2021 is to bring a raft of significant amendments to Polish tax regulations. The key changes, crucial from the real estate market's perspective, include introduction of the new 'real estate company' definition along with a number of new obligations to be assumed by such entities.
Definition of real estate company introduced by new regulations
The definition of real estate company refers to the entity's asset structure, meaning that it can also be met by entities which do not have legal personality, nor are income tax payers, including foreign companies.
Under the amended provisions, a real estate company means an entity obliged to prepare a balance sheet in line with provisions of accounting law, in which:
- 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
- for other entities:
- as at the last day of the year preceding the tax (financial) year, at least 50% of the book value of assets (directly or indirectly) consisted of 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 (financial) year, taxable revenues (revenues included in the net financial income) from:
- letting, subletting, lease (and other similar contracts); and/or
- from the transfer of ownership to real estate or rights thereto, and from shares in other real estate companies,
constituted at least 60% of total taxable revenues (revenues included in the net financial income).
Polish law and provisions of double tax treaties (DTT)
It must be emphasized that introduction of the concept of a real estate company into tax law and application of these provisions should be considered in the context of Poland-signed DTTs. The real estate clause, introduced to a significant number of double tax treaties signed by Poland, relates to entities with the assets consisting mainly (in the majority of cases in at least 50%), directly or indirectly, of real estate located in the territory of one of the treaty's signatories; in turn, pursuant to the same clause, the country in which the said real estate is located has the right to impose tax on alienation of shares in such an entity.
Thus, correct identification of duties imposed on real estate companies can only be made based on a thorough analysis of Polish regulations and the applicable DTT provisions which are not fully uniform.
Collecting tax advance payments by real estate companies - practical concerns
One of the key changes brought by the amended provisions is that the tax remittance obligations were shifted to real estate companies. In the case of alienation of more than 5% of shares (or rights of similar kind) in a real estate company by a foreign entity, the real estate company will be obliged to settle the income tax advance payment on the realized income from the transaction on behalf of the seller.
Importantly, new regulations provide for a situation where a real estate company has no knowledge on the amount of income earned by the seller through transaction. In such a case, it will be required to pay an income tax advance at the tax rate of 19% on the market value of the alienated shares (or rights of similar kind), irrespectively of the actual value of transaction and with no right to deduct the related expenses. It should be also emphasized that under the amended provisions, there is no possibility for a real estate company to be released from the liability as a tax remitter for non-collected tax.
Moreover, the seller (i.e. taxpayer) is required to transfer the amount of the income tax advance to the real estate company (i.e. remitter) before the deadline for making the payment falls. This, in turn, gives rise to a practical concern as to ensuring such performance of the transaction to secure interests of all parties thereto.
Other obligations of real estate companies
Other obligations imposed on real estate companies include:
- providing the Head of the National Revenue Administration with information on its partners/shareholders (whereas partners/shareholders in real estate companies will be required to report on shares/contributions held in these companies);
- appointing a tax representative, provided that such real estate companies have no seat or place of management in the territory of Poland or an EEA Member State;
- establishing a report on the executed tax strategy (for entities being part of tax capital groups or exceeding the cap of PLN 50m in revenue).
The amendments are to influence the Polish real estate market. This means that it must be prepared to develop new solutions aimed at securing turnover and mitigating the risk of incurring additional liability for tax settlements resulting from new obligations.