- Reporting for real estate companies – draft regulation
- Prohibition of depreciation write-offs higher than accounting for real estate companies
- Only registered lump sum for property rental
- NSA to side with German investment funds – CIT exemption
- Tax qualification of a leased building
- Should the mere possession of an unused structure be taxed?
- Cities exempt from property tax for greening
1. Reporting for real estate companies – draft regulation
According to Art. 27 Section 1e of the CIT Act (Art. 45 Section 3f of the PIT Act), real estate companies and taxpayers holding, directly or indirectly, in a real estate company shares (stocks) conferring at least 5% of the company’s voting rights are obliged to submit to the Head of the National Fiscal Administration, by the end of the third month of the following year, information on:
- entities holding, directly or indirectly, in that real estate company shares (stocks), all rights and obligations, participation titles or rights of a similar nature, together with the number of such rights held by each of them – in the case of information provided by real estate companies,
- in the case of information provided by taxable persons who are shareholders in real estate companies, the number of shares, overall rights and obligations, units or rights of a similar nature held, directly or indirectly, in that real estate company.
A mention of real estate companies is also found in the “Polish Order”. It concerns the removal from the provisions of the CIT Act (art. 27 sec. 1e) and the PIT Act (art. 45 sec. 3f) of the phrase , “by means of electronic communication” and the addition of paragraphs after them stipulating that the information in question should be submitted in electronic form, in accordance with the logical structure available in the Public Information Bulletin on the subject website of the office serving the minister responsible for public finance.
On 28 December 2021, a draft regulation of the Minister of Finance on the transmission of information on real estate companies with respect to personal income tax appeared on the website of the Government Legislation Centre. The draft indicates that the information will be sent electronically and will have to bear a qualified electronic signature or a trusted signature. In addition, an official certificate of receipt of the information will be issued by the electronic sub-box of the tax administration’s ICT system after proper verification of the logical structure, data correctness and the electronic signature. According to the justification for the regulation, the manner of sending this information by electronic means of communication is to take into account the need to ensure the security, reliability and non-repudiation of the data contained therein, as well as the need to protect them against unauthorised access.
The draft has not yet seen further work.
2. Prohibition of depreciation write-offs higher than accounting for real estate companies
As part of the “Polish Deal”, a restriction was introduced on the ability of real estate companies to recognise depreciation charges in excess of the limit set for accounting purposes as deductible costs.
The legal basis for the regulation in question is the amended art. 15 sec. 6 of the CIT Act, which states that “deductible costs are write-offs for wear and tear of fixed assets and intangible assets (depreciation write-offs) made in accordance with art. 16a-16m, with the proviso that in the case of real estate companies, write-offs relating to fixed assets classified in group 1 of the Classification may not be higher in a tax year than depreciation write-offs for fixed assets made in accordance with accounting regulations and charged in that tax year to the entity’s financial result“.
This change in tax settlements means that tax depreciation of real estate will be severely limited, which may negatively affect current investment results.
The legislator indicated in the explanatory memorandum that the purpose of the change in the content of the regulation is to reduce the differences occurring between the value of the income reported by the real estate company before its income taxation and the value of the gross profit reported for the same period.
The provision is effective from 1 January 2022.
3. Only registered lump sum for property rental
Changes within the framework of the “Polish Order” will also affect persons who rent residential premises. These persons will settle the income from the lease exclusively in the form of a registered lump sum (not as it was the case so far – a registered lump sum or taxation of income in this respect in accordance with the tax scale). This applies only to private rental not connected with business activity.
The legal basis is Article 9 of the “Polish Deal”, which gives Article 2(1a) of the PIT Act the following wording: “Natural persons who earn the income referred to in Article 10(1)(6) of the Income Tax Act shall pay a lump sum on registered income.” This provision refers to Art. 10(1) of the PIT Act, which provides for sources of revenue, and in para. 6 indicates: lease, sublease, tenancy, subtenancy and other similar agreements, including tenancy, subtenancy of special divisions of agricultural production and of a farm or its components for non-agricultural purposes or for running special divisions of agricultural production, with the exception of property components connected with business activity.
As a result of these changes, it will no longer be possible to deduct tax-deductible costs from the tax base. This will particularly affect persons making depreciation deductions, in whose case the tax burden may significantly increase. Higher taxes will also be paid by those who incur large renovation costs on rented premises and by those who rent flats bought on credit.
Lump-sum rental tax rates are to be, as before, 8.5% on rental income up to PLN 100 000 and 12.5% on the excess of income over PLN 100 000.
