Taxing times ahead

The new year looks set to bring in significant changes to the corporate income tax [CIT] law that could shake up the entire real estate market. As the government raises its anti-tax avoidance banner, taxation and compliance obligations are to be increased across the board once again. And real estate companies are going to have to learn about it all the hard way.

The changes adopted by the Sejm [the lower house of parliament] on October 28th 2020 still have to be accepted by the Senate (at the time of the writing of this article). In fact, the entire legislative process (which will come to an end with the publication of the bill in the Journal of Laws) should be completed by November 30th, thus allowing the changes to come into force on January 1st 2021. In the current situation, this may prove difficult to achieve in practice. Nevertheless, for the purpose of the commentary that follows, it should be assumed that all these deadlines will be met.

One of the key changes concerns limited partnerships. At the moment, such partnerships are tax transparent, which means that they are not subject to the CIT. The taxpayers in this respect are the limited partnership’s partners. As a result, the revenues from their business activity are taxed only once – for partners (as opposed to limited liability companies, for whom the company is taxed as well as the distribution of profits). In addition to this, tax transparency enables the tax returns for different projects or investments by particular partners (e.g. joint-venture companies) to be pooled. However, the current flexible rules on the distribution of funds have helped to make limited partnerships a widely used tool on the Polish market – and not only for the many real estate developers who have adopted this approach. But starting from January 1st 2021 (or May 2021, as the new law allows for its adoption to be delayed), limited partnerships will be subject to CIT with a regular rate of 19 pct. For small taxpayers (generally with revenues of up to PLN 2 mln per year), a reduced CIT rate will be possible of 9 pct. The overall tax levied – e.g. from a particular investment – will be almost doubled as a result. Some exemptions should be introduced, such as participation exemption on the profit distribution for partners that are corporations (similar to the exemption available for dividends). In the case of partners being individuals, the exemption is rather symbolic (up to PLN 60,000 of profit) and available only if certain conditions are met. Another important change that will certainly have an impact on the real estate environment is the shifting of the tax burden on the sale of shares of Polish real estate companies by foreign taxpayers. As long as a real estate clause is included in the relevant double tax treaty, a foreign seller of shares in Polish real estate companies can be taxed in Poland on the capital gains resulting from the sale. Such clauses have been introduced to the tax treaties with, for example, Germany, the UK and Luxembourg. As a consequence of these reforms, if a foreign entity sells at least 5 pct of the shares in a Polish real estate company, the Polish company will be obliged to pay an advance tax on the profit obtained by the seller. The advance payment has to be paid by the 20th day of the month after the month in which the income was generated. The seller is then obliged to transfer the amount of the advance tax payment to the real estate company before the payment deadline. If a real estate company does not provide the relevant details of such a transaction, the advance tax payment due will be 19 pct of the market value of the shares being sold.

Double Dutch

A significant volume of recent real estate investment in Poland has been made by Dutch investors. But now it has been confirmed that the rumoured negotiations on amending the double tax treaty with the Netherlands are close to being finalised. On October 29th, a protocol was signed based on which the existing treaty is to be redrafted. One major change will be the introduction of a real estate clause. At the moment, as long as a Dutch shareholder is managed from the Netherlands and has the relevant infrastructure – offices, personnel, equipment etc. – the sale of shares in a Polish real estate company is not taxable in Poland. The changes to the treaty with the Netherlands complements the one mentioned above, as once it comes into force (probably starting from 2022), it will be the Polish company that is obliged to pay the tax due from the sale of its own shares by a Dutch parent. According to these changes, the gains derived by a Dutch company from the disposal of its shares in a Polish real estate entity will be taxed in Poland if, at any time during the 365 days preceding the disposal, these shares have derived more than 75 pct of their value directly or indirectly from immovable property located in Poland. However, pension funds may be still subject to being taxed on the income generated from the sale of real estate-rich entities solely in the country of their residence and not in the country where the real estate is located.

Other changes

Companies that are not Polish that own real estate in Poland and that are not subject to taxation in the EU or the EEA are to be obliged to appoint a tax representative, regardless of whether the real estate company has already been sold or not. A tax representative will be (jointly and severally) liable along with the company for the tax obligations arising from the sale of such shares. Additionally, real estate companies will be required to provide the tax authorities with information about entities that directly or indirectly hold shares in such companies by the end of the third month after the end of each year. Taxpayers that directly or indirectly hold shares in a real estate company will have to inform the tax authorities of this as well. The number of shares that will trigger the above obligations will correspond to at least 5 pct of the voting rights or a 5 pct share in the profit of the real estate company. Some real estate companies will be obliged to draw up and publish reports on the implementation of their tax policies. Generally, such an obligation will be imposed on those companies whose income in the previous tax year was more than the equivalent of EUR 50 mln. As a result, the relevant holding companies or the SPVs involved in the exits from investments may end up with the full responsibility for this. As should be stressed, these reports should make the following information publically available: the procedure for compliance with the tax obligations; the number of tax schemes based on mandatory disclosure rules (MDR); the transactions with parties that exceed 5 pct of the balance sheet as well as with entities from tax havens; the restructuring activities both undertaken and planned by the taxpayer and the applications submitted for tax rulings.

Carrot and stick

The overall tax burden is, without doubt, going to be increased. Non-compliance with the reporting obligations will be subject to penalties. Those responsible for any failure to meet the above obligations will also be penalised, while the failure to appoint a tax representative could lead to fines of up to PLN 1 mln. On the bright side, however, the minimum tax exemption on leased buildings has been extended until the state of pandemic is lifted (and not until the end of 2020, as stated in the current rules). The question that arises, however, is are these measures proportionate? ‘More stick, less carrot’ may not be the most successful long-term strategy.

Real estate companies redefined

A real estate company is to be an entity, other than an individual natural person, obliged to prepare a balance sheet on the basis of accounting provisions, according to which:
on the first day of the tax year, at least 50 pct of the market value of its assets, directly or indirectly, is real estate located in Poland, or the rights to such real estate and its market value have exceeded PLN 10 mln – in the case of entities starting their business activities;
on the final day before the latest tax year, at least 50 pct of the book value of its assets, directly or indirectly, was real estate located in Poland, or the rights to such real estate and the book value of these real estate had surpassed PLN 10 mln, or – in the case of other entities – the revenue from leasing, subleasing, and other similar contracts and from shares in other real estate companies, constituted at least 60 pct of total revenues.