What key things should I look out for when investing in residential real estate?
Different tax issues arise depending on the structure adopted (investment through a Polish entity or directly through a foreign entity). They will affect the efficacy of investments and the level of interest from potential future buyers. Smart structuring of investments from the tax perspective at an early stage of planning is an extremely important element in ensuring profitability of the whole venture.
Pay particular attention to:
optimal structure for the investments and the buyer's tax status;
tax consequences of purchasing real estate in the context of corporate income tax (CIT), VAT and tax on civil law transactions (TCLT);
tax consequences of the buyer obtaining financing;
CIT and VAT taxation of operating activities, as well as the level of burdens with respect to real estate tax (RET).
NOTE: In Poland, tax practice regarding the purchase and lease of entire residential or mixed-use buildings is still developing and may be subject to various interpretations. The preparation and planning of investments in this area requires special care and diligence.
Any big differences between taxation of Polish and foreign investors?
As a rule - no. Polish and foreign entities may purchase residential real estate in Poland. With respect to CIT, the buyer can be a tax transparent entity or a company subject to taxation with CIT. Even with CIT-exempt investment funds (Polish and foreign), this exemption generally does not include income from lease of real estate.
To date, the most popular form of investing in real estate assets in Poland has been a Polish limited liability company.
Recent years have seen a significant increase in the number of transactions in which the buyer is a foreign entity. In terms of taxation, this formula of investment in Poland does not differ significantly from investment through a Polish company, but may slightly simplify flows and reduce obligations regarding, for example, withholding tax.
What are the VAT consequences of purchasing residential real estate in Poland?
The purchase of developed real estate may:
be taxed with VAT
be exempt from VAT or
be outside the scope of VAT.
In the latter two cases, the purchase of real estate will in principle be subject to 2% TCLT payable by the buyer (which unlike VAT is not refundable). The rules for taxing real estate acquisition depend primarily on the tax status of the real estate itself.
If the real estate acquisition transaction is taxed with VAT, it is extremely important to analyse the right to deduct VAT (and the buyer's right to a refund). This depends on the building's intended use.
Example:
A building is to be fully used for rental purposes subject to VAT at the rate of 8% or 23%. Here, the buyer should have the full right to deduct VAT.
The VAT Act also provides for correction rules for change of intended use within a certain period of time after acquisition (e.g. from VAT-exempt use to use subject to VAT and vice versa).
Example:
Part of the building (e.g. 20 separated premises) is to be used for VAT-exempt activities. Here, the buyer will not be entitled to deduct VAT on the purchase price of the premises acquired for the purposes of tax-exempt activity.
The right to deduct and refund VAT in connection with the acquisition of real estate will also depend on the business model.
Example:
The buyer will lease the entire apartment building to a company subletting the property. According to the tax authorities' current line of interpretation, the rent obtained by the buyer should be taxed at 23% VAT and, thus, the buyer should have the full right to deduct VAT in connection with the real estate acquisition. However, this business model may result in the subletting company not having the right to deduct the VAT charged on the rent for premises sublet to natural persons with a VAT exemption.
The choice of business model requires a detailed tax and financial analysis to identify flows and potential tax leaks, and to estimate their size over time. Information on the VAT taxation of different types of leases is provided in Q6.
NOTE: The correct tax classification of the subject of the transaction (as an enterprise / organised part of an enterprise or standalone asset) and the application of the correct VAT tax rates, at both the acquisition and operating stages, is extremely important not only due to the impact of VAT on cash flows (including leakages, if any), but also due to the heavy penalties available to the tax authorities for irregularities, including additional 20% or 30% VAT liability and penal fiscal liability of management board members.
How are expenses relating to the purchase of residential real estate accounted for in respect of CIT purposes?
As a rule, expenses for the purchase of land do not constitute tax-deductible costs. They may be deducted for CIT purposes only upon the sale of land.
On the other hand, as a rule, expenses for the purchase (or development) of a building or premises, which is subject to accounting depreciation and will be used by the buyer for a period longer than one year, may be recognized as tax deductible costs via depreciation write-offs.
Depreciation rates:
1.5% per annum for new residential buildings and premises,
2.5% per annum for new non-residential premises (e.g. service premises),
higher rate (up to 10%) for buildings and premises used by previous owners for a period of at least 60 months,
4.5% per annum for structures.
Separate rules may apply to the CIT settlement of premises equipment, which - depending on value and type - may be treated as tax-deductible as a one-off or through tax depreciation (usually at the rate of 20%).