In addition, the Polish Deal amends Article 22c point 2 of the PIT Act and Article 16c point 2a of the CIT Act, which leads to the exclusion of depreciation of residential premises and residential rights. The change is perceived as disadvantageous primarily for those who rent flats, but also for entrepreneurs who run their business in their own house or flat. Additionally, the legislator in Article 71(2) of the “Polish Deal” introduces the possibility of temporary inclusion of depreciation write-offs on fixed assets and intangible assets being, respectively, residential buildings, residential premises constituting a separate property, a cooperative ownership right to a residential unit or a right to a single-family house in a housing cooperative, acquired or created before 1 January 2022, as tax deductible costs. – such possibility will exist no longer than until 31 December 2022.
4. NSA to side with German investment funds – CIT exemption
By a series of judgments dated 25 November 2021 (cases ref. no. II FSK 470/19, II FSK 862/19, II FSK 813/19, II FSK 1176/19, II FSK 1269/19) the Supreme Administrative Court indicated that revenues generated by real estate investment funds with their registered office in Germany are exempt from corporate income tax in Poland. As an important prerequisite for the application of the exemption, it indicated that the revenue should be obtained from investments carried out in Poland through limited liability companies.
Therefore, the Supreme Administrative Court has undermined the hitherto presented approach of tax authorities stating that the potential possibility of investing through the agency of a limited partnership does not eliminate the tax exemption in Poland in a situation where on the Polish market the fund actually obtains revenues from investments in limited liability companies – which investments are also allowed for Polish investment funds. Thus, for the purposes of applying the exemption provided for in the CIT Act, the legal status of investment funds from other EU countries cannot be analogous to Polish funds.
In the opinion of the Supreme Administrative Court, the differences raised by the tax authority with respect to the permissible investments of the foreign fund cannot be the basis for questioning the exemption from income tax in Poland of such income which is exempted when earned by Polish funds. Thus, the Supreme Administrative Court questioned the approach commonly used by tax authorities according to which differences in the legal status of foreign investment funds eliminated the possibility of tax exemption of income earned by these funds in Poland.
Hopefully, the cited case law will contribute to unification of decisions (positive for such taxpayers) of the tax authorities. On the basis of the indicated judgments, mutual funds should consider whether, in the case of payment of tax on investment income in Poland, they are entitled to a refund of the improperly paid tax.
5. Tax qualification of a leased building
A case was pending before the Voivodship Administrative Court in Gliwice (ref. I SA/Gl 487/21) regarding the tax qualification of a leased student residence, which is defined in the land and building register as a residential building.
The case concerned an application for an individual interpretation, in which the applicant stated that the majority of the area of the building – a student hostel (approximately 85%) will be the area of residential rooms and related facilities – kitchens, toilets, corridors and staircases. According to the applicant, the main purpose of the building would therefore be to meet the accommodation needs of the university, i.e. to fulfil a residential function. The building was also to include spaces occupied by the administration of the facility, technical spaces, but also material storage and spaces intended for rental to commercial entities – in particular shops, cafes, gyms and other activities. The main purpose of these spaces will be to increase the comfort of living in the facility. In addition, it was not excluded that part of the premises would be rented to entities that are not directly related to providing residents with a higher standard and increasing the attractiveness of the flat – for example, for the office of a law firm.
The subject of the dispute pending before the Court was the issue of taxation of the area of the described building. Specifically, whether the building would be subject to real estate tax at the rate established for residential buildings (under section 5(1)(2)(a) of the Local Taxes and Fees Act).
In the company’s opinion, fulfilling residential purposes and the realization of the residential function allows for applying the indicated lower tax rates for residential buildings (the company believed that the increased rate should apply only to the part of the dormitory which was leased to commercial entities). In addition, it argued that the recognition of the building as a residential building was justified by the fact that the building was classified in the Classification of Fixed Assets and entered in the land and buildings register as a residential building.
The court disagreed with the applicant’s interpretation of the regulations, stating that pursuant to Article 5(1)(2)(b) of the Local Taxes and Fees Act, a higher tax rate applies to residential buildings or parts thereof occupied for business activity. On this basis – according to the Court – the authority rightly recognized that the Company is an entrepreneur conducting business activity consisting in making parts of the building available to third parties for a fee.
What was of key importance for the Court was the type of activity pursued, and thus the significance of the building in achieving the effects of this activity. If the building was not used, the company would not be able to achieve its economic purpose, which determines that it is occupied for business purposes. Thus, in the Court’s opinion, we are dealing with a residential building occupied for business purposes.
