This year there has been an abundance of new tax developments, amendments, interpretations and announced changes. Meanwhile, the construction and real estate market has developed certain standards regarding the effective, yet still relatively new, regulations. What were the recent hot topics and what awaits the industry in the future?
It has been given various names in publications of consulting companies: “cadastral tax,” “shopping center tax,” “tax on commercial real estate,” etc. Its new version will appear in 2019; however, some changes introduced mid-year have already become effective as of 2018.
What remains the same is the tax rate of 0.035 percent per month on the initial value of the fixed asset (gross). The main change is what is subject to taxation. As of now, the minimum income tax applies to buildings classified as commercial and service buildings (shopping centers, department stores, self-contained shops or boutiques as well as other commercial and service buildings) or office buildings. The amended regulations additionally provide for taxation of hotels, warehouses, residential buildings (although residential buildings constructed under government or local government social housing programs are exempt from the tax).
The tax will generally apply to all real properties being subject to lease, unless the share of leased space does not exceed 5 percent of the total usable area (GLA). What is newfor taxpayers is the right to a refund of overpaid minimum tax on income from buildings on top of their corporate income tax. The minimum tax will be refundable following confirmation by the tax authority of the company’s annual tax settlement. Fiscal authorities will mostly focus on verifying the marketability of the debt financing cost level as well as remaining costs and revenues. A tax inspection is to be expected following an application for a minimal income tax refund.
Pursuant to amendments being introduced, the minimum income tax will also apply to residential real estate. The idea behind the changes is to tax revenues from rental, lease or other similar agreements, but only of corporate entities. As it has been, leasing and renting by natural persons is not considered grounds for applying the new tax to leased or rented buildings. Therefore, the minimum income tax will not apply to private leasing of residential units, which is subject to the 8.5 percent or 12.5 percent flat-rate income tax.
It will no longer be possible to deduct interest costs on debt used to purchase shares (or stocks) of a company if they are to be ultimately settled together with the operating income of the acquired company. The described mechanism is commonly known as “debt push-down.” The above-mentioned regulation has been widely criticized, as it is another limitation (and ultimately encumbrance) when calculating tax results of entities operating in tax capital groups.
Although in the justification of this amendment to the Corporate Income Tax Act the lawmakers put forward a very specific example of a situation where the said regulation is to apply, there is no doubt that this law will have a major impact on the M&A market, where structures using the debt push-down mechanism are very common and not without a legitimate business reason. The possibility of recognizing interest on debt as deductible against the operating income of the acquired company is undoubtedly a tax advantage. However, classifying all such restructurings as tax optimization is an over-rigorous interpretation of purely economic solutions used, among others, by joint venture entities (which, after all, are not created exclusively to generate tax advantages).
As of the beginning of 2018, pursuant to the last major amendment to the Corporate Income Tax Act, the tax deductibility of the cost of debt financing, as well as of expenses on certain services and intangible assets from related parties, was considerably limited.
These restrictions have particularly affected taxpayers with a low operational income level against corresponding costs (low EBITDA rate). Among the latter, there are special purpose vehicles operating in the real estate market, which to a large extent use both external financing as well as numerous insurance, guarantee and surety services provided by related parties in order to ensure their functioning at the investment stage/in an early phase of operations.
It is worth noting that the Ministry of Finance is considering introducing further restrictions on tax deductibility of the costs of debt financing. The published draft bill of July 15, 2018 provides for a reduction of the level above which the excess of financing costs shall not be included in the tax result from 30 percent to 20 percent of tax EBITDA. Unfortunately, the draft amendment still fails to resolve doubts concerning the maximum threshold up to which the surplus of financing costs shall remain tax deductible – will it be PLN 3 million + 30 percent of tax EBITDA, or rather costs of up to PLN 3 million not to be limited and the surplus subject to the restriction of 30 percent EBITDA?
Another fundamental change introduced by the major amendment to the Corporate Income Tax Act is the limitation of tax deductibility of costs related to the taxpayer's acquisition of intangible services and assets from related parties or from non-related parties when the actual recipient of receivables on that account would be a related entity. Contrary to the controversial regulations concerning restrictions of the costs of debt financing, in this case lawmakers have clearly set a limit applicable to the costs of services of PLN 3 million (exempt amount) + 5 percent of tax EBITDA.
The list of changes that are already happening or are expected goes on. Among other important issues, there are further changes with respect to determining transfer pricing and the transfer pricing documentation. Also in the pipeline is another edition of Polish REITs, tailored to the market of apartments for rent, student housing and senior care homes.
Another quite important topic for the construction market is a set of guidelines pertaining to VAT tax due diligence and the VAT split payment mechanism. While looking at the announcements of the companies owned by the State Treasury, it is to be expected that the voluntary split payment mechanism will become widespread in the market. In the real estate transaction market, on the other hand, it is worth keeping track of the quite strongly established practice of acquiring leased commercial real estate in the form of an enterprise deal. What is of significance to all taxpayers is the new draft of the Tax Ordinance Act that, according to the lawmakers, is to be simple, transparent and taxpayer-friendly.
The scope and size of the amendments definitely does not guarantee simplicity and clarity of the already complicated tax system. Entrepreneurs are often confused by the complexities of the system, whereas foreign investors struggle to keep up to date with the constant changes. However, as long as the game is on and the positive economic situation continues, every point scored counts. The time for cleaning up will come later.