- Anna Koval
Poland - Key Tax Issues for Real Estate Investors
On 26 July 2021 the first draft of the amendments to the Polish Corporate Income Tax (CIT) Act (as well as other tax acts, including the Value Added Tax (VAT) Act and the Tax Ordinance) – called Polish Deal – were published on the Government Legislation Centre’s website. Afterwards, the draft bill was subject to amendments. Key changes are expected to enter into force as of 2022. A number of the changes is likely to have a significant, direct impact on the taxation of the real estate investments in Poland, i.e. in particular the following:
Tax depreciation of the real estate assets
Based on the draft amendments, tax depreciation write-offs recognised in relation to buildings cannot be higher than depreciation write-offs made for accounting purposes. In practice this may mean that if a given entity does not depreciate the building for accounting purposes (but rather revaluates this property to its fair market value) tax depreciation of such a building should be excluded. Moreover, it has been proposed that tax depreciation should be specifically excluded in relation to residential buildings and apartments (irrespective of their accounting treatment). It is not clear how these provisions could apply to premises in technically non-residential buildings which formally do not constitute apartments, but are used e.g. for short-term lease purposes.
Thin capitalisation rules
It is planned to specify that the thin capitalisation deductibility threshold should be understood as 30% EBITDA or PLN 3m (whichever is higher). So far, the above was not clear based on current rules but the prevailing interpretation (supported also by the judgements of the administrative courts, however not accepted by the tax authorities) assumed that the above limit should rather be calculated as 30% EBITDA plus PLN 3m. As such, the amendment could lead to a significant change in this area and limit the deductibility threshold for the taxpayers.
Withholding tax (WHT): Pay-and- refund mechanism/WHT special rulings
The draft amendments contain certain changes to the WHT ‘pay-and-refund’ mechanism for foreign payments with the aggregated amounts exceeding PLN 2m per year. This mechanism was introduced to the Polish CIT law already in 2019, but its applicability has been suspended (postponed) until 2022 (further postponement cannot be excluded – the developments in this respect should be closely monitored). The currently proposed changes assume that the WHT pay-and-refund mechanism would apply only to interest, dividend and royalties payments to related parties. As such, other payments (e.g. service payments or payments to non-related entities) should not be currently captured. It is also planned to change the definition on the ‘beneficial owner’ – in particular, with respect to the criterion of conducting actual business activity, it is intended to:
replace: the reference to the broad criteria regarding conducting actual business activity, provided in the regulations regarding the so-called ‘controlled foreign companies’;
with: the statement that the nature of the business activity of a given entity should be taken into account.
As another important change, it is proposed that the special formal ruling on the applicability of preferential WHT regime can be obtained not only in relation to WHT exemptions resulting from the directives of the European Union (i.e. Parent-Subsidiary Directive and Interest-Royalties Directive; ‘EU Directives’), but also in relation to the WHT exemptions or reduced WHT rates resulting from the respective double tax treaties (DTT(s)). Additionally, the draft amendments will specifically impose on the tax remitters higher standards of ‘due diligence’ in relation to payments to related parties.
‘Hidden dividends’ rule
The draft amendments include provisions intending to exclude from tax deductible costs so-called ‘hidden dividends’, i.e. certain payments made for the benefit of shareholder (or entities related to shareholder/taxpayer) which could be seen as aimed at replacing dividends. The proposed regulation is not entirely clear, however, it should be assumed that – if it enters into force – each payment to the shareholder/related entity should be analysed in the light of (i.) its terms (i.e. whether it is in line with market conditions) and (ii.) its impact on financial result of the taxpayer (i.e. whether the taxpayer would have made a profit if it had not provided the benefit to the related entity). Such considerations may have an impact on the potential tax deductibility of the discussed payments.
Introduction of a ‘diverted profits tax’
The draft amendments provide for new regulations introducing so-called ‘diverted profits tax’. This tax can be imposed at 19% on ‘diverted profits’, understood as costs (such as in particular intangible services, royalties or debt financing costs) incurred – directly or indirectly – for the benefit of related entities (provided that certain conditions are met). However, as a ‘safe harbour’ mechanism, the ‘diverted profits tax’ should not apply if the above costs are incurred for the benefit of a related entity subject to taxation on its worldwide income in the EU/EEA (assuming that this entity conducts a genuine and material business activity).
New type of ‘minimum tax’
Based on the current wording of the Polish CIT Law, a kind of ‘minimum CIT’ is already applicable to the real estate companies (as a percentage of the property value). However, currently, a new type of ‘minimum tax’ is proposed to be applicable to all taxpayers declaring tax losses or relatively low income (<1% of the revenue). Calculation of the new minimum tax: 10% of a ‘hypo basis’ including i.a.: 1. 4% of the revenues from sources other than ‘capital gains basket’ plus 2. excess of the financing costs over 30% tax EBITDA plus 3. excess of the intra-group service costs over 5% tax EBITDA increased by PLN 3m. Certain deductions or exempt categories of income may reduce the above ‘hypo base’. The ‘new minimum tax’ paid is to be potentially set-off against CIT payable within 3 subsequent tax years. Certain exclusions from the ‘new minimum tax’ are available – e.g. for new companies (within first 3 years of activity) or for companies recognising at least a 30% decrease of revenue. Alongside with introduction of the ‘new minimum tax’ it is planned to eliminate current rules limiting the deductibility of intra-group services above the threshold of 5% tax EBITDA plus PLN 3m.
