Małgorzata Dankowska
Małgorzata Dankowska Partner, Tax Advisor

Tax & Legal Highlights for Real Estate – January 2021

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Sale of the house: the preliminary sales agreement has no tax effects

According to the Corporate Income Tax Act, a sale of property rights against payment shall generate the taxable income. What is important, the transfer of rights to real estate occurs only when the final contract for the sale of property is concluded in a form of notarial deed (i.e. promised contract).

A preliminary agreement simply precedes the final agreement, because its purpose is to ensure that the parties will conclude the promised agreement.

Therefore, signing of the preliminary agreement does not trigger the corporate tax obligation with regards to the sale of rights to real estate. The above position is also confirmed in tax rulings issued by the Head of the National Tax Information. The tax authority states that since the preliminary agreement does not yet transfer the ownership of the real estate then it cannot be said that the seller has taxable income. Signing the preliminary agreement has the purpose of ensuring that seller will transfer the rights to the real estate to the purchaser on the agreed date. This cannot be changed by the earlier payment of all or part of the price, hence also the advances paid in connection with the conclusion of the preliminary agreement do not have any tax implications (Tax rulings of 26 May 2020 r. no. 0112-KDIL2 2.4011.283.2020.1.MM and of 16 October 2020 no. 0113-KDIPT2-2.4011.678.2020.1.MK)

The supply of real estate on which the small architecture objects  are located id not VAT exempt

According to the Construction Law, the term of  as the “object of small architecture” we shall understand small objects, in particular: objects of religious worship, objects of garden architecture, utility objects for recreation and maintaining order. Under the VAT act (article 29a (8)) in the case of supply of buildings or structures permanently connected with land or parts thereof, the value of the land is not separated from a taxable amount. Therefore the real estate shall be taxed with VAT rate appropriate for the building or structures. At this point it shall be emphasized that as a rule the supply of buildings, structures or parts thereof is exempt from VAT (article 43 (1) point 10 and 10a) – except for the VAT Act exemptions (e.g., delivery as part of the first settlement). However, due to the fact that the objects of small architecture do not constitute a building or a structure defined in the Construction Law, the VAT exemption will not apply to the sale of real estate with objects of small architecture erected on it.

Impact of changes in Construction law on property tax

The Construction Law, amended in September 2019, also introduced changes on how to determine the tax base for real estate tax. It is especially crucial for taxpayers, given the approaching deadline for submitting a real estate tax return. The change in the scope of documentation required for an application for an occupancy permit or to notify completion of construction works also affected an imprecise legal concept of “ensuring the possibility of using the building in line with its intended purpose”.

Until now, the taxpayers have been responsible for the determination of installations necessary to use the building by its functions. It is worth to emphasize that they have not been limited in this regard with any deadlines. After completion of the investment and finalization of formalities, taxpayers had the time to consider what installations are necessary for using the building by its purpose. Following the change in Construction Law Act taxpayers are obliged to make sure that the facilities classification is made at the latest when submitting documents to a competent authority.

In another case (i.e., when installations are not specified in the submitted documentation as means that ensure the possibility of using the facility by its intended purpose), there is a risk that the tax authorities will treat installations as structures separate from the building. Such classification will increase the taxpayer’s burden because constructions that are not part of a building should be taxed at a rate of 2% based on their value.

Another significant change in the Construction Law Act is the indication of the facilities that do not require a building permit, e.g. parcel lockers, ATMs, CDMs, etc. Since the Act on Local Taxes and Fees relates directly to the objects listed in the Construction Law Act, there is a risk of recognizing these objects as structures subject to real estate tax. Consequently, they can also be taxed at a 2% tax rate on their value.

The Ministry of Finance: Financial statements are not required as of 30 April 2021.

