Tax changes for investors in Poland real estate
Tax changes in 2022 will affect the real estate industry
On January 1, 2022, a comprehensive package of tax changes in Poland (the so-called “Polish Deal”) will come into force (with a few exceptions from 2023). Some of the changes will affect the real estate industry in particular.
From January 1, 2022, real estate companies (within the meaning of the Polish CIT regulations – see below) are obliged to make depreciation of real estate in the amount of no more than the amount made in accordance with the accounting regulations.
However, neither the changes nor the official justification for the changes provide more detailed information on the interpretation of this rule for real estate companies that account for the real estate as investments (mainly buildings rented to third parties).
In this case, real estate is reported at market value and no accounting depreciation is made. So there are two possible interpretations. In the worst case, tax depreciation on such a building should be excluded if a particular company is not depreciating the building for accounting purposes (but instead revalues it to its market value).
In this case, no tax depreciation could be effectively claimed, which would have a negative impact on cash flows. Regardless of the interpretation, the non-amortized tax value of such a property is recognized as a deductible cost when the property is sold.
In addition, a general exclusion from the tax depreciation of residential buildings and apartments. Originally, the change was supposed to come into force from 2022, but was postponed to 2023 in the last phase of the legislative process (renting) as tax-deductible costs in connection with their acquisition or development at the time of the exit in the form of an asset deal and not through tax depreciation billed.
Many of the changes in finance will have an impact on the real estate industry in practice. At present, excess borrowing costs can be recognized as tax-deductible costs up to the following limits: PLN 3 million (approx. USD 1.2 million) and / or 30% tax EBITDA. There are disputes with the tax office, but usually the administrative courts confirm that it should be a plus amount (the sum of both amounts).
From January 1, 2022, the limit will be set as follows: PLN 3 million or 30% tax EBITDA – whichever is higher. In addition, outside financing costs that are obtained from an affiliated company are not tax-deductible in the part in which the financing was used directly or indirectly for capital transactions, in particular for the acquisition of shares.
A new tax (so-called ‘minimum CIT’) is levied by companies as well as tax capital groups and permanent establishments of foreign taxpayers with low profitability (understood as being in a CIT loss position or with the ratio of business activity income to income) not exceeding 1%.
In essence, the minimum CIT is, among other things, 0.4% of income from operating activities, 10% of borrowing costs for affiliated companies that exceed 30% of the tax (Earnings before interest, steer, Depreciation and amortization) EBITDA and 10% of the cost of purchasing certain services or intangible rights (i.e. including advisory, advertising, administrative and control services, data processing and some intangible assets) incurred on behalf of affiliated companies or from tax havens – sometimes over 3 million PLN plus 5% of tax EBITDA.
Taxpayers can deduct the minimum amount of CIT paid for a given year from the CIT calculated according to general rules. However, the minimum CIT amount is only deductible for three consecutive tax years. The law provides for some conditional exemptions – e.g. for taxpayers who start their business activity (in the first three years) or for groups of companies that are tax resident in Poland.
New legislation also includes what is known as the “income shift tax” (whereby some costs incurred by a related party are actually subject to a 19% tax unless that related party has a real business activity within the EU or EEA) , Initiation of the disbursement and reimbursement mechanism (distributions / interest / license fees paid abroad to a related person in the amount of more than 2 million was postponed to 2021).
The real estate sector is of particular interest to the state. The Polish Deal, another tightened tax reform, will increase overall taxation in the real estate industry. Real estate companies have to incur additional costs to meet new (and not quite as clear) compliance requirements.
Piotr Pasko
Senior Manager, MDDP Poland
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