A Summary of Legal and Procedural Issues Relating to the Sale of Residential Property
We strongly recommend that you consider all the legal and tax implications of the sale prior to making the decision to sell. The Polish selling process is a complex and lengthy affair. This is especially so in cases of sales of new apartments which you have purchased directly from a developer (off the plan purchases). The main reason for this is that the system of title registrations in Poland is based on the land and mortgage register, which register can even take up to a year to establish by the local court. This effectively means that until this register is established, you do not have legal ownership and therefore all you can sell to a prospective buyer is the rights under the purchase contract with the developer. When buying newly built, off-plan properties, there are three stages and, if the market conditions are right, each one presents opportunities and risks to selling. In this Briefing Note we assume that the purchaser is a British national resident in the UK; however, we are equally able to identify similar legal issues for all other nationalities. Please note that you should always take appropriate legal advice in the country in which you are tax resident.
This is the stage where only the preliminary purchase contract is signed; this is a legal agreement between a developer and an individual obliging the individual to purchase a unit at an agreed price.
Selling your apartment at the preliminary purchase contract stage is known as assigning or, more commonly, “flipping”. This is when you buy and then sell, or turn over, a property before the title to it is acquired, in order to cash in on the capital growth accrued between the date of signing the contract with developer and the date of the assignment. It is a high risk venture but offers potentially lucrative returns in a high growth market.
It is essential to look closely at any preliminary purchase contract as they vary from one transaction to another. Some developers may not allow an apartment to be sold by way of assignment at this stage, particularly in phased developments, as developers do not want potential property speculators to be in direct competition with them. Unless your preliminary purchase contract provides otherwise, you will need the developer’s consent before you can assign your rights under the contract and, depending on the terms of the preliminary purchase contract, the developer may charge a fee for its consent. This may be at least 10% of the agreed contract price, although it can be higher and may mean that you could lose your deposit. Generally, the sale price (formally known as an assignment fee) is the amount of deposit paid plus capital growth in the local market, given that at this stage you are only selling a contractual right to purchase an apartment at the price specified in the preliminary purchase contract rather than at the current market value.
If you flip a unit you will be liable for tax but under a “promise on property” clause, which means that the proceeds from the flip will be subject to personal income tax. Personal income is subject to tax at progressive rates. If you would like to know more about the current personal income tax rates in Poland, please ask us for a copy of our Tax Facts.
On the basis of the UK/Poland Double Taxation Treaty, any tax paid in Poland can be offset against your tax liability in the UK. However, since the UK capital gains tax has now been reduced to 18% and the tax on profit in Poland is charged at 19%, offsetting is no longer an issue, unless you signed your final purchase contract on your Polish property before 6 April 2008. Subject to personal annual allowances, the UK’s capital gains tax before 6 April 2008 was charged at 40% on capital growth. If you are liable to pay the 40% rate in the UK, any tax paid in Poland can be offset against your UK tax liability. So, for example, if you paid 19% to the Polish Government there would still be a balance of 21% capital gains tax to pay to the UK Government. We will be pleased to discuss with you a variety of options for structuring the sale and purchase of property in Poland. When considering to sell your properties, please bear in mind the following: (a) If you sell within five years of signing a final purchase contract you may be liable for tax twice, depending on whether you signed your final purchase contract on or after 6 April 2008: once in the country where the investment property is situated, and secondly in the country where you are deemed to be tax resident; or (b) If you sell after five years from signing a final purchase contract you may only be liable for a single tax payment to the UK’s Inland Revenue. Therefore, you must judge whether it is better to keep your investment and enjoy five years of potential capital growth, or sell, bearing in mind that profit may be eaten up by capital gains tax.
A final purchase contract, signed between the developer and the purchaser, is a deed which transfers the legal title to the purchaser. However, although legal title is transferred upon the signing of this deed, it takes a considerable amount of time (up to a year in some cities) for the land and mortgage register court to establish a separate land and mortgage register for your property. After you enter into a final purchase contract with a prospective buyer, but before a separate land and mortgage register is established for your property, any agreement to sell the property will be conditional upon the creation of a land and mortgage register and the proper entries being made. This is because, legally, you cannot transfer clear title until such time that your title is properly registered with full effect, i.e., you cannot transfer clear title to something that does not yet (at least formally) exist in legal terms. The potential buyer may have to wait a number of months before the notary deed transferring title to him can be signed. This may directly impact on the sale price as any future buyer may want a discount on the asking price as compensation for waiting so long for the property title, and more importantly, possession of the property. Whilst complicated, such scenario can be overcome by a well drafted preliminary purchase contract between the individual seller and the potential buyer. We will be pleased to advise you further on this.
Any potential gains have to be balanced carefully against higher legal fees due to a more complicated legal transaction and any penalties.
To sell at this stage requires a detailed preliminary purchase contract agreed between a sophisticated prospective buyer and the seller, under which the seller agrees to transfer the title once it is registered in their name. The problem concerning the transfer of title which has not yet been entered in the land and mortgage register is usually overcome by a power of attorney, under which the seller hands over responsibility of transferring the title to the buyer.
A better solution may be for the potential buyer to rent the property until registration of title in the land and mortgage register. In addition to the rent, the buyer/tenant would be liable for all utility bills, as well as the monthly service charge (?condominium fees?).
When the notary deed has already been registered and the new owner has been entered in the land and mortgage register, the selling process follows not too dissimilar a procedure to that in the UK.
Your tax liability will depend on when you signed your final purchase contract (notary deed) with the developer. If you signed your notary deed before 1 January 2007, and you decide to sell your property in the first five years of signing the final purchase contract, you are liable to pay 10% tax to the Polish Government on the total sale price – not just the profit. Furthermore, if you hold your property for 5 years or more, you are not liable to pay tax in Poland, but you may still be liable in the country where you are tax resident. On the other hand, if you signed your final purchase agreement with the developer after 1 January 2007, you are liable to a 19% tax on the profit gain. If you are registered as residing at the apartment for 12 months or more, you could possibly qualify for the principal place of residence exemption and avoid tax liability in Poland altogether. We strongly recommend you obtain proper legal and financial advice before selling your property Source: TGC Corporate Lawyers
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