A very raw new deal

Polski Ład – the new Polish Deal (the latest raft of tax reforms) – is already making it more difficult for smaller real estate investors to operate, while the work on the regulations that are to govern FINNs (the Polish equivalent of REITs) remains frozen. Is this the end of investment leasing in Poland?

It’s a truth almost universally acknowledged that buying real estate is a safe way to invest funds over the long-term with the additional benefit that it can also provide a monthly income from the leasing of the property. The Polish government is currently preparing and introducing further changes aimed at regulating the real estate market. The lawmakers argue they need to slow down the accelerating housing price rises that have been seen year on year. The Polski Ład legislation has already introduced preliminary changes to discourage investment in the real estate market, including preventing companies from writing off depreciation costs against tax when they collect rental income as part of their business operations. Additionally, from 2023 the only possible way to tax private rental income will be a linear tax on recorded income, which will make it impossible to write off any rental costs, such as those involved in renovations, furnishings, mortgages, depreciation and insurance. A further controversial step is the planned (but still unconfirmed) proposal to limit the purchase of apartments for investment through a speculation tax or a tax on vacancy.

When does speculative investment begin?

Firstly, we have to ask ourselves the question, what actually is speculative investment? We can find the answer to this question in the act passed on September 29th 1994 on accountancy (Dz. U. 2021, position 217), where in article 3, section 1 item 17, such investments are defined as assets that are held by an entity to derive economic benefit from their rising value, the interest payments made on them or from dividends (shares in profits) or other benefits, including trade transactions. In particular, these include financial and real estate assets whose value in nature is immaterial and legal. In the case of insurance and reinsurance undertakings, such investments are understood to be capital deposits. In the wording of the regulation, the term ‘entity’ is defined as referring to organisations such as companies but also includes private individuals (article 3, section 1 item 5 of the Act On Accountancy).

For a lease to be considered an investment, it does not matter if it is signed with a business or with a private individual; what is important is the purpose for which the property was purchased and its role in the overall economic balance.

In the literature on the subject and in jurisprudence, disputes frequently arise over the moment when a landlord is understood to engage in economic activity – whether this is at the moment a residence is leased out, or when several are leased out, or even at the point when the landlord registers such activities as a business. It turns out that the answer is not as simple and clear-cut as it might seem and the courts have taken contradictory positions. The high court on January 25th 2017 ruled that the rental of a single residential unit could not be considered economic activity. It is also cannot be considered as economic activity to manage one’s own fortunes even if such actions are motivated by profit. To assert a different position would be to blur the difference between the normal usage that an owner (or co-owner) has rights to in terms of the property and the running of a business. (act II UK 621/15). However, according to the Main Administrative Court (April 5th 2014), when a wide range of rental activity is undertaken, it cannot be organised in any other way than on a professional basis and so it should be considered to be economic activity (II FSK 1092/12). Dividing leases into private activity and business is only important when it comes to selecting the form of taxation, which from 2023 is to be made uniform. However, none of this has any bearing on establishing the moment when an investment is made. The purchase of a residence by an individual for private purposes and then later generating rental income from it is already an investment. The difficulties arise when it is established that the purchase of an apartment is purely for investment purposes.

What about the freedom of the market?

It is hard to say how far the lawmakers will go in terms of regulating the real estate market, but the question arises whether any step taken to do so represents a limitation imposed on economic freedom and whether the steps taken might prove too drastic by preventing certain groups from operating their businesses. According to art. 2 of the Act of March 6th 2018 – Business law (Dz. U. 2021, pos. 162), everyone is free to establish, run and end a business on equal terms under the law. The principle of economic freedom is enshrined both in the principles of the political system and as a right of freedom. Freedom of economic activity may only be curtailed when the two following conditions are both met: a legislative ban and when it is crucial for the public interest. Even though the first condition can be easily understood and applied, ‘in the public interest’ is not clearly defined. Nonetheless, the principle cannot be interpreted broadly if the balance between the public interest and the curtailment of the rights of the individual is to be maintained. The regulations laid out by the proposed bill undoubtedly interfere in the principle of economic freedom by introducing a threshold to investing in the real estate market. By blocking the way smaller businesses invest, it would eliminate them from the market.

Results of the changes

The introduction of Polski Ład from 2023 as well as plans to further limit access to the real estate investment market could severely exacerbate the situation for many landlords as well as for many tenants. The changes could eliminate a certain group of landlords from the market, particularly those who purchase their properties on credit. As a result, this could lead to less competition and a rise in prices. Increased costs resulting from being unable to opt for forms of general taxation could also result in rising rents. The purpose of the legislation according to the lawmakers is to reduce the soaring price rises in the housing market, but in fact it could, together with rising interest rates, lead to a situation where buying ‘a place of your own’ becomes impossible, while the cost of renting is just too high. Moreover, the contradictory rulings regarding leasing as a business activity and as a private arrangement could result in many private landlords being classified as businesses and as a result they will incur even greater costs from the obligation to pay national health insurance contributions out of their income.

In the wake of the chaos of the recent changes, it should only be with the greatest care, after a thorough examination of the economic situation, that lawmakers take any such steps to limit access to the real estate market. Above all, people use the market to safeguard their wealth through long-term investments, which do indeed bring income but not quick profits. Undertaking drastic, ill-considered steps could punish many people – and not just those who run an honest business. Is this really the right step to take at a time when inflation is running rampant and the legal situation is so uncertain?

Legal eagle for the property scene

Marta Piękna-Kucharska is a legal advisor and member of the Warsaw Bar Association as well as a managing partner of the Piękna–Kucharska & Wspólnicy law firm. She specialises in company, economic and administrative law. She works with some of the most prominent real estate companies, start-ups and new technology firms. She concentrates on drawing up and negotiating lease contracts, as well as buying and selling property. She also advises the property sector on corporate projects as well as providing trade law services for internal subsidiaries. For many years she has been a member of the Supervisory Board for the Treasury. She studied law and administration at the University of Warsaw and has also completed specialist courses at Shafston International College in Australia.