Unjust enrichment (bezpodstawne wzbogacenie) is one of the most important concepts in Polish civil law, and it can have significant consequences for value added tax (VAT). Business owners often face the dilemma of whether amounts received as unjust enrichment are subject to VAT, and the answer is not always clear-cut. What matters is an analysis of the economic effects of the event and whether the conditions for a supply of services for consideration are met.
Supply of services for consideration as the basis for VAT
Under Article 8(1) of the VAT Act (ustawa o podatku od towarów i usług), a supply of services means any supply to a natural person, a legal person or an organisational unit without legal personality that is not a supply of goods. This definition covers a wide range of activities, including the transfer of rights to intangible assets, an obligation to refrain from an act or to tolerate certain situations, and the supply of services under an order of a public authority.
A supply of services within the meaning of the VAT Act covers any conduct for the benefit of another person, which may consist of either an act or an omission. What matters, however, is that such a supply is made for consideration, which requires a direct link between the activity performed and the remuneration received
A service should be understood as any conduct that may consist of an act or an omission. An act means doing or performing something for the benefit of another person, while an omission means refraining from doing something or tolerating a certain state of affairs. In practice, a supply may consist of both acts and omissions at the same time.
Consideration is a fundamental feature of a supply subject to VAT. It means performing an activity for remuneration, which in everyday language means payment for work, an amount due or compensation. An essential feature of remuneration is a direct link between the supply of goods or services and the payment received.
A direct link between a supply of services and the remuneration received exists where a direct and clearly individualised benefit for the service provider can be identified. The counter-performance must be directly linked to the supply made
As a rule, an activity is subject to VAT where there is a legal relationship between the parties (most often a contract) under which reciprocal performance takes place, and one party to the transaction can be regarded as the direct beneficiary of the activity. This means that not every receipt of money automatically qualifies as a supply of services for consideration subject to VAT.
The essence of unjust enrichment in civil law
The concept of a supply forming the essence of a service should be interpreted in line with its civil-law meaning. Under Article 353 § 2 of the Civil Code (Kodeks cywilny), a performance may consist of an act or an omission. A performance should therefore be understood as any conduct for the benefit of another party, which may consist of both an act and an omission.
Article 405 of the Civil Code provides that anyone who, without a legal basis, has obtained a financial benefit at the expense of another person must return the benefit in kind or, if this is not possible, repay its value. Unjust enrichment is an independent source of obligation that arises regardless of the will of the parties and is intended to restore a disturbed financial balance.
Article 405 of the Civil Code (a benefit obtained "at the expense of another person") implies that in unjust enrichment there must be such a relationship between impoverishment and enrichment that they can be regarded as two sides of the same shift of value from one estate to another
The value of unjust enrichment is limited by two amounts: the value of what has been lost from the impoverished party's estate without a legal basis, and the value of what has been added to the enriched party's estate without a legal basis. These values do not have to be equal, and if they differ, the lower amount determines the value of the unjust enrichment.
The rules on unjust enrichment should be applied where there is no other legal basis on which the financial balance disturbed without legal justification could be restored. They are also applied where other legal remedies would be considerably more difficult to pursue.
Case law on VAT on unjust enrichment
In its judgment of 20 February 1997 in case C-260/95, the Court of Justice of the European Union held that, for value added tax purposes, the economic rather than the legal effects of an event must be analysed first. The economic criterion and an analysis of the actual economic situation are fundamental to the VAT system.
In its judgment of 10 May 2011 in case I FSK 743/10, the NSA (Supreme Administrative Court) held that the repayment of the equivalent of construction work performed without a contract should be treated as a service. Even services accepted by the recipient that were not listed in the contract between the parties are subject to VAT. The classification of a transaction also determines the rate – we look at an example in our article on the VAT rate on the sale of agricultural land.
In judgment I FSK 743/10, the NSA dealt with a case where payment was received as unjust enrichment for construction work that had been carried out and retained. The company had performed the disputed construction work voluntarily as part of its business, and the resulting financial loss was compensated by the investor's obligation to repay the equivalent of the benefit received
Such circumstances allow the act of leaving the completed work with the beneficiary in return for repaying its value to the company to be classified as a service subject to VAT. The civil-law aspect of the case does not change the economic significance of such a transaction for VAT purposes.
Practical cases of VAT taxation
Analysing specific situations helps to understand when unjust enrichment is subject to VAT. The key is to establish whether a specific service with economic value was performed and whether that value is reflected in the amount repaid.
Consider a situation in which a company performing a construction contract had to carry out additional earthworks not specified in the contract but necessary to complete the project properly. In such a case, the company may bring a claim against the investor for repayment under the rules on unjust enrichment.
