Tax Highlights for Real Estate – December 2023

1. Real estate sale agreement disclosing VAT allows for VAT deduction

The Voivodeship Administrative Court in Warsaw in its judgment of 8 December 2023 (ref. III SA/WA 1473/23) confirmed that is acceptable for a company to deduct VAT on the basis of real estate purchase agreement.

The company purchased from the contractor three residential premises and two developed plots of land on which investments had been started. The sale of these properties was taxed at the relevant VAT rate. The sale purchase agreement, drawn up in the form of the notarial deed, included details of the sellers, applicable VAT rate and the amount of tax, as well as the sale price and the date of delivery of real estate. However, after signing the contract, the contractors had not issued sales invoices documenting the transaction. After unsuccessful attempts to contacts the sellers, the Company filed a relevant notice to the law enforcement authorities. The Company have had doubts concerning VAT deductibility in the absence of an invoice documenting the sale – so it decided to request tax ruling.

The Director of the National Tax Information in a tax ruling dated 19 Aprill 2023 (no. 0114-KDIP4-1.4012.702.2022.1.APR) held that the agreement does not constitute an invoice, and therefore concluded that the sales contract does not serve as a basis for deducting the VAT shown in that document.

However, the court emphasized in its oral reasoning that since there was no doubt that the economic event in question had actually occurred, there was no dispute that the transaction was subject to VAT, and the company had included VAT in the contract – in which case all formal requirements for a tax deduction were met.

2. The plot of land accompanied with zoning plan, agreements with gestors and design documentation does not constitute organized part of the enterprise

An individual tax ruling was requested by a company that owned undeveloped construction plots. It planned to make an in-kind contribution of one of the plots of land, together with zoning plan, a building permit, agreements with gestors and design documentation, to a newly established special purpose vehicle. The aim of the new entity was to conduct a construction project of a multi-family building.

Consequently, the company asked the Director of the National Tax Information to confirm whether the in-kind contribution of one of the plots being the assets would constitute an in-kind contribution of organized part of the enterprise within the meaning of the Corporate Income Tax Act The company wanted confirmation of the above issue, as such in-kind contribution would benefit from CIT exemption.

The Director of the National Tax Information found however that the key issue with the organized part of the enterprise is the continuation of the business activity with the acquired assets, so that on the day of the contribution the company would be able to carry out its business activity with the use of the contributed elements, without having to engage additional assets or processes. The authority also emphasized that it does not appear from the application for tax ruling whether the object of the in-kind contribution is separated in the company in an organizational, financial and functional manner.

The Voivodeship Administrative Court in Łódź, in its judgment of 30 November 2023 (ref. I SA/Łd 792/23), disagreed with the Company and rejected the complaint. In its justification the court argued that in the light of the definition of organized part of the enterprise, it is impossible to assume that real estate, even with certain intangible rights, constitutes an enterprise or a part thereof that could independently conduct any business activity.

3. Favourable judgement of the Supreme Administrative Court on taxation of hotel services

The Supreme Administrative Court in judgment dated 4 July 2023 (ref. II FSK 70/21) confirmed that a contract for the provision of hotel services is not similar to a lease, tenancy or other contract of a similar nature, and therefore hotels are not obliged to pay commercial property tax. This is thus an opportunity to reverse the negative line of jurisprudence that has been forming recently for hotel service providers.

The dispute arose on the basis of an individual tax ruling, in which the applicant was of the opinion that only those facilities which are let, leased or contracted out in a similar manner, i.e. activities falling under grouping 68 of the Polish Classification of Goods and Services, should be subject to commercial property tax. Hotel services, therefore, do not fall within this definition. According to the taxpayer, the purpose of rent or lease is to make the premises available to a given entity, tenant or lessee, for free disposal. As examples of such disposal, he pointed out conducting business activities or the permanent housing needs. The Director of the National Tax Information did not agree with the applicant’s position and emphasized that hotel, accommodation or short-term accommodation services fulfil the condition referred to in Article 30g, section 1, subsection 2 of the VAT Act relating to making a building available in whole or in part for use under agreement of a similar nature to a lease or tenancy contract.

The case was then sent to the Voivodeship Administrative Court, which ruled that the definition of the hotel service reflects the complex nature of this service, but also confirms the fact that its basic and essential element is the rental of houses, flats, rooms and accommodation. The disputed services are therefore similar to rental, and the court therefore rejected the complaint.

The case ended up before the Supreme Administrative Court, which ultimately sided with the Company. The court pointed out that a comparison of the legal regulations on lease agreements and hotel services shows that these are not similar agreements. Referring to the similarity to lease/tenancy agreements in the Tax Act does not therefore meet the requirement to precisely define the subject of taxation.

4. Tax authorities do not approve administration courts stand on taxation of real estate companies

The ruling was requested by a French company that has the status of a Polish CIT taxpayer and has the status of a real estate company. For accounting purposes the company applied the principles of French balance sheet law.

The subject for disagreement with the tax authorities was Article 15(6) of the CIT Act, introduced as part of the so-called Polish Deal in January 2022. Based on this provision, real estate companies can include depreciation write-offs charged on real estate as tax deductible costs at an amount not higher than for accounting purposes.

The applicant was of the opinion that their situation is not subject to the above-mentioned restrictions. Their company does not classify real estate as fixed assets in the balance sheet, but classifies it as investment, which prevents the application of the aforementioned provision in the case of depreciation. In their view, only assets that are also depreciated for accounting purposes are subject to restrictions.

The Director of the National Tax Information did not agree with the Company, stating that since it does not make depreciation write-offs on its property on the basis of accounting regulations, it will not be entitled to recognize any tax deductible costs of depreciation under CIT.

It is worth mentioning that there have already been many judgments of administrative courts in similar cases, but the tax authorities still insist on their position, unfavourable to real estate companies.

5. Voivodeship court judgement on the commercial property tax proportion

The company requested a tax ruling (issued on 18 October 2023, no. 0114-KDIP2-1.4010.499.2023.1.KW) regarding the CIT taxation of income from commercial buildings. The company is a member of a capital group, holds shares in other entities exceeding 25% and owns buildings leased to other entities.

The company’s question concerned the determination of the proportion for commercial property tax base. According to the Director of the National Tax Information, the amount of PLN 10 million assumed for related entities should be divided proportionally among all related entities. The Director pointed out that related entities include not only associated companies in accordance with Article 11a(2)(1) of the CIT Act, but also those in which the company has no shares, but which hold at least 25% of the voting rights or shares in the profits or assets of this company.

The company filed a complaint against the above ruling to the Voivodeship Administrative Court in Poznań. The court, in a judgment of 23 November 2023 (ref. I SA/Po 592/23), disagreed with the tax authorities and overruled the ruling issued. It stated that only the holding of shares in another entity is relevant, thus the position of the authority that the provision also applies to other related entities cannot be approved. When issuing the judgment, the court drew attention to two judgments of the Supreme Administrative Court issued in similar cases.