McDonald's in Poland likely won't be able to challenge value-added tax treatment of eat-in meals after the Supreme Administrative Court quashed a franchisee lawsuit.

The court's April 5 decision said McDonald's can't charge a 5 percent VAT on the meals. The decision will likely stop all similar lawsuits that have been initiated since the Polish Ministry of Finance declared in 2016 that all fast-food meals are subject to an 8 percent VAT rate, regardless of how they are served or consumed, local tax practitioners told Bloomberg Tax.

“I would not see any sense in continuing other litigations with” the tax authorities “regarding this particular type of business,” Przemyslaw Powierza, a tax partner at RSM Poland, said in an April 9 email. “There is a very small chance, that another” McDonald's “would get another ruling.”

But since the court's decision only concerned eat-in meals, lawsuits defending the right to charge 5 percent VAT on to-go meals may still succeed, Powierza said.

The court's decision is significant for both McDonald's, whose franchisees have been forced to repay millions of euro in VAT adjustments since 2016, and other major fast- food operators. For example, Wroclaw-based AmRest Holdings SE, owner and operator of 246 KFC, 106 Pizza Hut, and 41 Burger King locations in Poland, which continue to charge 5 percent VAT on at least some fast-food meals.

“We are the market leader, and, of course, this is a situation that affects the whole industry, not just McDonald's, so I am sure we are closely watched,” Anna Borys- Karwacka, a spokeswoman at McDonald's Polska, said April 4.

McDonald's currently has 403 restaurants in Poland, 322 of which are owned by franchisees. McDonald franchisees have filed more than 123 lawsuits since 2016, Borys-Karwacka said.

The Case

McDonald's adopted 8 percent VAT across all types of orders in 2016 to minimize business risk to its franchisees, Borys-Karwacka said. But in the case decided April 5, the McDonald's Gdansk-based franchisee defended the right to charge a 5 percent rate, arguing that fast-food orders should be considered “ready meals,” according to court documents.

The court's decision “is final and binding and ends the proceedings in this particular case,” Borys-Karwacka said in an April 7 email. “We are waiting for the written substantiation of the judgment. After analyzing it along with our advisors, we will take further steps to develop best approach to secure our franchisees’ business. We are determined to end this matter in the way which is auspicious for the entire system.”

AmRest still charges 8 percent VAT on dine-in meals and 5 percent on to-go meals, a decision that is “driven by the local laws and regulation as well as interpretations by the Polish Ministry of Finance,” Iwona Sarachman, a spokeswoman at AmRest, said in an April 3 email. She declined to comment on the McDonald's case.

The Supreme Administrative Court is Poland's court of last resort for administrative cases, and written justifications usually take a month.

The McDonald's franchisee brought the lawsuit to contest a Nov. 10, 2016, tax authority decision that required the franchisee to pay an unspecified VAT adjustment for 2011 after the tax authority concluded that the franchisee's taxable activities should be classified as providing services and not ready meals.

This decision was upheld April 7, 2017, by a higher-level tax authority. But the Provincial Administrative Court in Gdansk challenged the decision on Aug. 22, 2017 saying it wasn't convinced that the tax authority demonstrated that serving meals— made with semi-finished products by employees who are not required to have an “education in the direction of gastronomy” and served on plastic trays without plates or cutlery, among other considerations—fulfilled the definition of a restaurant service.

Crossing the Line

Until 2016, the Polish Ministry of Finance tolerated the fact that fast-food outlets used 5 percent VAT on to-go meals, Tomasz Wagner, a senior tax manager with Ernst & Young Tax Advisory in Warsaw, said April 4.

But then some chains took things too far, and the Ministry of Finance pushed back with the 2016 change, Wagner said.

“The way of offering these products, whether separately or in sets, such as a meat sandwich, fries with a drink, a tortilla, or baked potatoes with a drink, does not affect the way” they are classified for VAT, the ministry said in guidance.

It further makes no difference, if the point of sale is located in a public place, it features tables and chairs, tableware is available, the products are intended for on- site or take-out consumption, or if the point of sale comes with toilets, a coat check, is air-conditioned or heated, according to the guidance.

“This is what happens if the taxpayers try to push the system to the limit,” Wagner said. “Five percent was OK for the market, and nobody was against it, including the ministry. But at a certain point the biggest taxpayers started to think about optimizations of different kinds.”

For example, at least one change divided coffee into the ingredient, subject to 23 percent VAT, and the service, subject to 8 percent VAT, Wagner said.

“This started looking stupid on printouts from cash registers,” he said.

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