This question has once again become the subject of a dispute between local authorities and tax bodies. The latest judgment of the Supreme Administrative Court (SAC) of 9 October 2025 (case no. I FSK 2/24) shows that the boundary between a municipality’s economic activity and its public-law functions continues to raise serious doubts – particularly when infrastructure investments indirectly support commercial objectives.
The case concerned a municipality which, in 2022–2024, carried out an investment aimed at equipping lakeside land with essential sanitary infrastructure, including the construction of roads, pavements and lighting. The project was divided into two parts: the first involved the installation of water and sewage networks together with the construction of road surfaces, pavements and lighting; the second covered the creation of necessary sanitary networks and the construction of roads, pavements and lighting. The municipality owns the land in question, which, under the zoning plan, is intended for development. The purpose of the investment was to increase the attractiveness of the plots to facilitate their sale. Consequently, the municipality questioned whether this constituted economic activity subject to VAT and whether it would be entitled to deduct input VAT in full on the investment-related expenses.
The municipality argued that the sale of building plots constituted taxable economic activity and therefore believed it would be entitled to full VAT deduction related to the investment. It maintained that the expenditures were directly linked to taxable activities. Without incurring them, the sale of the land would be impossible or significantly hindered, and the sole reason for the expenditures was the intention to sell the plots.
The Director of the National Revenue Information (KIS) agreed that the sale of plots was a taxable activity but disagreed as to the entitlement to a full VAT deduction. Referring to the Public Roads Act, the authority stated that the expenses related to the municipality’s exercise of public-law authority over the roads concerned. Such authority includes construction, reconstruction, repair, maintenance, protection, signage and road management — extending also to pavements, cycle paths and lighting. Even roads not classified as public roads fall under the municipality’s management as internal roads, meaning that all investments and financing remain the responsibility of the land administrator. In the authority’s view, therefore, the expenditures related to road infrastructure, stormwater drainage, lighting and communication networks were connected with the municipality’s own tasks, and the resulting infrastructure would be publicly accessible. As a result, the municipality was not entitled to deduct input VAT on these expenditures. The authority granted full deduction only for the water and sewage network and partial deduction for the electricity infrastructure.
The Provincial Administrative Court (PAC) in Gorzow Wielkopolski (case no. I SA/Go 153/23) disagreed. It emphasized that, contrary to the tax authority’s argument, the municipality had clearly stated that all expenditures related to the investment were necessary to achieve the project’s objective — the sale of the building plots. These expenditures merely increased the attractiveness of the land and helped attract buyers. Therefore, according to the court, the expenses were objectively necessary for achieving the intended goal. Regarding road construction, the court stressed that the key criterion for classification was the connection between the expenditure and taxable activities. The mere fact that the expenditure could also be linked to the municipality’s own tasks did not preclude the right to deduct VAT. If the purpose of the expenses was to ensure the infrastructure needed to enable the sale of the plots, then the expenditures were connected with taxable activity.
However, the Supreme Administrative Court (SAC), in its judgment of 9 October 2025 (case no. I FSK 2/24), disagreed with the PAC. It held that the tax authority correctly classified the expenditures into those allowing full deduction, partial deduction and no deduction. The municipality may fully deduct VAT on the water and sewage network and partially deduct VAT related to the electricity infrastructure. For the remaining expenditures, the court found that the municipality was performing its own public tasks and therefore was not entitled to deduct input VAT. The SAC also held that the municipality’s assessment that all expenditures were exclusively linked to the planned sale of plots was irrelevant in this context.