According to the answer of the Minister of Finance of 30 December 2020 (no. DWR5.5101.148.2020) provided on request of the National Council of Statutory Auditors, limited partnerships that will become taxpayers of CIT as of 1 May 2021 (under the new provisions of Corporate Income Tax Act), will not be required to prepare a financial statement as at the date of closing the books of accounts (i.e. as of 30 April 2021).

Therefore the limited partnerships can either: 

  • Prepare two financial statements: the first – from 1 January 2020 to 31 December 2020, and the second – from 1 January 2021 to 31 December 2021, and as of 30 April 2021, close the books only for tax purposes (applicable only if the financial year corresponds to calendar), or
  • Extend the company’s financial year until 30 April 2021. and submit a financial report for that period. In this case, the accounting year will run from 1 January 2021 to 30 April 2021, and the next accounting year from 1 May 2021 to December 31, 2021. 

New withholding tax regime deferred once again

The Ministry of Finance, Funds and Regional Policy, one day before introducing new rules of withholding tax, again, deferred its application. Under the published on 30 December 2020, the Minister of Finance Decree (CIT, PIT) the provisions concerning the new WHT regime to be applied for payments exceeding 2m PLN, have been deferred until the 1 July 2021. By way of reminder, the new WHT regime was to be used from 1 January 2019, among other things, in the cases when payments constitute income from:

  • interest
  • copyrights or related rights
  • advisory, accounting, market studies, law, marketing, management and control of data processing, employees’ recruitment and the personnel sourcing services, guarantees and commitments services and payments based on similar titles
  • dividends and other revenues from participation in profits of legal persons.

The moment of completion of construction works vs real estate tax

According to the Local Taxes and Duties Act, the tax obligation arises on the first day of a month following the month when a taxable event occurred. If the taxable event consists in the existence of a building or non-building structure or a part thereof, the tax obligation arises on 1 January of the year following the year in which the construction was completed or in which the real estate was occupied (It may also take place before the property is finally finished)

Tax regulations do not refer in this respect to any administrative decision (e.g. an occupancy permit), but to the factual circumstances, i.e. completion of construction works. For this reason, it is assumed that the construction documentation, and especially the construction log (which is the basic element confirming the course of construction works) is the basis for the determination of the exact date of completion of works. Therefore, the date indicated in construction log may be decisive for determining the moment when the tax obligation arises.

The above is confirmed in the judgment of the Provincial Administrative Court in Gdansk of 15 December 2020 ref. no. I SA/Gd 781/20, and in the judgement of the Supreme Administrative Court of 12 January 2017 ref. no. II FSK 3785/14.

Leaseback as a way to increase financial liquidity

Sale and leaseback is a form of debt financing aimed at obtaining additional funds for the implementation of an investment or increasing financial liquidity. The essence of leaseback is the release of cash that is hidden in the value of fixed assets (e.g. real estate). Therefore, it can be assumed that leaseback has a similar function to a bank credit or a loan. 

As part of a leaseback, the following two steps are performed: 

  • Sale by the user of the leasing subject to the future lessor (e.g. a leasing company)
  • The financing party gives the user the previously purchased subject for use within a lease agreement. 

The user is obliged to pay the rent fees, the amount of which corresponds to the value for the purchase of goods by the financing party. After the end of the leasing period, a separate sale agreement shall be concluded, on the basis of which the lessee will purchase the leasing subject from the financing party. During the entire period, the leased object is in the economic possession of the user.

When determining the tax consequences of a sale and leaseback transaction, it should be noted that although the main purpose of the user (lease) is to obtain funds for running his business, the transaction is still, as a rule, not perceived in Poland as one financial transaction (VAT exempt). Leaseback is accounted for as two separate transactions (supply of the goods and supply of the goods under the leasing contract) with the right to deduct input VAT shown on invoices issued by the financing party. 

The above is confirmed by the tax rulings issued by the Head of the National Tax Information of 4 January 2021 no. 0114-KDIP4-3.4012.629.2020.1.MP  and of 30 September 2020 no. 0114-KDIP4-2.4012.319.2020.2.MC 

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