The Court also analysed the differences between the terms “connected” and “occupied” for the purpose of conducting business activity. The first term “related” has a legal definition, according to which land, buildings and structures connected with carrying out business activity means land, buildings and structures which are in the possession of an entrepreneur. On the other hand, the term “occupied” – although it does not have a legal definition – is considered to be a building in which business activity is actually conducted. Therefore, mere possession of a building is not sufficient here.
6. Should the mere possession of an unused structure be taxed?
The Supreme Administrative Court in the judgment of 1 June 2021, ref. no. III FSK 3555/21 resolved in favour of taxpayers a doubtful interpretation of Art. 1a. 1 (3) of the Local Taxes and Fees Act.
In the case in question we were dealing with a factual situation in which the taxpayer was conducting business activity connected with huge demand for water and had to supply this water by means of a water supply network and pipelines. The taxpayer, as part of his activities, stopped using one of the pipes because it was no longer necessary – he removed water from it, cut off this connection and plugged the pipeline. At the same time, he left this unused section on the ground, as dismantling it would entail incurring additional expenses.
The taxpayer asked the tax authority whether – since he no longer uses this section of the pipeline – he should report the entire pipeline for taxation as a construction?
To the question thus posed, the taxpayer suggested a negative answer. Unfortunately, the tax authority, like the court of first instance in Gliwice (in the judgment I SA/Gl 485/20) did not agree with this view. The court stated that in accordance with the interpretation of the provision in question, the mere fact of possession of a structure by an entrepreneur results in its recognition as being connected with the conduct of business activity.
This situation was resolved by the Supreme Administrative Court in light of the Constitutional Tribunal’s ruling (case ref. SK 39/19), which held that this interpretation of Art. 1a Section 1 (3) of the Local Taxes and Charges Act, leading to the conclusion that the mere possession of a structure by an entrepreneur leads to the conclusion that it is connected with the pursuit of business activity, is unconstitutional. In the opinion of the Court, entrepreneurs cannot be charged a higher tax rate only due to the fact of ownership, even though the buildings do not serve them to conduct business activity. The approach presented by the tax authorities creates a disproportionate tax burden by not distinguishing the situation of taxpayers who own a building, but do not use it, from those who do. Moreover, this regulation cannot be justified by the protection of public interest (thus, the prerequisites of the proportionality test are not met).
The Supreme Administrative Court added that the interpretation of the provision in question should take into account the fact that the entrepreneur owns the structure, but also whether the object of taxation is used for business activity. Therefore, if in the case in question we are dealing with a fragment of a pipeline which is permanently shut down for use, it does not constitute an object of taxation at the end of the month in which its shutdown took place.
7. Cities exempt from property tax for greening
First cities – such as Katowice – have introduced exemption from property tax for greening the property.
The text of the resolution in question reads as follows – the usable area of flats in residential buildings in which green roofs have been made and maintained on the entire surface of the roof during the term of this resolution, with the exception of those parts which cannot, for technical reasons, be planted with vegetation, or vertical gardens have been installed and maintained on external walls (including the root system), constituting at least 50 per cent of the surface of the wall on which the vertical garden has been created, are exempt from real estate tax. An additional condition is that there is no arrears of taxes and other public law liabilities or perpetual usufruct fees. The exemption resolution was adopted on 22 July 2021 and will remain in force until 30 June 2024. – However, its validity is likely to be extended.
Justifying the introduction of the resolution, the councillors use the argumentation that green roofs are natural filtering agents of urban pollution, they please the eye, help regulate the temperature inside the buildings, and protect against heat and wind. They can also reduce noise and excess moisture.
Similar changes have also been announced by the city authorities of Gdańsk and Poznań. Councillors in other cities are also beginning to debate similar solutions. This illustrates a new trend among local authorities and the fact that pro-environmental measures are becoming an increasingly important part of legislation. According to the declarations of city authorities, they want to fight in this way against the overwhelming concrete development. It is worth bearing in mind that in the case of Kalisz, the exemption does not apply to buildings in which economic activity is carried out.
Many observers of the phenomenon note that similar solutions have already been observed in the West for several years. Most probably, it is the western countries that have inspired local authorities in Poland to implement such solutions. According to the report “Living Roofs and Walls from policy to practice” covering various issues in the field of green roofs issued by the European Federation of Associations of Green Roofs and Facades, most cities with large green roof areas are located in Austria, Germany and Switzerland.