Take VAT!

By the middle of last year the situation was quite clear: when you sold an office building, a shopping centre or a warehouse you needed to pay VAT of 23 pct. Things took a rather more complicated turn when the tax authorities started to interpret property sales as selling an enterprise liable to a tax levy on civil law transactions of 2 pct and suspended the VAT rebate to property buyers. Furthermore, there have been some reports from people in the sector that the tax offices were even questioning tax decisions retrospectively. Such a situation has caused havoc and injected a dose of insecurity into the Polish commercial property market. “The latest interpretation of the revenue office of the tax on commercial property sales surprised developers and investors involved in trading properties on the Polish market,” explains Magdalena Ćwik-Burszewska, the head of tax at HB Reavis Poland.

Good data, bad moods

The investment market data for the last year are, however, excellent – a turnover of more than EUR 4.5 bln and the best result since 2006 – but they do not reflect the mood of investors. It was hard for them to pull out of transactions that were already underway, when the negotiation cogs ere already turning and significant funds had been employed. In its latest report, the RICS states that the situation regarding the tax on real estate transactions is a significant problem. “The latest RICS data indicate a decline in investment enquiries (which are measured in the net balance category) for the first time since 2012. The demand for properties from investors remained more or less level in the office sector, but in the retail and warehouse sectors the demand declined. The demand from foreign investors in all market sectors was also weaker. According to unofficial information, this is the result of changes to the Polish tax system,” write RICS’ experts.

Tomasz Trzósło, the managing director of JLL in Poland, expresses similar views. “The changes to the interpretation of Polish tax regulations have, of course, been noticed by investors, particularly those who were taken by off-guard by them when closing transactions last autumn,” he says. “It is worth emphasising that the real estate market has not only been impacted by these different tax rulings. An amendment to the tax law was introduced in January to impose a 30 pct penalty for inaccurate VAT calculation. Consequently, as long as investors do not have clear guidelines for how to operate in accordance with the law and what the correct interpretation of the law is and will become binding, using VAT in real estate transactions will be perceived as very risky and investors will avoid such transactions,” he predicts, going on to add: “The interpretation changes have been an issue since the final quarter of last year. There is no justification for remaining in such a state – after all, VAT revenues from real estate transactions that have been retained will have to be reimbursed. So this is not tightening up the system or increasing the revenue from VAT. I hope that the issue is solved quickly.”

Sinking reputation

This about-turn of the tax authorities, while generating some rather illusory benefits for the state budget, has resulted in damaging the reputation of the Polish investment market, introducing an element of instability to projected real estate turnover – something that probably all investors try to avoid. This discourages long-term capital, while encouraging the more aggressive speculative capital. “The situation in the final quarter of last year was the most difficult, as the government suggested that VAT returns would not be respected and that they could be retrospectively challenged, which clearly alarmed investors,” stresses Tomasz Buras, the managing director of Savills in Poland. “Tax on civil law transactions and the similar taxes, which are sometimes several times higher than in Poland, are in place in many countries across Europe; however, it should not be forgotten that it is not what the tax is called or the amount levied that are the most important factors, but it is a clear, coherent announcement that explicitly states how the tax regulations are to be applied,” he believes.

The real estate sector had already raised the issue by the end of last year, but it still remains unresolved. “Q4 transactions are currently nearing the end of the period of the so-called tax ruling acquisition, so it is the right time for the final decision regarding the reimbursement of VAT to be published. Some investors received information that the tax on civil law transactions would be in force, which led to arguments with tax offices,” adds the managing director of Savills in Poland. This is quite a puzzling practice because, according to Magdalena Ćwik-Burszewska, the Ministry of Finance has stuck to its previous interpretation in issued tax rulings (activities subject to VAT), similar to the administrative courts.

Rebound on properties

Representatives of the real estate sector do not deny there is a need for tightening up the system, but they feel that the real estate market has suffered unnecessary pain at the same time. “I understand the need to tighten up the tax system and curb the so-called VAT carousels. This direction requires, however, good preparation and well-thought out proposals. When implementing the new policy the real estate market was hit by a rebound,” remarks Tomasz Trzósło. The expert admits that many companies in the global economy employ tax optimisation approaches – and such cases certainly occur with real estate companies – but he points out that a traditional pension fund that buys directly or via a manager is long-term capital, of a very low rate of return and safe. “In principle it does not use any sophisticated tax structures. This is not in such a fund’s nature. These are companies that are managed quite passively and pay their taxes in full. They buy properties that are meant to generate revenue, which is distributed to pensioners after a deduction of the fund’s costs and taxes,” emphasises the head of JLL in Poland.

Trying to cope

Poland is a very attractive market for investment, which is why its participants are looking for a resolution to this situation. Some entities have chosen to interpret a real estate transaction as the transfer of an organised part of an enterprise, so it should be liable only to the tax on civil law transactions rather than VAT – and they have as a result applied for a tax ruling. “We have recently seen cases of tax offices confirming such an interpretation. This way makes it possible to resolve the issue. This admittedly makes the cost of the transaction slightly higher, although this does not amount to 2 pct, because the VAT included in real estate transactions so far also generated financing costs. However, I do not believe that a tax on civil law transactions of 2 pct is a problem. Such a higher cost will simply be reflected in slightly lower transaction prices,” forecasts Tomasz Trzósło. “We should do everything we can to encourage investors to invest capital here, because there are many benefits from doing so – starting from the development of local markets, to generating profits for development companies, to the creation of new jobs. That is why regulating the issue of tax interpretations by the government is of key importance and I really hope that the government will come up with a prompt and complete resolution of the problem,” argues JLL’s Polish head.