IMPORTANT NOTE: As of 1 January 2022, residential buildings, apartments constituting separate properties, cooperative ownership rights to apartments and rights to a single-family house in a housing cooperative (used for business purposes) are not depreciable for Polish income tax purposes (costs of acquisition or development of such facilities are recognised only upon sale).
For buildings and premises other than residential owned by real estate companies (as defined under the Polish CIT rules), tax depreciation write-offs qualified as tax deductible are limited by the amount of depreciation write-offs made for accounting purposes and charged to the entity's financial result in the fiscal year. Hence, if the property is not subject to accounting depreciation, depreciation write-offs are not tax deductible for Polish CIT purposes.
How to provide the buyer with cash for the purchase of real estate and how to account for financing costs for tax purposes in Poland?
As a rule, the buyer can obtain cash for the acquisition of real estate in the form of contribution from a shareholder or through debt financing. The following tax issues should be considered:
Cash contributions (including additional payments):
neutrality in terms of CIT and VAT;
TCLT paid by the company receiving the contribution at the rate of 0.5% of the contribution's value (except for the agio - the surplus of the issue value over nominal value of the new shares).
Debt financing:
limiting the deductibility of interest on financing based on the regulations implementing the ATAD I Directive (30% of tax-EBITDA or PLN 3 million, whichever is higher);
limiting the deductibility of interest on financing based on the provisions implementing the ATAD II Directive (provisions preventing discrepancies in the tax qualification of hybrid structures);
proper assessment of interest payments in the context of withholding tax provisions (including due diligence, determination of the beneficial owner of interest and the potential risk of applying tax anti-abusive clauses), taking into account potential exemptions from this tax or possible lower rates resulting from double tax treaties;
in the case of financing, obtained from related entities - analysis in terms of transfer pricing regulations (arm's length principle);
TCLT at the rate of 0,5% payable by the harrower lexemptions apply regarding shareholder loans and loans constituting a financial service exempt from VAT, among others).
How is the VAT charged on the lease of real estate?
The lease of real estate by a taxpayer in connection with their business activity is subject to VAT at the rate of 8%, 23% or is exempt from VAT. The rate depends on the purpose of the lease and the use of the rented building or individual premises.
Example:
VAT at 23%
lease of a residential property to another taxpayer that subleases that property to individuals,
rental of service premises to another business (B2B),
renting an apartment for non-residential purposes (e.g. for office purposes),
rental of garage space.
VAT at 8%
• rental of residential premises for the provision of accommodation services.
VAT exemption
• rental of real property of residential nature or part of real property, on one's own account, solely for residential (housing) purposes.
© NOTE: The qualification of services provided as accommodation services (8% VAT) or rental for residential (housing) purposes (VAT-exempt services) is in practice controversial due to the lack of relevant statutory definitions and the limited practice of the tax authorities in this respect.
There are no well-established and unambiguous criteria or guidelines developed to allow for a simple distinction between these services. It is usually assumed that an accommodation service is short-term rental of premises for business or leisure purposes. However, if the tenant's intention is to permanently reside in the premises and fulfill their housing needs, then this service should in principle be classified as renting premises for residential (housing) purposes. In practice, the classification / type of the rented property may affect the VAT taxation of lease. The appropriate qualification of the service provided by the landlord is crucial, since - assuming that the purchase of a residential building taxed with VAT - the structure of leases in a building (taxable lease vs. VAT-exempt lease) may directly affect the scope of the buyer's right to deduct VAT or the obligation to make appropriate corrections (the correction period for real estate is 10 years, and for other fixed assets 5 years), as well as, for example, the scope of the right to deduct VAT in connection with the purchase of services related to VAT-exempt activities. It is important to consider possible business models at the investment planning stage, taking into account the impact of adjustments on the rate of return on investment.
How is the lease of real estate taxed with CIT?
Rent constitutes the landlord's taxable revenue. The landlord's tax costs may be any expenses related to the business and incurred in order to generate, maintain or secure the source br income, including, for example, depreciation write-ofis financing costs (sublect to approprate restrictions), RET, or generaloperating costs Buch as lega, tax, accounting services. management costs, etc.). The CIT Act contains a list of costs that are not tax deductible (e.g. certain contractual penalties and damages, representation costs), as well as provisions limiting the possibility of including certain expenses as tax deductible costs (e.g. excessive financing costs).
