The amended Corporate Income Tax Act came into force in Poland on 1 January 2018. It introduced a commercial real estate tax which is expected to have a substantial impact on the real estate market.
What is taxed and tax rate
New tax regulations will apply to owners of office, retail and service buildings. Tax will have to be paid on income from a property, corresponding to its initial book value with monthly advances amounting to 0.035% of its initial book value in excess of PLN 10 million. Whenever a taxpayer has paid corporate income tax on its business activity exceeding the above monthly advances paid, those liabilities will be set off against each other and the taxpayer will only pay the difference between the corporate income tax and the advances paid towards the commercial real estate tax.
No income, yet tax must be paid
The commercial real estate tax is defined in the amended regulations as “income tax on income resulting from asset ownership”. It would be reasonable to assume that for tax liability to arise, income must be earned first. This tax, however, is levied on ownership of commercial properties, irrespective of whether they generate income or not. Under the new regulations, a commercial real estate is deemed as a potential source of income and, therefore, tax is due. In Warsaw alone there is approximately 616,000 sq m of vacant office space, meaning that tax will often have to be paid on properties generating no income. This, in turn, will force property owners to step up commercialisation efforts or improve property management.
Tax exemptions in doubt
The new regulations also specify cases where tax exemptions will be available. As such, they will chiefly apply to non-depreciable assets and properties used exclusively or primarily for the taxpayer’s own needs. Due to the imprecise language of the law, these regulations are likely to pose a risk to owners of office buildings.
The term “primary use” has not been clearly defined in the law, giving rise to considerable doubts. Perhaps the most straightforward answer to such doubts would be to conclude that for the “primary use” exemption to apply, more than 50% of space in a building must be owner-occupied. It is also unclear how common areas such as reception lobbies, staircases, lifts or public toilets should be classified, and how to precisely delineate owner-occupied office space. Another issue is whether or not auxiliary functions such as warehouse space or parking spaces should be taken into account. And another issue is: who will ultimately decide whether or not “primary use” has actually occurred? If a tax exemption is applied on the basis of the property owner’s declaration, there is a risk that tax inspectors would challenge the validity of the declaration citing the above doubts regarding space calculations. Consequently, property owners risk being fined and obliged to pay due tax. Some may also be tempted to consider increasing owner-occupation to more than 50% to avoid having to pay tax. It is, however, unclear whether tax inspection authorities will be able to establish if the property owner’s decision to take up more space was driven by their needs or sole intention to avoid tax.
The definition of the “taxpayer’s own needs" may also cause interpretation problems. It would seem perhaps most reasonable to associate such needs with office space being used by the taxpayer’s employees for business operations. Therefore, if an office building owner’s primary scope of business is to deliver conference services, will the requirement of fulfilling the “taxpayer’s own needs” apply? There will be similar doubts over this issue in relation to the increasingly popular and fast-growing segment of co-working spaces. And what about cases where office space is leased on a commercial basis to fulfil the taxpayer’s needs? Office space is, in fact, nearly always leased to satisfy the taxpayer’s needs to a certain extent.
Another debatable issue is the definition of the “taxpayer” itself. Office buildings are very often occupied by many companies from an owner’s group. Therefore, according to teleological interpretation, a statutory exemption should apply in such cases. Will the “taxpayer” be interpreted broadly as a group of affiliates or literally as a single company?
Who will ultimately bear the tax burden?
The new commercial real estate tax will undoubtedly be borne by property owners. Under most lease agreements, however, property taxes are added to service charges and borne by tenants. However, many leases stipulate that landlords may not include income taxes in service charges. There will certainly be doubts as to how the new tax should be classified. Although it is a property tax, it was introduced through an amendment to the corporate and personal income tax acts. This is likely to lead to doubts about landlords’ right to shift the tax burden onto tenants. For such doubts to be dispelled, an in-depth review of lease provisions will be required.
Piotr Capiga, Associate, Office Agency, Cushman & Wakefield
Oskar Wichowicz, a trainee, Office Agency, Cushman & Wakefield