenditure as investments in third-party fixed assets. The documents should clearly show the lasting nature of the expenditure, its link with the third-party fixed asset and its use in the taxpayer's business.
Managing the closure in practice should also include the option of applying for a tax ruling if there are doubts about the classification of individual assets. Although this procedure makes the closure take longer, it can prevent costly disputes with the tax authorities.
An IT company rented an office for 4 years, investing PLN 150,000 in specialist cabling and air-conditioning systems. Before closing the business, it carried out a detailed legal analysis confirming that this expenditure was an investment in a third-party fixed asset. This allowed it to settle the VAT adjustment correctly and avoid including this amount in the closing stocktaking.
Monitoring changes in legislation and case law is an important part of managing the closure properly. Tax law changes frequently, and the interpretation of the rules evolves as case law develops. Business owners should follow these changes on an ongoing basis or use the help of professional tax advisers.
