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Holding Polish Real Estate

DIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the direct holding of real estate. First is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax
Rental income derived by individuals may be subject to taxation with different forms: a tax on revenue recorded, a personal income tax according to general rules or a flat tax (when performing a business activity).

Minimum tax
Due to the Covid -19, companies are unconditionally exempted from paying the minimum tax for the periods from 1 March 2020 to the end of the month in which coronavirus epidemic would be revoked.

Minimum tax is paid on revenues from buildings and it amounts to 0.035% of building's worth a month (0.42% a year). The tax base is the value of the real estate on the first day of the month as per fixed asset register. The tax allowance is PLN 10 000 000 (ca. EUR 2.4m) and it concerns all related entities and real estates.

Subject to the minimum tax are buildings that are located in Poland, possessed or co-possessed by the taxpayer, and at least 5% of the usable space of the real estate has been given for use under a rental, lease or other agreement of a similar nature (but only to the parts of buildings actually subject to lease).

In practice, the minimum tax is deductible against regular Corporate Income Tax (CIT) – only excess of the minimum tax over regular CIT for a given tax year must be actually paid to a tax office.

In case of a loss position, it is possible to request a minimum tax refund from the tax authorities. However, the refund involves an investigation of tax reconciliations by the tax office.

Retail sales tax
Retail sales tax is paid on the surplus of revenues from retail sales over PLN 17 000 000 (ca. EUR 3,9m) achieved in a given month. The tax is progressive with two tax rates:

  • 0.8% of the tax base - in the part in which the tax base does not exceed PLN 170 000000 (ca. EUR 38,6m);
  • 1.4% of the excess of the tax base over PLN 170 000 000 - in the part in which the tax base exceeds PLN 170 000 000.

Deductibility of costs, interest and depreciation
The tax-deductible costs of rental revenues are costs incurred in order to achieve rental revenues.

These costs include interest actually paid on loans taken out for the purchase of the leased real estate incurred after its delivery, but also renovation, equipment and depreciation costs.

Costs are not deductible when a personal income tax is paid on recorded revenue which might be applicable only when an individual does not conduct a business activity.

Losses
An individual who does not conduct a business activity is not able to deduct a loss. A taxpayer who carries out business activity and declares a loss within it, may deduct a loss from income derived during five consecutive tax years. A maximum of PLN 5,000,000 or 50% (depending on which of these values is higher) of a loss from each of the previous five consecutive tax years is deductible.

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals. However, losses can only be offset against Polish taxable income, derived from an equal source of revenues.

Resident companies

Corporate income tax
Rental income is subject to corporate income tax.

If the value of sales revenue (along with amount of the due VAT) does not exceed an equivalent in PLN of 2 000 000 EUR both in the previous and current tax year or when the taxpayer starts his business activity (in the year of beginning), a company is subject to corporate income tax at a flat rate of 9%.

Other companies are subject to corporate income tax at a flat rate of 19%.

Minimum tax
Due to the Covid -19, companies are unconditionally exempted from paying the minimum tax for the periods from 1 March 2020 to the end of the month in which coronavirus epidemic would be revoked.

Minimum tax is paid on revenues from buildings and it amounts to 0.035% of a building's worth a month (0.42% a year). The tax base is the value of the real estate on the first day of the month as per fixed asset register. The tax allowance is PLN 10 000 000 (ca. EUR 2.4m) and it concerns all related entities and real estates.

Subject to the minimum tax are buildings that are located in Poland, possessed or co-possessed by the taxpayer, and at least 5% of the usable space of the real estate has been given for use under a rental, lease or other agreement of a similar nature (but only to the parts of buildings actually subject to lease).

In practice, the minimum tax is deductible against regular CIT – only excess of the minimum tax over regular CIT for a given tax year must be actually paid to a tax office.

In case of a loss position, it is possible to request a minimum tax refund from the tax authorities. However, the refund involves an investigation of tax reconciliations by the tax office.

Retail sales tax
Retail sales tax is paid on the surplus of revenues from retail sales over PLN 17 000 000 (ca. EUR 3,9m) achieved in a given month. The tax is progressive with two tax rates:

  • 0.8% of the tax base - in the part in which the tax base does not exceed PLN 170 000000 (ca. EUR 38,6m);
  • 1.4% of the excess of the tax base over PLN 170 000 000 - in the part in which the tax base exceeds PLN 170 000 000.

Deductibility of costs, interest and depreciation
All of the costs related to the possession of real estate are deductible from rental revenue. Such income is taxed against a flat tax rate of 19%.

Tax-deductible costs include interest on loans actually paid (costs of accrued but unpaid or remitted interest on liabilities are not considered as tax deductible expenses) incurred for the purchase of rented real estate and after its delivery. Interest accrued until the delivery of real estate increase its initial value and are included in tax deductible expenses by depreciation expenses, whereas interest accrued and paid after the day of delivery represent the tax-deductible expenses.

However, there is a limitation on the cost of debt financing, i.e. all costs related to financial means obtained from other entities (including interest, fees and commissions). Excluded from tax-deductible expenses are the costs of debt financing which exceed the safe harbour of PLN 3m (ca. 700k) plus 30% of the amount representing the surplus of total revenues reduced by interest revenues over the sum of tax-deductible costs reduced by debt financing costs and depreciation expenses not included in the initial value of a fixed asset or an intangible asset in a tax year. However, the costs of debt financing, which in a given tax year cannot be included as tax-deductible costs, are possible to be included in the next five tax years.

