Avoiding the tax trap

Old, lumbering, industry giants are often hardest hit as years of accumulated assets leave them unsure of what they own and what they should pay tax on - but even small business can find savings, as loopholes in the system emerge.

Identifying avoidable real estate taxes and charges has become a popular practice - and service - in recent years, helping large companies to design increasingly efficient property management strategies and saving them millions of złoty every year. Firms operating in Poland are learning that the sting of real estate taxes, which are calculated independently from a company's financial results, may be mitigated to a degree by knowing the loopholes in legal regulations and by having an up to date property portfolio.

"More and more managers are realizing the enormousness of savings potential that is hidden in so-called non-strategic costs - that is, in the expenditures and fees which are not directly related to the basic profile of [the company's] activity. Due to the complexity and time-consuming nature of existing regulations, many companies fail to verify that the fees they're paying are accurate, especially when they have many properties that are located all over the country," said Izabela Jaszczołt, manager of the research and development department at Alma Consulting Group Polska.

"Only after deeper analysis, it turns out that taxes are calculated on the basis of improper rates or that they are being paid on a property that has not belonged to a company for a long time," she added.

Size matters

Poland's unwieldy state-owned or privatized giants, whose property ownership often dates back to the communist era, stand to gain the most by reviewing their real estate tax costs. These firms are typically in possession of extensively built-up properties, including disused production facilities or warehouse space.

According to Piotr Karpiński from the property management department at consultancy King Sturge, such circumstances seldom occur in the case of modern businesses. "Due to an economic calculation, a modern company rarely owns more properties than it uses and needs, which leaves little room for possible real estate tax cost cutting," he said.

Where smaller real estate investors can look for savings, Karpiński stressed, are fees related to perpetual ususfruct rights. These can vary dramatically, depending on the particular administrative region as well as the way the land has been developed. Replacing low-value industrial build-up with a commercial project, for example, can increase the fees in question by as much as several hundred percent. In that case, investors can appeal the administrative decision in court and argue that the increase in the fees paid is unjust and unfounded.

"An investor can commission independent experts to evaluate the land and try to prove that its value is in fact lower than that which was adopted by the local authorities for fee calculation," said Karpiński.

Lack of clarity

For any firm, real estate tax is usually considered a fixed element of operational costs. However, as Alma Consulting Group experts pointed out, firms can save as much as 30 percent on the real estate taxes and fees that they pay. Overpayment is most often caused by calculating the wrong property size, by using the wrong tax rate or because changes in a company's portfolio of taxed properties go unmonitored.

In turn, these errors often result from a lack of precision and clarity in the relevant real estate tax or fee regulations. Regulations from other legal areas, including construction law, frequently come into play and can also cause difficulties. The situation is further exacerbated by conflicting rulings issued by Poland's tax authorities, which prevent entrepreneurs from acquiring a thorough knowledge of tax regulations.

Real estate tax law is complicated by the fact that there are three separate categories of taxable real estate but the distinction between them isn't always clear. Tax is paid on land and buildings, but also on all kinds of structures that the law does not define as buildings. Taxes may also be paid on bridges, viaducts and tunnels as well as industrial installations and technical appliances, even if they are located inside a building but are not part of its structure in architectural terms.

This lack of clarity with regard to what does and what does not constitute a building may account for a sizable part of tax overpayment, because the tax rate on structures not defined as buildings is higher than the tax on buildings. It can amount to as much as two percent of the property's value.

Saving options

There are many ways property owners can avoid paying undue real estate taxes and fees. Land can be excluded from taxation if the company proves that the land is not part of its economic activity and the property is classed as farming or forested land in the Land Register. In a similar vein, a lower tax rate can be employed in the case of buildings which are not used due to their poor technical condition, as long the proper documentation has been submitted and accepted by the relevant authorities.

Equally important is proper stock-taking. This provides a correct measurement of buildings' usable space and allows a firm to determine its properties' building or non-building status.

Companies also have to be careful in situations when a property is partly located in two or more administrative regions. In that case, tax needs to be paid to all administrative units. Each administrative region, however, is only allowed to levy a tax that corresponds to the percentage of the property which is located within its territory. Thus it is crucial to obtain a precise calculation of the property areas in each respective administrative region in order to make sure that undue tax is not paid.

Finally, a company can claim reimbursement if it feels that it overpaid in the past. The application has to include a corrected tax declaration as well as documents proving that overpayment actually occurred, such as architectural drawings.

"A company is eligible to submit a declaration of a tax overpayment within five years of the submission of the original tax declaration. As a result, it has the opportunity to reclaim a possible overpayment for any time over the last five years," said Jaszczołt.