- New definition of a structure and a building in real estate tax – what can we expect?
- Equipment of an auxiliary nature is also industrial equipment
- Making a contribution-in-kind in the form of land does not entitle to reduce the CIT tax base by “other costs” related to the real estate in question
- Qualification of expenses related to the development project as deductible costs for the sale of residential units
- The issue of taxation on income from buildings, as referred to in Article 24b(1) of the CIT Act, of apartment buildings and cottages made available as part of short-term stay and accommodation services provided
- A company running a hotel is not a real estate company
- Increased real estate tax not on all company property
- Durability of a building object’s connection with the ground
- Effectiveness of waiving the exemption under Article 43(1)(10) of the VAT Act when exercising the right of pre-emption. Issue of recognition of pre-emptive act as an invoice
- Exclusion from VAT of the sale of an organised part of an enterprise (hereinafter: “ZCP”). The issue of assessing whether the sale of the real estate will not be subject to the provisions of the VAT Act pursuant to Article 6(1) of that Act, as a continuaion of the sale under the ZCP
1. New definition of a structure and a building in real estate tax – what can we expect?
The judgment of the Constitutional Tribunal (hereinafter: “CT”) of 4 July 2023 (ref. SK 14/21) indicated that it is necessary to redefine the term of a building. This is due to the fact that the TK found the existing reference to the provisions of the construction laws to be unconstitutional. The deadline for amendments to the Act on Local Taxes and Fees (hereinafter: “u.p.o.l.”) is the end of 2024. On 17 June 2024, a bill to amend the u.p.o.l. was published on the website of the Government Legislation Centre (hereinafter: “GLC”), which addresses this key issue.
The draft law, prepared by the Ministry of Finance (hereinafter: “MF“), introduces a new definition of a structure, which will be directly regulated in the Tax Act, without reference to the Construction Law. The new definition of a structure is broadly defined as follows: facilities listed in Appendix 4 to the Act, as well as installations and equipment, if they constitute, together with such facility, a technical and utilitarian whole, construction parts of equipment not constituting parts of structures, construction parts of wind power plants and nuclear power plants, foundations for machinery and equipment, technically separate from such machinery and equipment, with the technical and utilitarian whole permanently connected with the ground. An important novelty is the introduction of an appendix to the u.p.o.l. with a list of structures (28 items such as e.g. car parks, silos, elevators, cable line, power grid), which would simplify the analysis of whether a given object is a structure for real estate tax purposes. However, bearing in mind that, in addition to the annex, installations and equipment may also be considered as structures if they form a technical and utilitarian whole with that object, construction parts…, it should be borne in mind that if an object is not listed in the annex, this does not mean that it should not be treated as a structure for real estate tax purposes.
There is also doubt as to how to understand the information provided in the explanatory memorandum to this proposal: the fact that a structure or part of it is located in a building does not mean that only the building is subject to taxation, to the exclusion of the object located inside it. If a structure or a part of it is located in a building which is not an integral part of that building, it constitutes a taxable object separate from the building, so how to distinguish when a structure is an integral part of a building and when it is not.
Along with the new definition of a structure, the MF has also provided a new definition of a building, with a view to keeping the rules consistent. The subject of taxation in this case will be the building together with the installations enabling its use for its intended purpose. The new definition of a building is similar to the regulations contained in the Construction Law.
As regards garages, the MF proposes to standardise their taxation, with a multi-bay garage forming part of a residential building to be regarded as an integral part of that building and taxed accordingly.
Despite the MF’s stated desire to eliminate interpretative doubts and preserve the fiscal status quo, we see potential for changes in the taxation of structures in terms of what was declared in the current year and what awaits us in 2025. According to the case law of the CT, the minimum period of vacatio legis for changes in tax laws regulating taxes whose accounting period is the calendar year is one month. This means that amendments to the provisions defining the concepts of a structure and a building must be enacted by the end of November 2024 in order to be effective as of 1 January 2025. It should also be noted that the draft is at the consultation stage and its shape may still change. The draft bill is available at the link: Projekt (rcl.gov.pl).
2. Equipment of an auxiliary nature is also industrial equipment
The Supreme Administrative Court (hereinafter: „SAC“) in its judgment of 22 February 2024 (ref. II FSK 714/21) qualified road mats leading to windmills as industrial equipment. As ancillary equipment used in the energy industry, they are used for transport, which makes it necessary to recognise them as having an industrial character.
