Tax changes for investors in Poland real estate
Piotr Pasko of MDDP Poland comments on the tax changes being introduced in 2022 on real estate investments in Poland.
A comprehensive package of tax changes in Poland (so called ‘Polish Deal’) comes into force on January 1 2022 (with some exceptions to be introduced as of 2023). Some of the changes will particularly affect the real estate industry.
From January 1 2022 real estate companies (within the meaning of Polish CIT regulations – see below) will be obliged to make depreciation write-offs from real estate in the amount not higher than the amount made in accordance with the accounting regulations.
However, neither the amendments nor the official justification to the changes provides further information on interpretation of this rule for real estate companies recognising the real estates as investments for accounting purposes (mainly buildings leased to the third parties).
In this situation, real estates are presented in the books at the fair market value and no accounting depreciation is being claimed. In this respect there are two possible interpretations. In the worst-case scenario, 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.
In this case, no tax depreciation could be claimed effectively, what would negatively impact the cashflows. Regardless of the interpretation, the undepreciated tax value of such real property will be recognised as a deductible cost upon the sale of the property.
Additionally, a general exclusion from the tax depreciation of residential buildings and residential apartments. Originally, the change was to take effect from 2022, but at the last stage of the legislative process, it was postponed until 2023. Again, adverse effect on the cash flows on companies owning such assets will be observed (especially with respect to the private rental sector) as tax deductible costs connected with their acquisition or development will be settled at the moment of exit in the form of an asset deal and not via tax depreciation.
Many of the changes regarding financing will in practice impact real estate industry. Currently, an excess of debt financing costs may be recognised as a tax-deductible cost up to the limit of: PLN 3 million (approximately $1.2 million) and/or 30% tax EBITDA. There are disputes with the tax authorities, but in general the administrative courts confirm that it should be plus (sum of both amounts).
From January 1 2022, the limit will be determined as: PLN 3 million or 30% tax EBITDA – whichever is higher. Moreover, debt financing costs obtained from a related entity, in the part in which the financing was used directly or indirectly for capital transactions, in particular for acquisition of shares, will not be tax deductible.
A new tax (so called ‘minimum CIT’) will be imposed on the companies as well as tax capital groups and permanent establishments of the foreign taxpayers with low profitability (understood as being in CIT loss position or with the business activity revenues vs income ratio not exceeding 1%).
Essentially, the minimum CIT will amount to inter alia 0.4% of the amount of revenues from operating activities, 10% of costs of debt financing incurred on behalf of related entities, exceeding 30% of the tax (earnings before interest, taxes, depreciation, and amortisation) EBITDA and 10% of costs of purchasing certain services or intangible rights (i.e. including advisory, advertising, management and control services, data processing and some intangible assets) incurred on behalf of related entities or from tax havens – in part exceeding PLN 3 million plus 5% of the tax EBITDA.
Taxpayers will be able to deduct the amount of the minimum CIT paid for a given year from the CIT calculated based on general rules. Minimum CIT, however, will be deductible in three consecutive tax years only. There are some conditional exemptions provided for in the law – e.g. with respect to the taxpayers commencing their business activities (in the first three years) or for the groups of companies being Polish tax residents.
New legislation covers also so-called ‘tax on shifted income’ (according to which some costs incurred towards a related party will actually be subject to 19% tax, unless such related party conducts a genuine business activity within the EU or EEA), introduction of the pay and refund mechanism (dividends/interest/royalties paid abroad to a related party in the amount of exceeding PLN 2 million) and provisions on hidden dividends (where tax deductibility of certain expenses paid to related parties may be questioned; this change however was postponed until 2023).
The real estate sector is of particular interest to the state. Polish Deal, another tightening tax reform, will increase an overall taxation of the real estate industry. Additional costs will have to be incurred by the real estate companies to meet new (and not that clear) compliance requirements.
Senior manager, MDDP Poland