The period of used real estate's depreciation is determined by deducting from 40 years the number of years from the day of delivery of the real estate for the first time for use. However, the period cannot be shorter than ten years, i.e. the depreciation rate amounts to a maximum of 10%. Non-residential real estates are subject to depreciation at a base rate of 1.5%. When it comes to real estates used for more than five years, the annual rate amounts to 10%. All the periods shall be computed as of the date of acquiring the real estate.

Anti-tax avoidance directive
The anti-tax avoidance directive (ATAD) is a directive published by the OECD and will be implemented by the European countries. ATAD contains certain interest restrictions that may affect investments in real estates.

The Act implementing solutions of the ATAD II in Poland was published on June 25th 2020. New provisions preventing the consequences of discrepancies in the qualifications of hybrid structures will be applicable to income achieved after 31 December 2020.

Divergences in the tax qualification of hybrid structures can occur in two situations: (i) a different qualification of the entity, or (ii) a different qualification of the payment (instrument) on tax grounds by different jurisdictions.

As a result of these regulations, Polish entities will not be able to treat a given payment as a deductible cost in situations where it exists:

  • deduction without inclusion – a deduction of a payment from the tax base in one jurisdiction without the corresponding inclusion of that payment in the tax base of the taxpayer in another jurisdiction;
  • double deduction – deduction of the same payment from the tax base in more than one jurisdiction.

Hybrid mismatches may arise in the following situations:

  • hybrid entity mismatch occurs when entity is treated as tax transparent in one jurisdiction and as non-transparent in another jurisdiction;
  • hybrid financial mismatches take place when instrument that is qualified differently for tax purposes in two jurisdictions,
  • disregarded permanent establishment that is not considered for income tax purposes in the jurisdiction where the establishment is located.

If a double deduction or deduction without tax is made by related parties or under an arrangement to exploit differences in the qualification of hybrid structures, it will be considered unlawful.

The rules also apply to situations of deduction of costs by a taxpayer with double tax residence.

Losses
A taxpayer who suffered a loss in a given tax year e.g. if interest and depreciation costs exceed rental revenue, can deduct the loss from income derived in five consecutive tax years - provided that the loss from previous years reduces the income derived from the same source of revenues. A maximum of PLN 5 000 000 or 50% (depending on which of these values is higher) of the loss from each of the previous five consecutive tax years is deductible.

As of 1 January 2021, additional limitations in settling tax losses are in force in Poland. The taxable person’s losses are not taken into account if the taxable person acquired another entity or acquired an enterprise or an organised part of an enterprise, or received a cash contribution for which it acquired an enterprise or an organised part of an enterprise, as a result of which:

  • the subject of the taxable person's actual core business activity after such acquisition or purchase, in whole or in part, was different from the object of the taxable person's actual core business activity before such acquisition or purchase, or
  • at least 25% of the shares of the taxable person are owned by an entity or entities that did not have such rights at the end of the tax year in which the taxable person suffered such loss.

As far as PGK is considered, the loss incurred by a given company from the group is settled within a total income achieved by PGK. The loss incurred by the group as a whole is deductible from income derived by the group in five consecutive tax years.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies, since income derived from Polish real estate held by a foreign company is considered to be subject to corporate income tax in Poland. However, losses can only be offset against Polish taxable income derived from an equal source of revenues.

INDIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the indirect (shares) holding of real estate. First is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax
Incomes from participation in profits of legal persons (dividends) are taxed against a flat tax. As a general rule, the tax is charged by the taxpayer (here: company paying the dividend). The flat-rate income tax is levied on income (revenue) derived in Poland.

In this case, the taxpayer (company paying the dividend) charges a flat-rate income tax at a rate of 19%.

Non-resident individuals

Personal income tax
Income derived from participation in profits of legal persons (dividends), are taxed against a flat tax. As a general rule, the tax is charged by the taxpayer (here: company paying the dividend). The flat-rate income tax is levied on incomes (revenues) derived in Poland.

In this case, the taxpayer (company paying the dividend) charges a flat-rate income tax (dividend withholding tax) at a rate of 19%.

Dividend withholding tax
A flat-rate income tax (dividend withholding tax) is charged at a rate of 19%. The tax is deductible from an income derived from an equal source of revenues.

Resident companies

Corporate income tax
Corporate income tax is paid only on the ongoing business activity of the resident company.

Deductibility of costs, interest and depreciation
Costs borne by resident companies may be deductible against incomes on the ongoing business activity of the resident company in question.

Distribution of income and gains
Income derived from participation in profits of legal persons (dividends), are taxed against a flat tax. As a general rule, the taxes charged by the taxpayer (here: company paying the dividend). The flat-rate income tax is levied on incomes (revenues) derived in Poland.

In this case, the taxpayer (company paying the dividend) charges a flat-rate income tax on dividends at a rate of 19%.

Dividends paid to another Polish capital company that holds at least a 10% share in the capital of another capital company being a Polish resident is exempt from the flat income tax on dividends.

A company that receives income from a share in the revenue of the paying company is committed to be subject to corporate income tax on its global income, regardless where the income was derived.

Non-resident companies

In case of indirect holding of real estate, non-resident companies obtain only income derived from participation in profits of legal persons (dividends). As a general rule, the tax is charged by the taxpayer (here: company paying the dividend). The flat-rate income tax is levied on incomes (revenues) derived in Poland.

In this case, the taxpayer (company paying the dividend) charges a flat-rate income tax on dividends at a rate of 19%.

Tax exemption or lower tax rate might be applicable based on Directives (holding at least 10%/25% shares for 2 years) or Double Tax Treaties.

Key contact person:

piotr_liss_tax_partner_piotr.lissrsmpoland.pl_.png

Piotr LISS

Tax Partner
Tax Advisor (10240)

T: +48 61 8515 766
E: ekspert@rsmpoland.pl