The case concerned a company involved in the construction of wind turbines. It rented mats from a German entity to pave temporary roads on a wind farm site. These are necessary for access across the fields by vehicles delivering components to the windmills. The company has a tax residency certificate from the German contractor and hoped that it did not need to withhold withholding tax (WHT) on the wages paid to the German contractor for renting the panels and mats. It considered that they were not industrial equipment within the meaning of the Polish-German double taxation treaty (DTT) and the CIT Act. The Director of the National Tax Information Service (hereinafter: “NTIS”) disagreed with the company’s position, stating that the concept of industrial equipment should be understood broadly. Wind farms should be seen as one element of the electricity industry. The authority held that payments to the German contractor for the lease of panels and mats are royalties (Article 12(3) of the Polish-German DTT). The company, as the payer, must therefore collect and remit WHT on the dues paid to the lessor. The taxpayer did not agree with such a decision of the tax authority and, after challenging the individual interpretation, it was repealed in a judgment of the Provincial Administrative Court in Poznań (hereinafter: ”PAC”) (ref. I SA/Po 794/20). The court of first instance ruled that the tax authorities incorrectly and too broadly interpreted the notion of industrial equipment. It indicated, moreover, that the panels and mats temporarily laid on access roads are not connected with industrial production of goods and therefore should not be treated as industrial equipment. However, the decision of the court of first instance was ultimately disagreed with by the SAC. It opted for a broad understanding of the concept of industrial equipment and including means of transport as industrial equipment. The SAC held that a wind farm industrially generates electricity, and therefore mats and panels temporarily hardening the road to enable the transport of components for the wind turbines are also industrial equipment. The notion of ‘industrial equipment’ includes any equipment used in professional trade, and it must be related to the activity of the entity in question, but it does not have to be used directly in the production process.
3. Making a contribution-in-kind in the form of land does not entitle to reduce the CIT tax base by “other costs” related to the real estate in question
The Director of the National Tax Information Service (hereinafter: “NTIS”), in an individual ruling issued on 23 February 2024 (case number: 0111-KDIB2-1.4010.547.2023.2.BJ), held that making an in-kind contribution in the form of land does not constitute grounds to reduce the CIT tax base by “other costs” related to the real estate.
The applicant presented a factual situation in which a company acquired a landed property, which it later contributed as an in-kind contribution to another company in exchange for taking up shares. The applicant asked whether it had the possibility to reduce the CIT tax base by “other costs” related to the real estate, i.e. costs of geotechnical opinions, costs of surveying services, valuation of the real estate, stamp duty related to the development plan, preliminary conceptual design. NTIS, in an individual interpretation issued, indicated that in the present case, the initial value of the land property contributed in kind would be the tax deductible cost, pursuant to Article 15(1j)(1) of the CIT Act. At the same time, he emphasised that “other costs” related to the real estate, such as costs of geotechnical opinions or real estate appraisal, are not directly related to the in-kind contribution of land, but to the entire investment process. Therefore, these expenses cannot be considered as deductible costs.
4. Qualification of expenses related to the development project as deductible costs for the sale of residential units
The moment at which the cost is recognised may determine whether the developer will be able to deduct the expense incurred for the implementation of the development project. In the judgment of the PAC in Warsaw of 13 March 2024 (ref. III SA/Wa 2491/23), it was indicated that such costs are a direct cost of the investment.
In an individual interpretation of 25 September 2023 (case number: 0114-KDIP2-2.4010.399.2023.1.IN), The Director of the National Tax Information Service (hereinafter: “NTIS”) held that the construction of tax deductible costs, as defined in Article 15(1) of the CIT Act, is based on the general clause which states that tax deductible costs are costs incurred to earn revenue or to preserve or secure a source of revenue, with the exception of costs listed in Article 16(1) of the same Act. The condition for the recognition of expenses as deductible costs is the existence of a cause and effect relationship between the expense and revenue. It is the taxpayer’s obligation, as the person benefiting from the fact of recognising certain expenses as tax deductible costs, to demonstrate the link between incurring the expense and obtaining revenue, as well as to properly document the expense. In an individual interpretation, the tax authority justified that all expenses incurred by a taxpayer may be qualified as direct, i.e. leading directly to the generation of revenue, as well as indirect, related to the functioning of the company as a whole. This division is reflected in the provisions of Article 15(4) and (4d) of the CIT Act, which, as a rule, prescribe that direct costs are to be recognised as tax-deductible costs when revenue arises, while non-direct costs are to be recognised at the time they are incurred. The WSA in Warsaw, in a judgment of 13 March 2024 (ref. III SA/Wa 2491/23), overruled the interpretation of the CIT Act and indicated that such costs are direct costs of the investment. There is still no written justification for the judgment, but from the oral recitals of the ruling a different position from that presented by NTIS emerges.
