Why purchasing property doesn't have to be a taxing experience
Knowing how to efficiently handle taxes on real estate can make a serious difference to your property portfolio's bottom line, especially for foreign investors. Here, we present a brief summary of the binding legal regulations that investors from abroad should bear in mind when taking a slice from the Polish property pie. This guide was prepared by Tomasz Ożdziński and Katarzyna Kopczewska, experts from the tax department at PricewaterhouseCoopers.
Why a share deal could be a better option
According to Polish regulations, the acquisition of real estate by a foreign investor may be performed directly (e.g. a foreign investor purchases property through a branch operating in Poland) or indirectly (via the acquisition of shares in an existing Polish company that owns real estate). The tax implications of the two options differ significantly.
The most obvious advantages of the acquisition of shares are simplicity and speed. Furthermore, most foreign investors prefer this route, since it would at certain times allow for a Polish income tax-free exit from the investment. The wide network of double-tax treaties signed by Poland means investors may not have to pay capital-gains tax on the sale of shares in Poland.
However, Poland has recently renegotiated various double-tax treaties, and introduced changes in the taxation of real-estate disposals through the sale of shares. New double-tax treaties, concluded with Ireland, Germany and Denmark among others, feature a clause that allows Poland to tax the capital gain in the case of the sale of shares in a Polish company of which the majority of assets consist of Polish real estate.
The direct acquisition of real estate in Poland by a Polish branch of a foreign investor is a more complicated and time-consuming transaction, due to specific legal requirements and procedures. However, taking this route means foreign investors can bypass withholding taxes that are imposed on any subsequent repatriation of profits.
Nevertheless, for investors from the EU, this argument is currently irrelevant, as EU regulations implemented by Poland provide for withholding tax exemption on dividend payments made by Polish companies to their parents in EU Member States, if certain conditions are met.
Still, capital gains earned on the sale of real estate are subject t Polish corporate income tax of 19 percent. Compared to the sale of shares in a company holding real estate, which would at times be tax free in Poland, this seems to be a significant additional tax burden.
Minimizing risk
It's not just tax an investor has to worry about, as these two acquisition routes have their own potential risks.
When an investor purchases shares in a company, they are also buying a company with all its history and potentially hidden financial and tax liabilities. Comprehensive due diligence for tax and financial issues is the key here to uncovering any nasty bad debts that could be lying in wait to snare the eager investor.
The primary purpose is to estimate the exposure to tax arrears that could be acquired along with the business purchased, and this could influence the share price.
Investors can avoid this problem altogether by directly acquiring real estate, provided a certain legal procedure is followed. Under the consent of the seller, the purchaser may apply to the authorities for certificates of the seller's outstanding tax and tax-related liabilities. If the transaction is closed within three days after issuance of such certificates, the purchaser is responsible only for the tax arrears disclosed therein (if any). This deadline may be extended to 30 days, provided the real estate constitutes a component of a going concern subject to the acquisition.
Know your transfer tax
The sale of shares in a Polish company is subject to a transfer tax called the Civil Law Activities Tax (CLAT), which is charged at the rate of one percent of the market value of the shares, even if both parties to the transaction are foreign entities.
The purchaser and seller are jointly and severally responsible for payment of this tax. However, it is usually contractually agreed that the purchaser pays it. Generally, CLAT paid on the transaction may not be immediately recovered, but is included in the acquisition cost of the shares at the moment of their future disposal.
The sale of development land and buildings is generally subject to VAT at the rate of 22 percent. However, there are exemptions to this rule. VAT exemptions apply, among others, to residential buildings. Disposals of residential buildings are VAT exempt, unless this is a first disposal before occupation. The latter is subject to VAT. Be aware though that until December 31, 2007, the 22-percent standard VAT rate is reduced to seven percent, so get your skates on if you want to keep your VAT bill down.
Furthermore, the disposal of used buildings is VAT exempt, provided that the vendor was not entitled to deduct VAT historically incurred on their acquisition or construction. Should the above VAT exemptions apply, a CLAT of two percent would be levied instead.
In all cases, the VAT treatment of the sale of a building is applicable also to land on which the building is located.
Claiming back the VAT
Input VAT incurred on a direct acquisition transaction may be recovered, provided the purchaser intends to use the real estate for running its business activities subject to VAT. However, if the business activity that the real estate is going to be used for is VAT exempt (such as bank and insurance services, the lease of buildings or apartments for housing purposes, or the lease of land for agricultural activities), then you'll have to grin and bear it when the input VAT bill comes.
When input VAT incurred by a purchaser in the month of the acquisition exceeds output VAT charged on its VATable sales in this month (this often happens in the case of a significant investment, such as the acquisition of real estate), the purchaser is entitled to roll the amount of the excess VAT over to the next month or request a cash refund.
The standard VAT cash refund period for real estate acquisitions is generally 60 days from the filing of the tax return showing the refund. This period may be shortened to 25 days, provided that input VAT results from invoices documenting amounts that have been fully paid to the vendors' bank accounts.
A claim for a significant VAT cash refund usually attracts the attention of the tax authorities, and it is typically standard procedure that they commence a tax inspection in order to check the legitimacy of the refund claim.
