Tax on revenue from buildings

Michał Pacyga, Legal counsel, Tax advisor, Manager, Transaction Tax, EY 

Last year saw some major amendments to the Personal Income Tax Act (PIT Act), the Corporate Income Tax Act,  (CIT Act) and the Lump Sum Income Tax on Certain Incomes Earned by Natural Persons[1], which introduced the so-called minimum levy on commercial real estate. The above-mentioned regulations have had a major impact on the broadly defined real estate industry. Even though the practice of applying the new regulations hasn’t fully formed yet, the Ministry of Finance has already come up with a proposed amendment. New changes will become effective the following year.

As of 01 January 2018, taxpayers who have particular buildings such as office and commercial buildings, whose initial value exceeds PLN 10 million, have to pay the so-called minimum income tax. The aim of this solution is to prevent tax base erosion resulting from excess tax-deductible expenses generated by entities owning commercial real estate.

From the very beginning, these regulations have generated considerable concern. In particular, the question was raised whether the new regulations do not actually introduce a new tax aimed at protecting the domestic market against foreign entities, which have a stronger financial basis. Because of the minimal threshold of the real estate value, exceeding of which triggered the minimum levy, and the scope of the tax limited only to particular types of real estate, the European Commission (EC) decided to start proceedings on illegal public aid. This is one of the reasons the lawmakers decided to amend the regulations on the minimum levy, among others, by expanding the scope of the tax on other buildings as well.

As a result of the June amendment, the minimum levy (currently referred to as the tax on revenue from buildings) will apply not only to the potential revenue generated by strictly commercial buildings (such as stores, shopping centres and office buildings) as before, but also to revenue generated by all buildings included in the fixed asset register of a taxpayer, which have been leased out in whole or in part pursuant to a tenancy agreement, a lease agreement, or a similar contract. The new tax will not apply to residential buildings put into service in accordance with central or local government’s social housing programmes and buildings subject to private rental. Consequently, the minimum levy will now apply to all buildings, including residential ones, with the two exceptions above.

Under the new regulations, when determining the tax basis of the minimum tax, the total initial value of all buildings owned by the taxpayer in the given month will be taken into account. The obtained value of potential revenue will be then reduced by the tax allowance of PLN 10 million. Importantly, if the total share of rented space will not exceed 5% of the building usable space, the building’s initial value shall not be included in the  tax base.

In the light of the new regulations, the fundamental issue is whether a particular building or its part has been rented.  In a situation, where only part of a building is rented under a lease agreement, the taxpayer will be obliged to pay the tax only on revenue from the rented part. Combined with the introduced exemption for buildings used by the taxpayer for their own business needs, this underlines the income-related (or revenue-related, to be precise) nature of the minimum levy and, at the same time, remove the loophole resulting in taxation being applied to entities that do not achieve financial benefits from their real estate.

The tax rate remains unchanged. It will still amount to 0.035% of the taxable basis a month, which is 0.42% a year. It will still be possible to deduct the amount of tax on building revenue from the advance PIT or CIT tax payment. The paid and undeducted tax can be recovered in the final tax return submitted for a given year.

A new possibility introduced by the amendment for the taxpayer is to request a refund of the undeducted minimum tax. The minimum tax will be refundable, following a confirmation by the tax authority that the amount of the liability for tax or a loss was calculated in accordance with the general rules in the tax return submitted. Moreover, even if the tax authority determines the taxpayer’s liability for tax or loss to be different than declared, the minimum tax refund will still be eligible for the taxpayer as long as the tax liability is lower than the amount of paid minimum tax. However, the regulations fail to stipulate in what form will the tax authorities determine the above. It would seem that it will be necessary to launch tax proceedings, which will be concluded by issuing the final assessment decision. Therefore, obtaining overpaid tax refund may entail few-months-long and often costly tax proceedings.

Importantly, the new regulations that are beneficial to the taxpayers, such as the proportional tax base depending on the ratio of rented space to the entire building area, or the possibility to request a refund of paid minimum tax have a retroactive effect, i.e. taxpayers will be able to use them when settling the minimum levy for the current tax year.

Additionally, in order to tighten the regulations, a specific anti-avoidance rule was introduced, which allows the tax authorities to question solutions used by the taxpayer aimed at avoiding payment of the tax and applied without a legitimate economic reason. In particular, the clause would apply to transfers of ownership or co-ownership, or submitting of the building or its part into finance lease, for no legitimate economic reason.

According to the statement of reasons of the Act, the discussed amendments were introduced to prevent aggressive tax optimisation used by large business entities, which consequently is to increase the competitiveness of micro- and small entrepreneurs. Undoubtedly, the new regulations on the minimum levy introduce some order to the previously effective provisions, as they provide for more transparent taxation rules and exempt entities which, pursuant to the previous regulations, were subject to additional tax regardless of their results. However, this does not change the fact that based on the new regulations on the minimum levy, taxpayers who have nothing to do with the broadly defined real estate industry or aggressive tax optimisation (e.g. those who rent part of their real estate stock occasionally) may be subject to the minimum tax. Obviously, the introduced refund of overpaid tax is to prevent the latter from happening; nonetheless, this institution may turn out to be a theoretical solution, all the more so as it is likely to entail complicated tax proceedings.

Whether the “minimum levy” will achieve the expected result of increasing the competitiveness of Polish smaller companies without impeding real estate investments in Poland will be clear only after some time of functioning of the new regulations. However, constant amendments to the rules do not seem to be in line with the lawmakers’ goal.

[1] Journal of Laws 2017, item 2175.

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