5. The issue of taxation on income from buildings, as referred to in Article 24b(1) of the CIT Act, of apartment buildings and cottages made available as part of short-term stay and accommodation services provided
NTIS, in an individual interpretation issued on 14 March 2024 (case number: 0111-KDIB2-1.4010.26.2024.1.KK), took the position that hotel services consisting in providing flats and cottages for short stays are subject to tax on revenue from buildings.
The applicant in the case was a company specialising in the provision of hotel services. Its object was to provide accommodation in buildings in which flats were located, as well as in cottages. The offer was mainly aimed at tourists and people looking for short-term accommodation. The services were provided in various locations in Poland. The facilities provided to guests were registered in the register of facilities providing hotel services. The request for an interpretation concerned the taxation of apartment buildings and cottages used for the provision of hospitality services with the tax on revenue from buildings set out in Article 24b(1) of the CIT Act. The company’s position was that the services provided were not the same as the provision of real estate for use under a rental, lease or other contract of a similar nature, which would be a key prerequisite for taxing these facilities with tax on revenue from buildings. The applicant argued that its business is the provision of short-term accommodation and overnight stays. NTIS took a position unfavourable to the applicant on this issue. It explained that the hotel services provided by the company actually qualify as an activity similar to rental, which makes them subject to the tax on revenue from buildings, pursuant to Article 24b(1) of the CIT Act. The tax authority pointed to the nature of the hotel contract as a mixed contract, combining elements of various types of contracts, including rental. The tax authority stressed that from the point of view of the purchaser of the hotel service, the most important element is precisely the accommodation service, which brings this activity closer to lease. Pursuant to Article 24b(1) of the CIT Act, income tax on revenue from a fixed asset being a building that meets the criteria listed therein is 0.035% of the tax base for each month.
6. A company running a hotel is not a real estate company
The Voivodship Administrative Court (hereafter: PAC) ruled on 19 March 2024 (ref. I SA/Gd 43/24) that an agreement under which a taxpayer undertakes to provide hotel services does not meet the definition of an agreement similar to a lease, tenancy or rental agreement. Consequently, a company providing hotel services on the basis of such a contract cannot be deemed to be a real estate company.
The case in question involved a company that provides hotel and catering services in a historic granary. In addition, it organises conferences and events with catering services in its own conference rooms. The company’s assets primarily include the historic granary in which it provides services. In 2022, its revenue from hospitality services exceeded 53% of its total revenue. The company thus fulfilled the first two conditions provided for in the definition of a real estate company under the CIT Act, i.e.: at least 50% of its assets consisted of real estate located in Poland and its market value exceeded PLN 10 million. Only the classification of the third condition remained in dispute – whether the company provides services of a similar nature as rental, sublease, lease, subtenancy or leasing agreements. If this was the case, and the revenue generated in this respect would represent at least 60% of tax revenue, the company would be considered a real estate company. The company believed that it did not meet this condition because, it argued, the provision of hotel services does not take place under a contract that could be considered similar to a lease or rental. It pointed out that the main purpose of the service was not to provide space on the premises, but for guests to obtain the entire package of benefits. NTIS took a different view – in an individual interpretation of 26 October 2023 (number: 0114-KDIP2-1.4010.379.2023.2.MW), which stated that a hotel contract is a non-named, mixed contract that contains elements of a lease agreement. Thus, it is similar to a lease agreement and should be recognised as such in this case. The case was referred to the PAC in Gdańsk, which, in its judgment of 19 March 2024, ref. I SA/Gd 43/24 (a non-final ruling), overruled this interpretation. The administrative court ruled that, contrary to the claims of the tax authorities, it is difficult to recognise a hotel service as similar to a lease, tenancy or rental agreement. According to the court, it is difficult to find any analogy between the definitions and prerequisites of a lease, tenancy or rental agreement contained in the Civil Code and the hotel service provided by the company.
