The past couple of months brought a raft of new tax responsibilities imposed on entities operating in the real estate industry. These include, inter alia, increasing the tax burden on immovable property (including the minimum tax on commercial real estate) and alienation of shares in companies holding real estate in the territory of Poland (e.g. through introduction of real estate clauses into double tax treaties in force).
New tax responsibilities are followed by a number of amendments to the CIT Act, vesting additional tax duties for real estate companies, applicable as of 2021. The goal behind introducing these regulations seems to be debatable, while their content may raise significant interpretation doubts. As usual, the Ministry of Finance explains it with the need to tighten up the Polish tax system.
Definition of real estate company
The Ministry of Finance decided to implement the specific definition of real estate company. Up to now, such notion was absent from the CIT Act, although a similar concept could be found in the catalogue of income sources located in Poland.
Under the new definition, a real estate company means an entity other than natural person, obliged to prepare a balance sheet in line with provisions on accounting, in which:
a) for entities commencing their business activity - as at the first day of the tax year, at least 50% of the market value of assets (directly or indirectly) consisted of real estate located in Poland or rights thereto, with the value exceeding PLN 10m; or
b) in the case of other entities - as at the last day of the year preceding the tax year, at least 50% of the book value of assets (directly or indirectly) was real estate located in Poland or rights thereto, with the book value exceeding PLN 10m or an equivalent amount determined according to the relevant exchange rate, and in the year preceding the tax year, taxable revenues from: rental, subrental, lease, sublease and other similar contracts, and from the transfer of ownership to real estate (or rights thereto), and income from shares in other real estate companies, constituted at least 60% of total taxable revenues or revenues included in the net financial income.
Thus, the newly introduced definition clearly indicates that the status of a real estate company is granted based on the asset structure and not the legal form of conducting business activity. This means, that the status of a real estate company can be equally granted to a partnership, provided that the value of its immovable property exceeds the threshold set by the definition.
The question remains of how 'rights to real estate' should be interpreted. It seems that the legislator's intention was not to extend the definition to entities that lease or rent real estate, since the 'right to real estate' should in fact pertain to obligations and not to property rights (including limited property rights). In practice, this could raise numerous doubts and become the source of disputes with tax authorities.
In practice, the new definition will also serve as a means to determine whether the provisions of real estate clauses, introduced to the majority of double tax treaties, should apply in situations of alienation of shares, transfer of rights and obligations, participation units or rights of similar kind in a real estate company (as defined under the amended CIT Act). It should be kept in mind the scope of the real estate clause provided by the CIT Act and double tax treaties differs from the one encompassed by the definition of real estate company, thus creating two partially overlapping sets of entities. In principle, every real estate company must meet the requirements of the real estate clause, yet it does not mean that every company that meets the conditions of the real estate clause will be automatically classified as such. For example, a company which at the end of the last tax year did not own real estate, but will purchase it during the present tax year and its shares will be alienated in the same year, will not be a real estate company, but may meet the criteria of the real estate clause, which means that the sale of its shares will be taxed in Poland on general rules.
Additionally, entities qualified as real estate companies will have to comply with a number of additional obligations presented below.
Alienation of shares in a real estate company and shifting obligations of tax remitters
Another amendment relates to shifting obligations related to remitting income tax on capital gains from alienation of shares, transfer of rights and obligations, participation units or rights of similar kind in a real estate company from the seller (taxpayer) to the real estate company itself, provided that the seller has a limited tax liability in Poland (i.e. is not a Polish tax resident) and alienation is made in relation to shares giving at least 5% voting rights in a real estate company or all rights and obligations giving at least a 5% share in the profit of a company with no legal personality or at least 5% of the total number of participation units in a real estate company or rights of similar kind.
In such a situation, the real estate company, being a tax remitter, will be required to calculate the tax in the amount of 19% and to pay it to the account of the competent tax office by the 20th day of the month following the month in which the transaction took place.
Thus, in order to fulfil the duties presented above, the real estate company must know details of the transaction, including the costs and income on the seller's side (to assess properly taxable income). In the absence of information on the exact amount resulting from the transaction, the real estate company will be obliged to settle the 19% income tax based on the market value of the alienated shares, transferred rights and obligations or other rights of similar kind.
It should be stressed that the process of determining the tax remitting duties may give rise to a number of practical problems, especially for entities making continuous investments in real estate companies. In their case, calculating the 5% share may prove difficult, especially if the transactions add up over the subsequent 12 months. A similar issue may be faced by companies enjoying the real estate company status, listed on regulated markets. Lack of knowledge about entities trading in such shares may prevent the real estate company from properly performing its tax remitting obligations. It seems that the legislator did not anticipate such situations, given that it did not provide real estate companies with the appropriate tools to collect information about their shares subject to trade.
Moreover, although the new regulations impose on the sellers the duty of providing the real estate company with sufficient funds to cover the income tax on the transaction, it may happen that they fail to perform it. If such is the case, the real estate company will have to cover the tax due from its own funds and then raise a claim against the seller. Therefore, when planning acquisition of shares in real estate companies, one should pay particular attention to the correct performance of disclosure obligations by the seller and to securing funds for payment of the tax due.
Failure to appoint a tax representative punishable by a fine of up to PLN 1 million
Furthermore, real estate companies having no seat or place of management on the territory of Poland (e.g. foreign entities holding real estate in Poland) will be required to appoint a tax representative. However, this obligation will not be imposed on real estate companies subject to income tax on their worldwide income in an EU or an EEA member state, regardless of the place it is earned.
The main role of the tax representative will be to perform remitting obligations for and on behalf of the estate company it represents and to be jointly and severally liable with the real estate companies for tax obligations arising from selling shares in this real estate company.
A tax representative may be a natural person, a legal person or an organizational unit without legal personality that meets a number of conditions specified in the new regulations of the CIT Act (e.g. it has its registered office, management board or place of residence in Poland, has no tax arrears exceeding the threshold for tax liabilities payable in respect of each tax, has not been convicted for a tax offense and is also authorized to provide professional tax advisory services or bookkeeping services).
It must be kept in mind that a tax representative should be appointed by way of a written agreement. Interestingly enough, the regulations do not provide for a deadline in which the tax representative must be appointed. Yet, failure to do so may result in an administrative fine of up to PLN 1 million.
New disclosure obligations
Moreover, the regulations provide for the imposition of new disclosure obligations on real estate companies and on taxpayers holding, directly or indirectly, at least 5% of the voting rights in a real estate company or at least 5% of the total number of participation units or rights of a similar nature thereto.
Consequently, real estate companies will have to disclose information on entities owning, directly or indirectly, shares, participation units or rights of a similar nature in the said real estate company, along with the number of such participation rights held by each of them, while partners of real estate companies will be obliged to disclose information on the number of shares, participation units or similar rights held, directly or indirectly, in this real estate company.
The above-specified information, valid as at the last day of the tax year of the real estate company, must be submitted electronically to the Head of the National Revenue Administration within 3 months from the end of the tax year.
In practice, this may entail numerous interpretation doubts as to the determination of which entities operating within capital groups or belonging to investment funds will be required to provide such data. Importantly, non-disclosure may result in penal fiscal liability of individuals obliged to satisfy the disclosure duty.
Jarosław Nożewski, Senior Tax Manager, Corporate Tax Advisory, KPMG in Poland