Other changes Other proposed changes include e.g.:
changes regarding the taxation of mergers and demergers (to be considered in case any group restructurings are planned);
obligation to provide the Polish tax authorities with the accounting books along with the annual CIT return itself;
changes in the area of transfer pricing (‘TP’) – aimed at simplifying/clarifying some provisions, shifting some deadlines, regulating penal fiscal responsibility for preparation of certain TP-related documents etc.;
obligation for some taxpayers to provide the tax authorities with the accounting books/fixed assets registers in electronic format (as of 2023). As the proposed draft bill is still within the legislative process, the final shape of the changes should be closely monitored.
Upcoming changes to protocol to PL-NL DTT
On 29 October 2020 the representatives of Poland and the Netherlands signed a new protocol to the double tax treaty between these two countries. Ratification of the protocol will result in major changes to the DTT, including in particular:
Introduction of the so-called ‘real estate-rich company clause’ to the DTT.
General anti-abuse rule in the form of the so-called Principal Purpose Test.
Clarification regarding dividend-like income (income from shares) for WHT purposes – aimed at including liquidation proceeds, income from purchase of own shares as income from transfer of investment certificates.
The parts of the protocol which are of great importance for real estate investors could potentially become binding as of 2022 – provided that the ratification procedures are completed in both countries until the end of September 2021. This is however unlikely – thus we expect that these changes will become binding as of 2023. Further developments in this respect should be monitored.
Investors using Dutch holding companies should consider the impact of the above-mentioned changes. Dutch investors considering the sale of the Polish real estate companies will need to verify if such sale will trigger capital gain taxation in Poland.
Changes regarding statements on election of VAT taxation on real estate transactions
As of 1 October 2021, there will be a simplification for the taxpayers executing certain real estate transactions, in case of which the VAT taxation was possible only if the taxpayers file the joint statement to the tax office prior to the transaction – where they state that they chose to have the transaction taxed with VAT (instead of applying VAT exemption). Namely, according to the new regulations, it will be sufficient that the information on election of VAT taxation will be included in the notarial deed documenting the transfer of real property – i.e. the parties to the transaction willing to choose VAT- able transaction will not be obliged to file a separate statement in this respect (as it is now).
The simplification mentioned above may result in less administrative burdens for the investors executing ‘asset deal’ real estate transactions on the Polish market. As there is yet no practice in this respect, this matter should be analysed by parties’ advisors prior to the transactions, on case-by-case basis – so that it is made sure, whether (i.) the new simplification may be applied, or (ii.) the statement on election of VAT taxation will still be required in order to ensure the VAT taxation of the transaction.
Reporting on payment deadlines – obligation for ‘real estate companies’
Under the Act on Countering Payment Gridlocks, ‘real estate companies’ have been obliged to submit annual reports on the payment dates used in the previous calendar year for commercial transactions. The report for 2021 should be filed via a digital system by 31 January 2021 (in case of the companies having the tax year corresponding to the calendar year). ‘Real estate company’ should be understood here in line with the new definition included in the CIT Act as of 2021. Accordingly, this should cover entities – other than natural persons – obliged to prepare balance sheet based on accounting provisions, in which:
As of first day of the tax year, at least 50% of market value of assets consisted directly or indirectly of market value of real estate located in Poland or rights to such real estate – in case of entities commencing their activity.
As of the last day of the year preceding their current tax year at least 50% of balance sheet total value of assets consisted directly or indirectly of balance sheet value of real estate located in Poland or rights to such real estate - in case of entities other than mentioned above.
On the top of the above, in order to qualify as ‘real estate company’:
(i.) The respective fair market/book value of the real estate must exceed PLN 10m; and
(ii.) in case of entities mentioned in the point (b.) above, in the previous tax year the company obtained at least 60% of tax revenues from (sub)lease of real estate and agreements of similar nature or from ownership rights relating to real estate/other real property companies.
Entities qualifying as real estate companies should ensure that the reporting is timely made.
National System of e-Invoices (KSeF)
The Ministry of Finance has published a draft act providing for the introduction of structured invoices and the National System of e-Invoices (‘KSeF’). Based on these provisions, the invoices will be issued and received through the Ministry’s platform, hence the ability to provide and receive data in a structured form will be required. The new provisions are planned to enter into force on 1st January 2022. The use of the system in the initial phase is to be voluntary [with some benefits applicable to the entities deciding to use the system – such as e.g. possibility to receive the VAT refund within the shorter period than the standard one; lack of obligation to provide the so-called JPK files (i.e. the Standard Audit Files) to the tax authorities; etc.]. It is planned that starting 2023, use of the system will become mandatory. The final shape for the provisions should be analysed in order to be updated on the obligations imposed when the new law comes into force.
Source: Key Tax Issues at Year End for Real Estate Investors 2021/2022, PwC