7. Increased real estate tax not on all company property
As the Voivodship Administrative Court (hereafter: PAC) in Rzeszów ruled on 13 February 2024 (ref. I SA/Rz 644/23), an entrepreneur conducting business activity, for which an increased real estate tax rate is provided for in a resolution of the city council, is obliged to apply it only to buildings and land directly related to that activity.
The decision of the administrative court concerned a company for which a qualified (increased) rate in property tax was set for buildings and land within the scope of PKD codes indicated in the resolution of the city council. In the case of the company, this was the manufacture of other furniture (PKD 31.09.Z). Pursuant to Article 5(2) and (3) of the Local Taxes and Fees Act, it is possible to differentiate the tax rate for particular types of taxable objects – this may be done by the resolution-making body, in this case the City Council. The company’s main business profile coincides with the one specified in the resolution of the councilors, on which tax should be paid at an increased rate. Initially, the company did so in respect of all the properties it owned. Upon further review of the facts, it concluded that it should not pay the increased rate of property tax on those only indirectly used for furniture production. The company therefore applied for a declaration of overpayment. The mayor of the city – as the authority with jurisdiction over property tax – refused to declare the overpayment, holding that the company was right to pay tax at the increased rate. The authority of the second instance – the local government appeals board (hereinafter: “SKO“) – was of the same opinion. The company disagreed with this position and filed a complaint with the administrative court. In its complaint to the WSA in Rzeszów, the company first of all drew attention to the content of the resolution – the councillors explicitly indicated therein that the qualified (increased) tax rate applied to real estate used directly for the indicated points of the PKD of economic activity, i.e. in this case, ‘production of other furniture’. It thus argued that the position of the fiscal authority was a violation of the content of the resolution. The WSA in Rzeszów agreed with the company’s arguments. The court reminded that the councillors referred in the resolution to the relevant PKD code, and the ordinance of the Council of Ministers in this matter narrows the scope of economic activity only to specific processes, which aim directly at manufacturing a given product. As the court pointed out, the introduction of an increased tax rate in a municipal resolution using the criterion of the type of business activity cannot result in its automatic application to all land and buildings owned by a company that also carries out other business activities. The court emphasised in its justification that both a literal interpretation and a supportive purposive interpretation lead to an unambiguous conclusion that only those land and buildings are subject to taxation at the qualified rate which are directly related to the given PKD code in this case.
8. Durability of a building object’s connection with the ground
The Voivodship Administrative Court (hereafter: PAC) in Szczecin ruled on 20 March 2024 (ref. I SA/Sz 692/23) that the notion of permanence of a building object’s connection with the ground is not equivalent to the notion of its inseparability. The possibility of physically moving an object does not exclude its permanent connection to the land.
In the course of the proceedings, the municipal tax authority established that the company was the holder of building objects in the form of advertising media. They considered that the signs, where the building part can be considered to be permanently connected to the ground, constitute a functional whole. The disputed freestanding billboards installed on a load-bearing structure fixed on foundations should be understood as a whole intended and used to display an advertisement together with all structural elements. The view of the tax authorities of the first instance was also shared by the SKO. It was not until the PAC in Szczecin, in a judgment overturning their decisions, that the feature of permanent connection with the ground refers to technical and utility issues. The court pointed out precisely that this boils down to the foundation of the object permanently enough to ensure its stability and ability to withstand external factors. Among other things, these include activities that could damage, cause it to be moved or displaced to another location. Whether or not an advertising device is permanently attached to the ground is therefore not determined solely by the technology of the foundation or the technical possibilities of moving the advertising medium to another location. What is crucial is the combined determination of the tax authority. It must take into account the size of the fixture, the design, the intended use and whether safety considerations require such a permanent connection. The tax authorities cannot abstract from the specific design of the device in question, its size and purpose, which determine the type of binding to the ground. The fact that an advertising hoarding is assembled from off-the-shelf elements that can be dismantled and moved to another location does not exclude the fact that it is permanently bound to the ground. As the administrative court emphasised, none of the provisions of the construction law make the qualification of an object dependent on the method, technique and technology of its construction or the fact that it can be dismantled at any time.