Tomasz Ożdziński is a senior manager in the tax department of PricewaterhouseCoopers and the leader of the real estate tax team. Katarzyna Kopczewska is a specialist in this team.
Why a share deal could be a better option
According to Polish regulations, the acquisition of real estate by a foreign investor may be performed directly (e.g. a foreign investor purchases property through a branch operating in Poland) or indirectly (via the acquisition of shares in an existing Polish company that owns real estate). The tax implications of the two options differ significantly.
The most obvious advantages of the acquisition of shares are simplicity and speed. Furthermore, most foreign investors prefer this route, since it would at certain times allow for a Polish income tax-free exit from the investment. The wide network of double-tax treaties signed by Poland means investors may not have to pay capital-gains tax on the sale of shares in Poland.
However, Poland has recently renegotiated various double-tax treaties, and introduced changes in the taxation of real-estate disposals through the sale of shares. New double-tax treaties, concluded with Ireland, Germany and Denmark among others, feature a clause that allows Poland to tax the capital gain in the case of the sale of shares in a Polish company of which the majority of assets consist of Polish real estate.
The direct acquisition of real estate in Poland by a Polish branch of a foreign investor is a more complicated and time-consuming transaction, due to specific legal requirements and procedures. However, taking this route means foreign investors can bypass withholding taxes that are imposed on any subsequent repatriation of profits.
Nevertheless, for investors from the EU, this argument is currently irrelevant, as EU regulations implemented by Poland provide for withholding tax exemption on dividend payments made by Polish companies to their parents in EU Member States, if certain conditions are met.
Still, capital gains earned on the sale of real estate are subject t Polish corporate income tax of 19 percent. Compared to the sale of shares in a company holding real estate, which would at times be tax free in Poland, this seems to be a significant additional tax burden.
Minimizing risk
It's not just tax an investor has to worry about, as these two acquisition routes have their own potential risks.
When an investor purchases shares in a company, they are also buying a company with all its history and potentially hidden financial and tax liabilities. Comprehensive due diligence for tax and financial issues is the key here to uncovering any nasty bad debts that could be lying in wait to snare the eager investor.
The primary purpose is to estimate the exposure to tax arrears that could be acquired along with the business purchased, and this could influence the share price.
Investors can avoid this problem altogether by directly acquiring real estate, provided a certain legal procedure is followed. Under the consent of the seller, the purchaser may apply to the authorities for certificates of the seller's outstanding tax and tax-related liabilities. If the transaction is closed within three days after issuance of such certificates, the purchaser is responsible only for the tax arrears disclosed therein (if any). This deadline may be extended to 30 days, provided the real estate constitutes a component of a going concern subject to the acquisition.
Know your transfer tax
The sale of shares in a Polish company is subject to a transfer tax called the Civil Law Activities Tax (CLAT), which is charged at the rate of one percent of the market value of the shares, even if both parties to the transaction are foreign entities.
The purchaser and seller are jointly and severally responsible for payment of this tax. However, it is usually contractually agreed that the purchaser pays it. Generally, CLAT paid on the transaction may not be immediately recovered, but is included in the acquisition cost of the shares at the moment of their future disposal.
The sale of development land and buildings is generally subject to VAT at the rate of 22 percent. However, there are exemptions to this rule. VAT exemptions apply, among others, to residential buildings. Disposals of residential buildings are VAT exempt, unless this is a first disposal before occupation. The latter is subject to VAT. Be aware though that until December 31, 2007, the 22-percent standard VAT rate is reduced to seven percent, so get your skates on if you want to keep your VAT bill down.
Furthermore, the disposal of used buildings is VAT exempt, provided that the vendor was not entitled to deduct VAT historically incurred on their acquisition or construction. Should the above VAT exemptions apply, a CLAT of two percent would be levied instead.
In all cases, the VAT treatment of the sale of a building is applicable also to land on which the building is located.
Claiming back the VAT
Input VAT incurred on a direct acquisition transaction may be recovered, provided the purchaser intends to use the real estate for running its business activities subject to VAT. However, if the business activity that the real estate is going to be used for is VAT exempt (such as bank and insurance services, the lease of buildings or apartments for housing purposes, or the lease of land for agricultural activities), then you'll have to grin and bear it when the input VAT bill comes.
When input VAT incurred by a purchaser in the month of the acquisition exceeds output VAT charged on its VATable sales in this month (this often happens in the case of a significant investment, such as the acquisition of real estate), the purchaser is entitled to roll the amount of the excess VAT over to the next month or request a cash refund.
The standard VAT cash refund period for real estate acquisitions is generally 60 days from the filing of the tax return showing the refund. This period may be shortened to 25 days, provided that input VAT results from invoices documenting amounts that have been fully paid to the vendors' bank accounts.
A claim for a significant VAT cash refund usually attracts the attention of the tax authorities, and it is typically standard procedure that they commence a tax inspection in order to check the legitimacy of the refund claim.
Tomasz Ożdziński is a senior manager in the tax department of PricewaterhouseCoopers and the leader of the real estate tax team. Katarzyna Kopczewska is a specialist in this team.
