Tax Highlights for Real Estate – April 2023

Developer acting as an investor is not entitled to the expansion tax relief

The expansion tax relief (also known as the pro-growth tax relief) allows for an additional deduction (from tax base) of costs specified in the CIT and PIT Act, incurred in order to increase revenue from the sale of products manufactured by the taxpayer, starting sale of a new type/kind of product or starting sale in a new country. With this relief, the taxpayer is entitled to reduce the income tax base by up to PLN 1 million in a tax year.

In an individual tax ruling dated February 17, 2023, No. 0114-KDIP2-1.4010.191.2022.4.KW, The Director of the National Tax Information questioned the right to benefit from this tax relief by a developer, who proceeded with the construction of a residential area as an investor.

According to the tax authority, the developer cannot benefit from the expansion tax relief because the developer will not produce new products (buildings, apartments) by himself, but will act as a distributor of products produced by the general contractor.

In other words – according to the tax authority, outsourcing construction works to a third party prevents the taxpayer from taking advantage of the expansion tax relief.

Photovoltaic panels (cells) are not structures, according to the construction law

Another judgements was issued confirming that photovoltaic panels (cells) are not structures – by the Provincial Administrative Court in Gdańsk, dated March 3, 2023, ref. no. no. I SA/Gd 1071/22.

Photovoltaic farms generally consist of two basic elements:

1. cells (panels) which are silicon semiconductors that convert solar radiation into electricity,
2. building parts (the bearing structure) supporting the cells above the ground.

According to Article 3(3) of the Construction Law act, building parts of photovoltaic farms are classified as structures.

However, when it comes to cells, the administrative courts, referring to Art. 3(3) and (9) of the Construction Law act, claim that the legislator requires the existence of a utility-technical relation in order for a given object to be recognized as a structure in its entirety. There is no such relationship between the abovementioned parts of photovoltaic farms. Together with the metal structure, they constitute a functional, but not a technical whole, because they are made of different materials with a different purpose. Cells are technically advanced surfaces that convert solar radiation into electricity. On the other hand, building parts (the bearing structure) are simple elements whose function is only to support the cells.

As a result, only construction parts of photovoltaic farms are subject to real estate tax.

Classification of related industrial installations in Real Estate Tax

Pursuant to the Polish Act on Local Taxes and Fees, two types of building objects are subject to real estate tax: buildings and structures. These objects are taxed at different rates.

One of the common problems in practice is to distinguish when a given object is part of a building and when it is an independent structure.

In the judgment of February 3, 2023, No. I SA/Bk 516/22, the Provincial Administrative Court in Białystok commented on the classification (for the purposes of real estate tax) of functionally connected building objects – a bitumen mixing plant with nodes for the production of concrete and gravel that have been combined for the purpose of the production process.

The court stated that: “if individual objects in physical terms, each of which meets the characteristics allowing it to be considered a separate object of taxation, are used to achieve a specific economic purpose and for this reason have been functionally combined, their sum cannot be used to create a single object of taxation.”

In other words, what is important is not so much the functional connection of a set of objects, but rather the assessment whether the individual elements of such a production line constitute one material object that is technically independent. Only that which is part of such a material object and cannot be separated from it without damaging or significantly changing the detached object can be a single subject of Real Estate Tax.

In conclusion, buildings connected in a functional way, but having intrinsic characteristics enabling their independent use, should be subject to real estate tax as separate building objects.

Compensation for lost profits as tax deductible costs

In the judgment of March 14, 2023, No. II FSK 2145/20, the Supreme Administrative Court confirmed that the payment of a compensation by a developer to contractors in connection with construction delays can be considered as related to obtaining revenue, and may be treated as tax deductible costs.

The developer paid compensation to the contractors, thanks to which it avoided the necessity to withdraw from a contract, which would have led to the payment of a contractual penalty higher than the compensation.

The tax office claimed that the compensations could not be classified as a tax deductible costs, because they did not directly or indirectly affect the creation, securing or preservation of revenue.

Both the Provincial Administrative Court and the Supreme Administrative Court did not agree with the tax authority. According to both instances, these expenses were aimed at limiting losses (there was a cause-effect relationship between limiting losses and incurring these expenses). Therefore, these expenses can be treated as tax deductible.

Russia on the EU tax havens list

By the decision of the EU’s Economic and Financial Affairs Council (ECOFIN), Russia has been added to the list of non-cooperative jurisdictions for tax purposes.

Pursuant to the provisions on reporting tax schemes (MDR), making cross-border payments to related entities seated in a country indicated in in this list, constitutes a specific hallmark referred to in Article 86a(1)(13)(a) of the Tax Ordinance and thus potentially leads to the creation of a tax scheme that is subject to MDR reporting.

VAT rate for resale of utilities related to the leased area and common parts of the building

As a rule, the supply of water, heat and sewage disposal should be treated as separate from the rental service if the tenant has the ability to choose the way in which they are used by, for example, deciding on the amount of their consumption. This is the case, for example, when the settlement is based on meter readings. In such a case, the costs of utilities re-invoiced to the tenant should be a separate items on the invoice, with the VAT rate appropriate for the given goods/services.

However, this rule does not apply when the costs of utilities consumed in the common parts of a building are being transferred to the tenants. In an individual tax ruling issued on April 5, 2023, No 0114-KDIP4-1.4012.63.2023.2.PS, the Director of the National Tax Information reminded (confirming the existing line of jurisprudence) that the transfer of the cost of utilities (mainly electricity, water or gas) consumed in the common areas to the tenants should be treated as one comprehensive service related to the main service – i.e. the service of renting the warehouse halls and taxed at the rate applicable to the rental service.