9. Effectiveness of waiving the exemption under Article 43(1)(10) of the VAT Act when exercising the right of pre-emption. Issue of recognition of pre-emptive act as an invoice
As the Voivodship Administrative Court (hereafter: PAC) in Wrocław ruled on 22 February 2024 (ref. I SA/Wr 713/23), a declaration on resignation from the VAT exemption on the sale of real estate, made by the parties to a preliminary agreement, is also effective towards the entity exercising its pre-emptive right.
The case concerned a company that requested an individual VAT interpretation related to the acquisition of a pre-emptive right to purchase land. The owner notified the company that it had concluded a preliminary sale agreement with another entity. This agreement stipulated that the parties would, prior to the transaction, make a statement to the tax authorities that they would renounce the exemption of this supply from VAT by opting for taxation at the 23% VAT rate. The company decided to exercise its right of first refusal and made a declaration of its intention to tax this transaction. As it declared the exercise of its right of first refusal, the landowner issued a VAT invoice to it. It was for the previously agreed amount of the transaction, but was issued at a 0% VAT rate. The company believed that the VAT invoice issued by the supplier was defective. Nonetheless, it believed that it was entitled to deduct input tax, as all the necessary information to do so was contained in the deed of pre-emption, which in this case should be considered an invoice. National Tax Information (hereafter: NTIS) on 09 June 2023, in an individual interpretation issued (case number: 0111-KDIB3-1.4012.179.2023.1.KO), took a position unfavourable to the company, holding that the seller had issued an invoice that did not include the specified VAT. The tax authorities emphasised that the deed of pre-emption is a contract and does not constitute, in the light of the VAT Act, a document that would give rise to the deduction of input tax. In the opinion of the tax authority, such a document is also not a VAT invoice. The PAC in Wrocław, in a judgment (ref. I SA/Wr 713/23), did not share the views of NTIS and revoked this individual interpretation. In its justification, the administrative court referred to the essence of the right of pre-emption as an institution of civil law. It emphasised that exercising the right of pre-emption means concluding such an agreement between the owner of the real estate and the entitled party. The company thus entered into a transaction between the other two entities, replacing one of them. It had entered into the totality of rights and obligations, which is precisely what the right of pre-emption is based on, the court corrected. The court concluded that the entity exercising the right of first refusal in the sale of real estate has the possibility to waive the VAT exemption by means of a declaration by the seller indicating a third party as the purchaser. The ruling of the PAC in Wrocław in this case is not final.
10. Exclusion from VAT of the sale of an organised part of an enterprise (hereinafter: “ZCP”). The issue of assessing whether the sale of the real estate will not be subject to the provisions of the VAT Act pursuant to Article 6(1) of that Act, as a continuaion of the sale under the ZCP
In an individual interpretation (case number: 0114-KDIP1-1.4012.72.2024.1.AKA) dated 25 March 2024, the National Tax Information (hereafter: NTIS) looked at the issue of exclusion from VAT of the sale of an organised part of an enterprise.
The applicant was a company mainly engaged in trading activities. It also carried out the production of steel structures in a separate organisational unit of the company (registered in the National Court Register as its branch). Separate intangible assets, including liabilities intended for the performance of specific economic tasks, were assigned to this branch. In the case at hand, the tax authority considered that the transaction involving the sale of the real estate would not constitute a disposal of an enterprise within the meaning of Article 551 of the Civil Code, nor of a ZCP, the definition of which is contained in Article 2(27e) of the VAT Act. Thus, the provision of Article 6(1) of the VAT Act will not apply to this sale, regardless of the fact that the buyer will exercise its pre-emptive right under the lease agreement. The authority further stated that the definition of an organised part of an enterprise contained in the provision of Article 2(27e) of the VAT Act is not an independent definition, but should be considered, inter alia, in the context of the provisions of Article 6(1) of that Act, which excludes from VAT taxation the disposal of property and nonproperty components previously separated organisationally and financially from an existing enterprise, intended for the performance of specific economic tasks, while it does not apply to the disposal of individual property components of an enterprise. In connection with the above individual interpretation, it is worth noting that real estate may be an organised part of an enterprise.