My mother is in debt

The selection of either option depends on several tax, legal and business factors and as such is an interesting issue. However, below we shall focus on the simple opportunity for tax optimization upon the acquisition of a company owning real estate.

At the same time, to acquire a company owning real estate and with clear commercial potential generally requires the employment of considerable funds. Investors usually decide to fund the acquisition using both capital and debt, whereas such debt may be internal (a loan granted within the investor’s group) or external (a bank loan to purchase the shares), or a combination of the two options.

Thus, the above acquisition scheme is ineffective. However, it could be modified so as to combine interest costs related to funding the SPV acquisition and the income generated from the real estate.

The tax group solution is commonly applied in other European countries. Hence, the income and costs of the SPV and the Holding Company can be combined. This results in obvious benefits: the taxable base is reduced since the operating income and interest costs related to the acquisition are combined in ‘one’ taxpayer. Polish laws also allow a group to be formed. Unfortunately, forming and operating such a group is subject to a number of conditions (concerning e.g. the profitability level) and administrative requirements with the effect that this is not a common solution for investors.

It should be noted that usually Polish structures and the scale of real estate companies’ operations are relatively limited, hence merger proceedings should not bring about significant legal or administrative difficulties. It should be further noted that the above merger scheme and its tax consequences are accepted by the tax authorities – though the investor should be able to provide some non–tax reasons for the merger.

Michał Thedy and Paweł Toński,

with the Ernst & Young company