- Changes in the tax on civil law transactions
- Sale of a shopping mall constitutes a sale of an enterprise, excluding VAT – judgment of the Supreme Administrative Court (NSA)
- The moment of starting the calculation of the period of at least 2 years of holding shares in order to benefit from the exemption of income from the disposal of shares of a subsidiary, referred to in Article 24o sec. 1 of the CIT Act
- Limiting of costs of debt financing before 2022 could have been applied together – judgment of the NSA
- The general anti-avoidance rule (GAAR) may also apply to activities that took place before its entry into force – judgments of the NSA
- Did you know? Initial value of a fixed asset financed with a loan in a foreign currency as at the date of putting it into use
1. Changes in the tax on civil law transactions
On 31st August 2023, an important change in the tax on civil law transactions (PCC) entered into force. Buyers of the first apartment or house on the secondary market will not have to pay PCC. The second important change regarding PCC, coming into force only from 1st January 2024, is that in the case of purchasing more than 5 apartments located on one property – from 6th and subsequent apartment – double taxation will apply, both VAT and at the rate of 6% PCC. Therefore, it is worth analysing the planned investments now.
According to the amendment to the PCC Act, the purchase of the first apartment or house from a secondary market will be exempt from tax. Without PCC, it will be possible to acquire not only the ownership of a residential unit constituting a separate property, but also the ownership of a single-family residential building and cooperative ownership right to a residential property, relating to a residential unit or a single-family house.
However, in order to take advantage of this privilege, the buyer, being a natural person, will not be able to be the owner of a property before. The exception is to be applied to people who previously inherited a maximum of a half of a property (residential unit or a house).
On the other hand, in some cases when bulk-buying residential units, both levies will have to be paid – VAT as well as PCC – in the amount of 6% of the value.
This will be the case if a natural person or, for example, a company, buys more than five apartments in one investment, and this sale will be subject to VAT. In such cases, the sixth and subsequent apartment would be subject to double taxation of 6% PCC. An important aspect of the new regulations of the mass purchase of apartments is whether the apartments will be part of one investment – whether they are part of a block of flats built on the same land or a block of flats built in other locations.
If more than six apartments are acquired in different locations across the country or even in the same city, they will still be exempt from PCC double taxation and potentially VAT, which is just one of the possible ways to avoid the described tax levy.
2. Sale of a shopping mall constitutes a sale of an enterprise, excluded from VAT – judgment of the Supreme Administrative Court (NSA)
On 28th July 2023 NSA issued a judgment (case No: I FSK 892/18) regarding the classification of the sale of commercial real estate – a shopping mall. The court stated that this transaction constitutes the sale of an enterprise (or its organised part), which is not subject to VAT. In this case, PCC will be imposed on the purchaser.
The transaction in question took place in 2016 and, according to the taxpayer, constituted a sale of an asset subject to VAT, which was intended to ensure the right to deduct VAT by the purchaser. In particular, lease agreements and construction guarantees were transferred along with the property. On the other hand, there was no transfer of property management, insurance, supplies and bank accounts agreements.
However, within the tax audit procedure, the tax authority questioned this approach (the right to deduct VAT and the tax obligation resulting therefrom), considering the transaction as a sale of an organised part of an enterprise.
The case came to an end before the NSA, which while examining the case, referred a question to the Court of Justice of the European Union (CJEU) for a preliminary ruling on the issue of the lack of clear indication in Polish regulations of the relationship between ZCP and the legal succession of the purchaser and the possibility of selling the enterprise in a situation where not all assets relevant to the conducted business activity are the subject of the transaction.
The CJEU in its judgment C-729/21 confirmed that the Polish VAT Act is consistent with the principles of the VAT Directive. The key issues for VAT taxation of real estate sale transactions are: the purchaser’s intention to continue the seller’s business activity and the transfer to the purchaser of tangible and intangible assets that enable the continuation of the seller’s business activity (even if they are not assets related to the transferred assets). However, the CJEU left it to the NSA to assess whether the sale of the shopping mall in the case in question can be classifies as a sale of an enterprise.
