On December 11, 2018, the Ministry of Finance published explanations on the taxation of commercial real estate acquisition.
The most important guidelines in this respect have been presented below.
When evaluating, whether assets should be considered (i) an enterprise, or (ii) an organised part of an enterprise, the following circumstance needs to be taken into account:
1) the intention of the Buyer to continue business activities previously carried out by the Seller, using the assets subject to the transaction
2) the actual possibility of continuing these activities based on the assets subject to the transaction.
The said evaluation must take place at the time of the transaction.
The transaction shall be considered a disposal of an enterprise or its organised part if, at the time of the transaction, the following cumulative criteria are fulfilled:
- the assets transferred to the Buyer have the capacity and are sufficient to carry out the previous business activities of the Seller,
- the Buyer – as part of their activities – intends to continue business activities previously carried out by the Seller to the same extent, using the assets subject to the transaction.
Type of transferred assets
In the case of transactions on commercial real estate, it is a typical situation to hand over a leased building. Additionally, it is necessary to determine whether all following elements are transferred to the Buyer:
- rights or obligations arising out of the Seller’s contracts for debt financing, purchase, modernisation, adaptation, or redevelopment of transferred property, provided that the Seller used such form of financing and is a party to such contracts;
- property management contracts;
- asset management contracts;
- cash receivables related to transferred assets
NOTE! Not in every case is it necessary to transfer all elements typical for a real estate transaction and indicated in items a-d above. It is enough to transfer to the Buyer the minimum allowing to continue the previous business activities of that enterprise.
Property management contract is crucial (?)
According to the Ministry of Finance, a circumstance excluding the possibility of considering assets transferred to the Buyer to be an enterprise, is the situation when it is necessary to take additional factual or legal actions (such as concluding contracts) necessary to carry out business activities on the basis of the acquired assets. This situation may occur when the Buyer has entered or is entering into property management or asset management contracts on their own, even if they are concluded with the same entities that provided the said services to the Seller.
Utility contracts are not crucial
For legal or business reasons, such contracts are usually not transferred to the Buyer as part of the sale of a commercial property. A typical situation is when the Buyer concludes a new contract with the previous utility supplier. In some cases, the Seller may, for some time (until the Seller has concluded a new contract) still be the party to the contract with the utility supplier, and recharge utility costs to the Buyer. Whether these contracts have been transferred as part of the transaction shall not be regarded as the decisive factor when qualifying a transaction as disposal of an enterprise or its organised part.
Elements of little significance
Insignificant elements of the transaction, which do not determine whether an asset is qualified as enterprise or its organised part, are as follows:
- movables comprising the furnishings of the building;
- rights resulting from performance securities of lease contracts established by tenants (e.g. rights resulting from bank guarantees, deposits, voluntary submissions to execution);
- rights resulting from performance bonds issued by contractor of construction/renovation works carried out in the building;
- rights resulting from contracts for services, including contracts for security and cleaning services or facility management agreements, etc.;
- copyrights used throughout the fields of exploitation indicated in related agreements, including the copyright for the building design, copyright and protection of registered trademarks;
- license rights of software used for managing the property;
- right for domain names related to the property;
- technical documentation of the building, in particular building log books, construction designs, fire and chimney inspection reports;
- legal documentation of the building – e.g. copies of contracts and administrative decisions
The intention to continue business activities
In order for a transaction to be considered a disposal of an enterprise, it is crucial that the intention to continue its business activities by the Buyer is evident at the time of the transaction. If – after some time – the purpose of the property changes, e.g. due to changes in the economic situation of the taxpayer, there are no grounds to consider that the Buyer had no intention to continue business activities previously carried out by the Seller.
The fact that the commercial property continues to be leased for some time after the transaction was concluded is not a circumstance on its own confirming the Buyer’s intention to continue business activities previously carried out by the Seller (e.g. when the intention applies only to a short period of time, and it is planned to demolish the building eventually).
When are we dealing with an asset deal in terms of VAT taxation?
The explanation mentions a few typical situations, in which the transaction is subject to the provisions of the law on VAT. These are:
- properties acquired from the developer (different core activities of the Seller and the Buyer),
- acquisition of the property from its previous user (e.g. sale and lease back),
- acquisition of the property by its previous tenant,
- acquisition of the property to demolish it and develop a new project.
The explanations do not question the protection applicable to taxpayers following individual tax rulings obtained prior to their publication.
The full text of the explanations: https://www.mf.gov.pl/c/document_library/get_file?uuid=cc7e5cfa-1107-4738-be83-655b242e2248&groupId=764034
We would like to invite you to individual consultations regarding the factual state in your case.