- Analysing the nature of the activity performed
- Establishing the economic value of the supply
- Checking whether there is a direct link with the remuneration
- Assessing whether the supply was made for consideration
- Classification for VAT purposes
There is no doubt that the company performed a specific service with a specific economic value expressed in the amount repaid as unjust enrichment. In these circumstances, it should be assumed that there is a supply of services for consideration subject to VAT
On the other hand, it is worth noting the individual tax ruling (KIS) issued by the Director of National Tax Information on 26 August 2021, no. 0114-KDIP4-3.4012.400.2021.1.KM. The authority stated that where funds are repaid as unjust enrichment because no service at all was performed against which the payment had been made, there is no supply of services for consideration.
Criteria for assessing VAT taxation
Assessing whether VAT is due requires a detailed analysis of the overall relationship between the parties. The key is to establish whether there is a specific supply and whether the amount repaid is due in return for a counter-performance in the form of specific activities.
| Criterion | VAT taxation | No VAT taxation |
|---|---|---|
| Performance of a service | Yes, the supply was made | No, there was no service at all |
| Economic value | Can be determined | Cannot be established |
| Direct link | Exists between the service and the payment | No causal link |
| Nature of the transaction | Reciprocal | Unilateral |
Where the overall relationship between the parties shows that there was no specific supply, the amount repaid is not due in return for a counter-performance. As a result, the transaction is unilateral, and the funds repaid cannot be regarded as remuneration for any service.
The repayment of the equivalent of specific work performed for consideration without a legal title can be treated as a service. Consequently, where funds repaid as unjust enrichment are the equivalent of work performed, there is consideration, which means the activity is classified as a supply of services
How to settle VAT on unjust enrichment
Business owners who have received funds as unjust enrichment should carry out a detailed analysis of their situation in terms of tax obligations. This process requires both the legal and the economic aspects of the event to be taken into account.
The first step is to establish whether any performance was made for the other party. This may be work carried out, a supply of goods, a supply of services or other activities with economic value. Next, you need to assess whether there is a direct link between the performance and the payment received.
- Analysing the nature of the performance
- Assessing the economic value of the performance
- Checking whether there is a direct causal link
- Establishing whether the performance was made for consideration
- Tax classification for VAT purposes
If the analysis shows that the conditions for a supply of services for consideration are met, the business owner will have to settle VAT in accordance with the applicable rules. This means issuing a VAT invoice and paying the output VAT to the tax office (urząd skarbowy). For the buyer, the key question then becomes the right to deduct – we discuss it using the example of PDF invoices sent by email and fax.
The absence of a legal basis for a given performance does not automatically rule out VAT on the event. What matters is the economic substance of the transaction and whether the conditions for a supply of services for consideration are met
If there are doubts about the tax classification of an event, business owners can apply for a tax ruling. This allows them to obtain the authority's position before settling the tax, and following an individual tax ruling cannot harm the applicant (Article 14k of the Tax Ordinance Act (Ordynacja podatkowa)), which reduces the risk of incorrect tax classification.
Documentation and accounting records
Properly documenting transactions involving unjust enrichment is crucial for tax and accounting purposes. Business owners must take particular care with documentation that will allow VAT to be settled correctly.
The documentation should cover all the facts relating to the claim for unjust enrichment. The nature of the performance, its economic value and the legal grounds for the repayment claim should be described in detail.
A construction company carried out additional earthworks not covered by the contract but necessary for the project. After the project was completed, it brought a claim against the investor for reimbursement of the costs as unjust enrichment. The amount received of PLN 150,000 net was treated as a supply of services for consideration subject to VAT, which required an invoice to be issued and tax of PLN 34,500 to be paid.
The accounting records should reflect the economic substance of the transaction. If the funds received are classified as a supply of services for consideration, they should be recognised as sales revenue together with the output VAT. Otherwise, the amount may be recognised as other operating income without VAT. Tax adjustments on winding up a company are covered separately in our piece on the VAT adjustment when closing a business.
Consequences of incorrect tax classification
Incorrect tax classification of transactions involving unjust enrichment can have serious financial consequences for a business owner. The tax authorities (including during a tax audit or a customs and tax audit) may challenge the taxpayer's position and demand payment of the tax with interest.
If a business owner has not settled VAT on amounts received as unjust enrichment and the tax authority finds that the conditions for a supply of services for consideration are met, it may issue a decision determining the correct amount of the tax liability. Late-payment interest is charged on the arrears from the day the tax should have been paid, and for VAT the authority may also impose an additional tax liability (Article 112b of the VAT Act). We prepare ongoing VAT settlements and JPK files for clients of our accounting firm in Warsaw.
The additional tax liability in VAT is, as a rule, up to 30% of the understated liability, and if after an audit the taxpayer files a correction and pays the tax – up to 20% (Article 112b of the VAT Act). Separately, the business owner may be liable under the Fiscal Penal Code (Kodeks karny skarbowy, KKS), for example for giving false information in a tax return (Article 56 KKS) – as a fiscal offence or a petty fiscal offence, depending on the amount and the degree of fault
On the other hand, if a business owner has wrongly settled VAT on amounts that are not subject to tax, they may apply for a refund of the overpayment. This procedure, however, requires a detailed justification and evidence supporting their position.
