Significant tax changes expected for real estate companies in Poland from 2021/22
Justyna Bauta-Szostak and Łukasz Kupień of MDDP take a closer look at the obligations of real estate companies in Poland following the introduction of a bill to improve tax collection.
The real estate clause is to be introduced to the Polish-Dutch tax treaty (most probably from 2022) and other changes to taxation of income from sale of real estate companies are intended to be implemented in Poland in 2021.
Real estate clause in the Polish-Dutch tax treaty
On October 29 2020, a protocol was signed based on which the Polish-Dutch tax treaty is to be reshaped (the changes will be effective most probably starting from 2022). A major change is the introduction of so called ‘real estate clause’. At present, as long as a Dutch shareholder is managed from the Netherlands and has relevant substance – office, personnel, equipment etc., a sale of shares in the Polish real estate rich company is not taxable in Poland.
According to the changes, gains derived by a Dutch company from the alienation of shares in a Polish real estate rich entity, may be taxed in Poland if, at any time during the 365 days preceding the alienation, these shares derived more than 75% of their value directly or indirectly from immovable property located in Poland. However, the pension funds (which are generally exempt from tax in their state) may be still subject to tax on income received from alienation of real estate-rich entities solely in the country of their residence, and not in the country where the real estate is located. Exit strategies should be verified as per above.
Planned changes regarding Polish internal rules
According to a bill, a real estate company will be obliged to settle corporate income tax (CIT), or personal income tax (PIT), advance on the profit obtained by its foreign shareholders from the sale of shares of such real estate company. Additionally, real estate companies will be obliged to publish data about its shareholders and some of them will be obliged to appoint a tax representative in Poland.
The Polish Ministry of Finance justifies that the change will improve tax collection and execution, which will be easier once an entity that has real estate in Poland has a tax remitter. At present, the bill is processed in the Parliament and its final version should be published before December 1 2020.
Definition of a real estate company
A definition of a real estate company will be introduced to the Polish CIT Act. A real estate company will be an entity, other than a natural person, obliged to prepare a balance sheet on the basis of accounting provisions, in which:
On the first day of the tax year, at least 50% of the market value of its assets, directly or indirectly, was real estate located in Poland or rights to such real estate and the market value of these real estate exceeded PLN 10,000,000 ($2.6 million) – in the case of entities starting their business activity; and
As at the last day of the year preceding the tax year, at least 50% of the book value of its assets, directly or indirectly, was real estate located in Poland or rights to such real estate and the book value of these real estate exceeded PLN 10,000,000, as well as revenue from letting, subletting, lease, sublease and other similar contracts and from shares in other real estate companies, constituted at least 60% of total revenues – in the case of other entities.
A real estate company as a tax remitter
If a foreign entity sells at least 5% of shares in a real estate company, a real estate company will be obliged to pay an advance tax on the profit obtained by the seller. A seller will be obliged to transfer the amount of the advance tax payment to a real estate company before payment deadline.
If a real estate company will not have information about details of the transaction, the advance tax payment will be set at 19% of the market value of the shares being sold.
A real estate company will be obliged to inform the tax authorities about its direct and indirect shareholders as well as about their % of participation. Additionally, Polish taxpayers (including those with limited tax obligation), who have at least 5% of shares will be obliged to report to the tax authorities the amount of their direct or indirect participation in a real estate company.
This provision raises numerous practical doubts, in particular in relation to entities listed on stock exchanges or entities that belong to investment funds. Lack of reporting may be subject to certain penalties.
Obligation to appoint a tax representative
Non-Polish companies owning real estate in Poland which are not subject to taxation in the EU or the EEA on the entirety of their income, are to be obliged to appoint a tax representative, regardless of the fact that a real estate company is sold or not. A tax representative shall be jointly and severally liable with a real estate company for tax obligations arising from the sale of shares in a real estate company. Lack of appointment of a tax representative may trigger tax penalties up to PLN 1 million (€230,000).
Moreover, the Minister of Finance will publish individual data from annual CIT returns of real estate companies and indicate them by name.
To summarise, new provisions may have significant impact on real estate companies operating in Poland, as well as for their shareholders. There are still a lot of ambiguities which may create interpretational doubts.