Tax me anyway

By introducing the new regulations, the Ministry of Finance intends to tighten up the tax system. In the opinion of the Ministry, until now taxes from the real estate sector paid into the budget have not been commensurate with the profitability of this sector. The Ministry estimates that the return on investment in real estate is 5–7 pct per year, and yet no income tax is paid on many properties.

This tax applies to commercial and service buildings such as shopping centres, department stores, independent shops and boutiques, other commercial and service facilities as well as office buildings. The classification of a building is based on the classification of the fixed assets. The tax does not apply to other buildings, for example: hotels, warehouses or residential real estate. Interestingly, it does not apply to separate premises designated for commercial or service purposes, as the regulations stipulate that each building is itself the subject of taxation.

The tax is levied on commercial buildings whose initial value exceeds PLN 10 mln (app. EUR 2.5 mln). In the case of a building complex, each building is to be subject to tax separately. The initial value of the building is determined in the same way as for tax depreciation purposes. The tax base is the initial value of the building – and therefore excludes the land value and the value of the equipment in the building, which are deducted from the sum levied. Such equipment can include separate fixed assets, such as elevators, escalators, power generators, air conditioners and other technical equipment, and is to be depreciated separately. The owners of buildings that have properly segregated construction costs could therefore have a lower tax base.

This tax amounts to 0.035 pct of the tax base for each month, and thus 0.42 pct per annum. Therefore, for a building with an initial value of PLN 100 mln, the tax base is PLN 90 mln and so PLN 378,000 (EUR 94,000) of annual tax is due.

This tax will be due only if the amount calculated according to the above rules is higher than the CIT calculated according to the general rules. The law stipulates that the taxpayer is not required to pay this tax if it is lower than the advance on CIT calculated according to these rules. The amount of paid and non-deducted tax is to be deducted from the corporate income tax for the year if the CIT is higher than the commercial tax.

Once the entire building has been rented, the CIT amount should usually be higher than the commercial property tax, therefore the new tax should not be an additional encumbrance. This is partly due to the fact that following the amendment to the regulations for thin capitalisation effective from 2018, the CIT tax base could be higher than it has been previously, because the new restrictions apply to both external and internal (banking and intragroup) financing. According to the new rules, the tax costs could include debt financing costs of more than 30 pct of the EBITDA (the 30 pct EBITDA regulation does not apply to debt financing costs under PLN 3 mln in the tax year). What is an issue, however, is the rent free period after putting the building into use or the period when the building is not fully leased. It then becomes necessary to pay the commercial property tax before CIT taxation is required.

If a building is jointly owned by taxpayers, when calculating the initial value the value calculated from the records of each individual taxpayer is taken. If the building is owned by a partnership, the initial value attributable to the partners is determined in proportion to their share in its profits. These rules do not apply if the building is jointly owned by a taxpayer and a related party according to a transfer pricing arrangement.

The tax also does not apply to office buildings used exclusively or mainly for the needs of the taxpayer in question or those for which depreciation has ceased to be written off.

Depreciation is not written off if business operations are suspended or ceased and if a fixed asset has ceased to be used. Therefore, should a taxpayer carry out a thorough renovation or modernisation of the office building or shopping centre, there will be grounds for not paying the commercial property tax during this period; there are, however, no businesses of this sort within that range.

The tax will also not be due if the owner uses the office building exclusively or mainly for its own needs. The regulations are not precise as to the meaning of using a property ”mainly” for one’s own needs – is it enough to occupy over 50 pct of the office space or should this percentage be higher? In our opinion, more than 50 pct is necessary.

The tax on commercial real estate also applies to investment funds owning properties such as shopping centres, department stores, independent shops and boutiques, other commercial and service buildings, and office buildings. The exemption from CIT for investment funds has also been restricted under the new legislation. If they own any of the above-mentioned property types they are now taxable under CIT in terms of the income generated from these properties; for example, from the sale of these properties or from renting them.

Concerns have been raised that the commercial property tax is unconstitutional since it represents a double taxation of income. In addition, it has been noted that it is a type of cadastral tax and overlaps with property tax. A similar tax was introduced in the past by Luxembourg only to be overruled by the European Commission. The fate of these Polish regulations also needs to be monitored closely. The Ministry of Finance claims that it does not amount to double taxation and expects to receive app. PLN 27 bln from this tax over the next ten years.

Justyna Bauta-Szostak

partner, tax advisor, legal counsel,

head of the real estate practice at MDDP