Following the tax authority, the NSA held that the sale of the shopping mall constituted a sale of an enterprise. In the justification, it pointed out that the key argument in the classification of a sale of a commercial real estate is whether the assets transferred as part of the transaction enabled the purchaser to conduct independent business activity.
This decision may have a significant impact on the assessment of similar transactions by tax authorities. Therefore, in the case of similar projects planned, it would be recommended to refer to tax authority for an individual interpretation (tax ruling) in a specific case.
3. The moment of starting the calculation of the period of at least 2 years of holding shares in order to benefit from the exemption of income from the disposal of shares of a subsidiary, referred to in Article 24o sec. 1 of the Corporate Income Tax Act (CIT Act)
The period of „at least 2 years” referred to in Article 24m sec. 2 of the CIT Act in the version in force as of 1st January 2022 (i.e. also affecting 2023, as indicated in the request for tax ruling) also includes an uninterrupted period that had its beginning before that date, and therefore the beginning of the 2-year uninterrupted period meets the conditions set out in Article 24m sec. 1 point 1-4 of the CIT Act, which may have occurred before that date.
This view was presented by the Head of the National Revenue Information (KIS) in the tax ruling of 4 August 2023, ref. No: 0114-KDIP2-2.4010.256.2023.2.SP/IN. The application was submitted by a Polish company, being a holding company, holding shares in several companies.
The applicant indicated that it plans to sell part of the shares in the subsidiary to an unrelated entity for consideration and therefore a doubt arose whether the period of at least 2 years of holding shares (Article 24m sec. 2 of the CIT Act) includes the Company’s ownership of shares in the subsidiary, calculated from the moment of acquisition of these shares in 2016. Or should this period be counted from the date of entry into force of the provisions on taxation of holding companies, i.e. from 1 January 2022.
The Head of KIS unequivocally expressed his view that if the sale of shares takes place after 1 January 2023 and the sale of shares concerns a subsidiary that holds shares continuously for a period longer than two years, in the case of company going forward with this transaction, the income obtained from the sale of shares is subject to the exemption stipulated in Article 24o sec. 1 of the CIT Act.
The condition is that at the time of the planned transaction, the company meets the condition of having the status of a holding company continuously for a period of 2 years, and that it submits to the competent head of the tax office statements on the intention to benefit from the exemption at least 5 days prior to the planned sale of shares.
4. Statutory limits of costs of debt financing before 2022 could have been applied together – judgment of NSA
In the judgment of 9th August 2023, case No: II FSK 212/2 the NSA clearly stated that before the amendment to the regulations on limiting debt financing costs (i.e. from 1st January 2018 until 1st January 2022), this limit applied only to debt financing costs representing the surplus of over PLN 3 million. Mirosław Siwiński – attorney-at-law and tax advisor, partner at Advicero Nexia represented the Company in this winning dispute with the tax authorities.
The factual background concerned a Polish company involved in the production and sale of electricity in wind farms, which benefited from external debt financing. The Company wanted to have the ability to deduct debt financing costs (over and above interest income) from income up to PLN 3 million and 30% EBITDA (i.e. profit before tax, interest and depreciation) in a given tax year, in this case 2019.
The tax authority disagreed with it on this point. It stated that the deduction limit is 30% of EBITDA or PLN 3 million – whichever is higher – as is applied in the current regulation (Article 15c of the CIT Act). This unfavourable tax ruling was first overruled by the Provincial Administrative Court (WSA) in Warsaw (case No: III SA/Wa 2620/19). The court ruled that only the surplus over PLN 3 million is limited to 30% of EBITDA.
