By Piotr Brzózka, advocate, senior associate, Osborne Clarke and Rafał Kran, tax adviser, senior manager, MDDP


The slowdown in housing investments observed recently, and the influx of refugees caused by the ongoing war in Ukraine have increased an already large hole in the Polish housing market. Among many solutions, the conversion of shopping centres into residential buildings is considered.

Demolition of underused or underperforming shopping centres is just one way of dealing with such properties. Investors are urgently seeking alternative solutions. One of the options is to convert a shopping centre for housing. Such conversions vary in scope. Sometimes they involve demolition of parts of existing buildings. Often they are carried out as more or less advanced reconstructions.

Zoning and permitting requirements

Currently, almost every type of conversion of a commercial building requires a number of administrative decisions and arrangements with local authorities

At the very beginning, the necessity of obtaining an environmental permit should be considered and such permit obtained if required. It precedes other decisions in the investment process, and is required if the investment exceeds the statutory thresholds and is classified as having a potential significant impact on the environment.

If the construction permit is to be obtained for the reconstruction, then conformity of the planned development with the zoning regulations is must be ensured. If a local master plan is in force, its provisions affect the possibility to undertake the reconstruction and also its character. The investor may either adapt their plans to the master plan or begin the arduous task of amending the master plan. This is crucial in the case of large-scale shopping centres, most of which are located on the basis of existing local plans. If a local master plan is not in force, the reconstruction requires a separate zoning permit. Its issuance is preceded by arrangements with local authorities who present their standpoint on the investors’ plans as far as they fall under their jurisdiction. The process of obtaining a zoning permit largely depends on effective cooperation between the competent authority and the authorities involved in the arrangements.

Completion of the administrative part of the process comes with the construction permit. Almost every conversion of a shopping centre requires a construction permit to initiate the works. The construction permit is not required only for the least invasive conversions. To use that path, the planned investment must fall into the legal category of reconstruction – it may not affect the characteristic parameters of the building (such as the built-up area, height, length, number of storeys). Also, it may not involve any alterations of the building’s envelope or its structural elements. In practice, avoiding a construction permit for reconstruction of a commercial building is only possible in limited number of cases.

The necessity of carrying out the entire administrative-construction process affects the time and costs of the investment. However, the benefits arising from such conversions encourage investors to continuously seek new solutions and improvements. A similar assumption seems to have been made by the Ministry of Development and Technology which last year published a draft act streamlining the process of commercial buildings conversion. One of the main objectives of the draft is that any conversion regulated therein should require neither construction permit nor notification. The only exception would apply to the structural elements of the building, interference with which would still require the relevant administrative approvals. The work on the act is ongoing and it is worth monitoring as the draft in its foundation layer is compliant with ESG goals.

Tax implications

Conversions may have a different scope and nature, which may involve various tax issues. Nevertheless, the key issues concern the method of settling expenses related to the conversion, in particular whether a given expense can be included in CapEx costs (i.e. settled in the initial value of fixed assets) or in OpEx costs (constituting tax deductible costs, recognised directly in the tax result ). It is worth adding that investment costs are not detailed in Polish income tax (CIT) regulations and thus many issues should be considered from the point of view of case law, official tax rulings, as well as common practice.

A conversion may sometimes require the demolition of a part of the existing buildings. Demolition costs may constitute CapEx for tax purposes, as the general cost of construction (allocated to fixed assets).

Most often, however, a conversion will mean a change in the functionality of the existing building. In practice, most of the works will be classified as improvement (modernisation, extension, adaptation), which is the basic type of CapEx. Such a classification will apply in particular to a fixed asset in the form of a building, but also to other fixed assets (such as devices and internal installations). It is important that the costs are appropriately divided between fixed assets (on the basis of direct or indirect allocation), because each of such costs may be depreciated on different terms. Some of them may mean the creation of a new fixed asset, which has not been presented in the register of fixed assets so far (for example a new HVAC unit on the roof).

In practice, some of the works may turn out to be renovation works, which in turn is an OpEx cost. In accordance with the practice of Polish tax authorities, the OpEx also includes expenses for public infrastructure (construction of a new road, pavement renovation, extension of external connections). OpEx also includes financing costs, e.g. legal advisory expenses of the loan. The interest on financing accrued during construction is essentially CapEx, but to qualify as OpEx, the interest on improvements to existing buildings is required by tax authorities (this may be one of the areas of contention).

If building units for sale is envisaged as part of the investment, a part of expenses should be separated, which will constitute tax costs of the units (for direct deduction with sales revenue). The legal regime here is different than in the case of fixed assets. This additionally increases the complexity of the settlement.

Detailed settlement of the investment should take place as part of a comprehensive cost segregation project. Such professional settlement allows for appropriate qualifications and allocation of costs based on technical specifications with cost estimates, invoices, contractual provisions, existing records of fixed assets, and often also technical inspection of the investment. As a result of the cost segregation, the investor receives reliable data for the tax register of fixed assets and can apply different depreciation rates to each fixed asset; on the basis of the initial value of the building, the investor may determine the tax base for the purposes of income tax on buildings; can easily determine the tax base of the structure for the municipal property tax purposes; and receives professional settlement documents, which constitute a defence file in the event of a possible tax audit or due diligence.