By Tomasz Krasowski, managing counsel, tax advisor, and Marcin Czajkowski, counsel, advocate, Tax Team, Dentons
In these unprecedented times of international political and economic instability, everybody is feeling the pinch across many areas. Rising interest rates which are negatively affecting the ability of individuals to buy apartments. At the same time, the propensity for individual mobility has become increasingly noticeable in recent times. That spells higher demand in the private rental sector (PRS) which has catapulted PRS-related tax matters centre stage as they may also significantly impact cash flows and ultimate returns on Polish investments. And from the perspective of the investors interested in investing in PRS in Poland, the latest hints on potential new taxes to be imposed on investors buying apartments in bulk should be carefully considered.
As with all other types of real-estate investments, the PRS investment structure should be carefully considered. To date, the most popular form of investing in real estate has been via Polish limited-liability companies. However, structures where foreign companies directly own Polish properties are also possible and are becoming increasingly popular. In terms of taxation, this form of investment does not differ significantly from investment through a Polish company, but may slightly simplify flows and reduce liabilities regarding, for example, withholding tax (WHT).
When it comes to VAT on PRS, focus should be concentrated on the investment’s structuring and business model to be adopted, taking into account every stage of investment.
During the acquisition phase, it is extremely important to analyse the buyer’s right to recover (that is to deduct or obtain a refund) of input VAT. This depends on the building’s intended purpose. For example, if it is to be fully used for so called accommodation services it is subject to 8% VAT. The VAT on a residential let to another taxpayer that subleases that property to individuals or charges rent on service premises provided to another business on a B2B basis, is 23%. In both cases, the landlord should have the right to recover input VAT incurred on the acquisition of the property and the operational cost. This differs from a lease of residential premises for purely living purposes which are VAT exempt – generally, in such case the landlord does not have the right to recover the input VAT. The VAT Act also provides for correction rules concerning change of intended use of a building or premises within a certain period of time after acquisition (from VAT-exempt use to use subject to VAT and vice versa).
Qualification of accommodation services for 8% VAT or for VAT-exempt residential housing rental solely for housing purposes, is in practice controversial due to the lack of statutory definitions and the limited precedence setting practice of the tax authorities. Although the PRS sector has developed rapidly in recent years, there are still no simple unambiguous criteria or guidelines on how to distinguish between these services. It is usually assumed that accommodation service means the short-term rental of premises for business or leisure purposes. However, if the tenant’s intention is to reside permanently in the premises, then, in principle, this service should be classified as renting premises for residential housing purposes.
The appropriate qualification of the service provided by the landlord is crucial, since – assuming that it concerns the purchase of a residential building subject to VAT – the structure of leases in a building (meaning: taxable lease vs. VAT-exempt lease) may directly affect the scope of the buyer’s right to deduct VAT or the obligation to make appropriate corrections (the correction period for real estate is ten years, and for other fixed assets five years), as well as, for example, the scope of the right to deduct VAT in connection with the purchase of services related to VAT-exempt activities. It is important to consider all possible business models at the investment planning stage, taking into account the impact of adjustments on the rate of return on investment.
Expenses associated with the purchase of land, residential buildings or residential apartments, are not depreciable for Polish income tax purposes (costs of acquisition or development of such facilities are recognized only upon sale). Separate rules (raising controversies in current tax practice) apply to buildings and premises other than residential, owned by real estate companies (as defined under the Polish CIT rules).
Income from real estate (taxable revenue less tax-deductible costs) is subject to CIT at the 19% rate (or 9%, applicable to so-called small players if certain conditions are met) regardless of whether the landlord is a Polish or foreign entity.
As regards the financing, tax deductibility of interest on financing is limited to 30% of tax-EBITDA or 3,000,000 złotys (whichever is higher). Anti-abuse rules preventing discrepancies in the tax qualification of hybrid structures and transfer pricing rules should also be considered. Moreover, special attention must be paid to WHT on interest paid to non-residents. That includes thorough due diligence checks on whether preferential WHT rates may apply, and on the determination of the beneficial owner of interest and assessment of the potential risks in applying anti-abusive tax clauses.
The landlord may also be subject to so-called tax on revenues from buildings (also known as the minimum CIT levy), which is 0.035% per month (0.42% annually) of the initial value of the building adopted for tax purposes (the basis for calculating the tax is reduced by 10,000,000 złotys). To put it simply, this tax is ultimately imposed on the landlord’s activity only in cases where the amount of this tax is higher than the amount of CIT payable under general rules.
The landlord is also subject to real estate tax (RET) applicable to land, buildings (parts thereof) and structures (building objects).
The Polish government has recently unveiled a new concept regarding taxes to be imposed on institutional PRS investors. According to the officials handling this matter, current legislative works focus on taxing entities buying more than five apartments (on the primary or secondary market) per annum. Each purchase over this limit would be liable to 6% stamp duty levied on its fair market value. Also, investors buying apartments and not renting them out are in the taxman’s sights, but so far, no clear concept on how to tackle this issue has been formulated.
Taxation of PRS investments should prompt investors to carefully plan every aspect of their Polish investments well in advance. Investors should closely monitor any developments related to the latest hints on potential new taxes to be imposed on investors buying apartments in bulk.