The court held that in Article 15c sec. 14 point 1 of the CIT Act in its wording at that time, the legislator directly excluded the application of Article 15 sec. 1 of the CIT Act to that part of the excess of debt financing costs that does not exceed PLN 3 million. The judgment of the WSA was upheld in the second instance. The NSA fully agreed with the arguments of the court of first instance. It drew attention to the primacy of the literal interpretation of the provisions contained in Article 15c of the CIT Act. It also referred to the systemic and functional interpretation of Article 4 of Council Directive (EU) 2016/1164 of 12th July 2016 laying down the rules against tax avoidance practices that directly affect the functioning of the internal market.
In accordance with the above, it is also worth analysing transactions that occurred before the amendment and which effects may also occur now – after the amendment of the relevant provisions of the CIT Act – we invite you to contact us.
5. The general anti-avoidance rule (GAAR) may also apply to activities that took place before its entry into force – judgments of the NSA
In recent judgments (case No: III FSK 354/23, III FSK 489-495/23) the NSA ruled that the general anti-avoidance rule may apply to tax benefits arising as a result of activities that took place prior to the entry into force of the GAAR regulations (i.e. 15th July 2016).
The case concerned a dispute related to an event that took place in 2009, in connection with which a company (telecommunications industry) had benefits in real estate tax (PON). The case revolved around finalising the sale transaction and leaseback of telecommunications infrastructure with a subsidiary, as a result of which the tax base was reduced.
The tax authorities, wishing to recover PON arrears, initiated proceedings for 2016-2018 using the tax avoidance clause (for this purpose they handed the proceedings over to the Head of the National Administration [KAS]).
The Head of KAS stated that the 2009 transaction was a sham and was made solely for the purpose of obtaining a tax advantage, so he determined the PON for the Company in the amount that would have been applicable as if the transaction in question had not taken place at all.
In turn, the WSA in Warsaw ruled that in the case of the Company, the purpose of the 2009 transaction was not limited to a tax advantage, and hence the conditions for the application of the GAAR clause were not met. The NSA also confirmed this view. However, the NSA agreed with the view that there is a possibility to question tax advantages arising after the entry into force of the clause, even if they result from activities prior to its validity.
Considering the arguments presented by the NSA, in the case of similar transactions (including those concluded in the past, which could give rise to the risk of applying the GAAR clause by the tax authorities) – we recommend analysing both past and planned / ongoing transactions and referring to tax authorities for individual decisions.
6. Did you know? Initial value of a fixed asset financed with a loan in a foreign currency as at the date of putting it into use
The purchase or production of fixed assets is very often financed by a loan or a loan denominated in a foreign currency. The liabilities arising in this way, in accordance with the Accounting Act, are subject to valuation at specific moments in the financial year.
It is worth remembering that the initial value of a fixed asset also includes financing costs, i.e. those related to the loan obtained in a foreign currency, which consists of interest costs, costs or income from exchange rate differences, commission costs and other costs related to the said debt.
The valuation of the liability in foreign currency as at the balance sheet date in a situation, when the loan is dedicated to the production of a fixed asset, is charged to the value of the fixed asset under construction, and not to costs or revenues. Similarly with the reversal of the valuation made in the new financial year. What should be done if the asset is put into use during the following year?
Well, the currency and interest valuation of the liability financing the project as at the date of putting the fixed asset into use should be included in the initial value of the fixed asset, i.e. interest costs and exchange differences from the valuation of the liability should be included in the fixed asset under construction. Then, the valuation should be reversed in the period after the asset is put into use, including it in profit and loss statement. Subsequent valuations and their reversals will be registered in the same way, i.e. as costs or income from exchange rate differences.
This approach ensures a comprehensive valuation of the initial value of the fixed asset and prevents a disproportionate burden on the financial result after putting the asset into use as a result of the next balance sheet valuation.
The above has a significant impact on the correct approach related to the methodology of keeping company accounts. Therefore, it is necessary to examine whether the existing procedure regarding the valuation of such fixed assets is appropriate, or to ensure that in the future, after the investment in question has been made – it should be correctly recognised in the accounts – we invite you to contact us.