Income from real estate (taxable revenue less tax deductible costs) is subject to CIT at the rate of 19% regardless of whether the landlord is a Polish or foreign entity.
The landlord's activity may also be subject to the tax on revenues from buildings (also known as the minimum CIT levy), which is 0.035% per month (0.42% annually) of the initial value adopted for tax purposes of the taxable building(s) (the basis for calculating the tax is reduced by PLN 10 million). To put it simply, this tax is ultimately imposed on the landlord's activity only in cases where the amount of this tax is higher than the amount of CIT payable under general rules.
Moreover, as from 2022 two new taxation concepts have been introduced to the CIT Act: (i) 19% tax on 'shifted profits (which replaced the CIT deductibility limitation with respect to intangible services) and (il) 10% minimum income tax. Both were also substantially adjusted by the most recent amendment to the CIT Act effective 1 January 2023, which, amongst others, suspended the effect of the minimum income tax until 2024 (i.e. the regulations on minimum tax will not cover income generated in 2022 and 2023).
The tax base for the tax on 'shifted profits' includes the expenditures (e.g. fees for intangible services and financing costs) incurred for the benefit of foreign related party and deducted for CIT purposes in a given tax year, if certain conditions are met. This tax will not apply to fees paid to a related party that is tax resident in an EU/EEA country and conducting „genuine and material economic activity" there.
As a side note, the CIT Act defines real estate companies and imposes reporting obligations on them (and some of their shareholders).
How is RET charged?
As a rule, land, buildings (parts thereof) and structures are subject to RET. The buyer of real estate (not a private individual) should submit a RET declaration to the competent tax authority in timely fashion and - starting the month after purchasing the real estate - pay tax installments. Installments are payable by the 15th day of each month, and for January - by January 31.
RET rates are established in the form of a resolution of the municipal council and set within statutory brackets. If the purchased real estate is to be used as part of the buyer's business (renting buildings or separate premises), the maximum tax rates for 2023 are as follows:
land: PLN 1.16 per m?
buildings or parts thereof (including residential buildings): PLN 28.78 per m? of usable area (calculated in accordance with the provisions on RET)
structures: 2% of their initial value adopted for CIT purposes
The property tax paid constitutes a CIT deductible cost.
What are the tax consequences of selling real estate in Poland?
ASSET DEAL
CIT: As a rule, sale of real estate located in Poland is subject to CIT on general principles. 19% CIT is charged on the income from sale of real estate (difference between the sale price and the net tax book value of the real estate).
VAT/TCLT: Sale of real estate is taxed as per Q3 above.
SHARE DEAL
CIT: Sale of shares in a Polish company by a foreign shareholder is not subject to taxation in Poland, unless the relevant double tax treaty contains the so-called real estate clause - then the profits from the sale of shares (stocks) will be taxed with CIT at 19% in Poland.
In the case of (direct or indirect) sale by a foreign shareholder of at least 5% of shares (stocks) in a Polish real estate company (as defined in the CIT Act), the obligation to pay a CIT advance on the capital gains may be imposed on this Polish real estate company (acting as a tax remitter - the seller of shares (stocks) should provide such company with funds to pay this tax advance). However, this obligation arises only if the double tax treaty includes a real estate clause.
TCLT: As a rule, sale of shares in a Polish company is subject to 1% TCLT payable by the buyer.
What kind of changes are planned in the tax legislation concerning residential property investors?
There have been rumors for some time about possible changes to the tax legislation and various concepts for taxing PRS institutional investors, but as of the date of this report, no official draft changes have been published.
According to government officials, current legislative analyses focus on taxing entities buying more than 5 apartments (on the primary or secondary market) per annum. Tentatively it is planned to make each purchase over this limit liable to 6% stamp duty levied on its fair market value.
It should be noted that so far this proposal has been widely criticized, as it would negatively affect the Polish residential market. Namely, not only PRS investors, but also developers who are facing problems related to limited purchases of apartments by individuals (who struggle with high interest rates on financing), would suffer the consequences of this new tax.
Undoubtedly, the change could also indirectly impact individuals who prefer renting apartments because they simply do not want to buy them (e.g. because they value their mobility) or cannot afford them (e.g. due to increasing interest rates) - the new tax may reduce the supply of apartments available for rent (whereas PRS investors could unlock the market and buy some of the projects that otherwise would not even be completed).
Also, investors buying apartments and not renting them out are in the taxman's sights, but so far, no clear concept on how to tackle this issue has been formulated.
Source: Knight Frank