Yikes, there's more!

Anna Szymańska is a tax senior manager at the Warsaw office of Ernst & Young.

If you thought the news in my last column was bad, there's more - this time related to real estate.

If you are thinking of buying or building a house or flat, or if you intend to sell and reinvest the proceeds in a new property, don't put it off, do it now before the end of 2003. My advice comes not as a result of my having any inside info as to any prospective boom on the real estate market, rather as a result of reading another snippet of information relating to further tax reforms planned by Finance Minister Grzegorz Kołodko.

If the minister's plans go through to become law in 2004 it could mean an effective increase in the price of building a house of up to 20 percent on current prices.

Apart from a proposal to subject building materials and plots to a 22 percent VAT, the finance ministry is considering removing the existing exemption which allows an individual selling a property not to pay the 10-percent flat-rate tax on the sale proceeds, if those sale proceeds are used for housing purposes (i.e. building or purchasing a home) or to pay off a mortgage (if utilized within two years of the date of sale).

As if that were not bad enough, it has also been proposed that income from the sale be taxed at a flat rate of 19 percent (rather than the current 10 percent). The difference between the purchase price and the sale price, taking into account additional costs incurred on the property, for example renovation and extensions that help to increase its value, will be subjected to this tax on all properties sold before the fifth anniversary of their original purchase date.

What does this mean in practice? Basically the better the location, the more expensive the land, the greater impact the cost of the land itself will have on the ultimate price of the finished property.

According to property experts, in an average transaction the cost of a plot of land can account for up to 15 percent of the total price of the property. The introduction of a 22-percent VAT charge on the purchase of this plot of land will ultimately lead to an increase in the total price of the property of around 3 percent-3.5 percent. The price differential will be more noticeable for houses than for flats: for single family houses the cost of the plot on which the building is erected can amount to some 25 percent of the total price.

In theory, the increase from 7 percent to 22 percent VAT on building materials should not directly impact the ultimate price of the property as this VAT is recoverable for the developer. However, in practice the recovery of these amounts can take several months. Time, as they say, is money, so in real terms, whether you view it as a direct or an indirect impact, the price of property is likely to increase by a further 6 percent-8 percent (or even 15 percent if some reports are to be believed) as a result of this VAT increase.

In summary, the price of acquiring a building plot will increase by 20 percent (22 percent VAT less current 2 percent stamp duty) and the cost of building materials will increase by 15 percent (22 percent VAT less current VAT at 7 percent) - which could ultimately result in an increase in the cost of your dream home of 15 percent-20 percent. Don't forget that if you sell an existing property in order to purchase the new dream home you will also be paying an additional 19-percent tax on part of the sale proceeds. Also bear in mind that you are likely to be paying more personal tax next year than you will this year, so your cash-flow will also be affected in 2004.

Getting your foot on the property ladder has always been a hard and expensive first step - in 2004 it could prove to be beyond the reach of some potential house buyers.

Moving away from real estate, it appears that the finance ministry would like everyone making use of funds from the Phare and ISPA programs to pay VAT up front on the full amount of aid funds and, if applicable, to seek refunds in the future.

Under existing regulations, those benefiting from Phare or ISPA funds pay VAT on services related to the realization of the funded project, but only on that part which is co-funded by them. The remaining part, funded by one of the aid programs, remains subject to VAT, though it qualifies for the zero-percent rate. In order to benefit from this VAT rate, the contractual agreement with the fund must first be registered with the the Office of the Committee for European Integration (UKIE). It is more interesting perhaps to note that while the ministry is working on the text of the Ministerial Decree that will bring about this change, the offices of the UKIE have ceased to accept and review new applications for agreement registration and confirmation of applicability for the zero-percent VAT rate.

To illustrate, say we have a project that will benefit from aid funds to the tune of 60 percent of the total realization cost, where building works are subject to VAT at 7 percent and have a total value of zł. 500,000 without VAT. The investor has to fund 40 percent out of his own pocket, meaning a sum of zł. 200,000, with the remaining zł. 300,000 coming from the aid fund.

Under the current regulations (having, of course, registered all appropriate agreements and obtained confirmation from the UKIE) the firm will have to pay 7 percent VAT but only on the zł. 200,000, the remaining zł. 300,000 being covered by the zero-percent VAT rate.

Under the proposed new regulations there will be no option to utilize the zero-percent VAT rate. As a result, there would be no obligation to register agreements with the UKIE and the firm realizing the investment would be obliged to pay the 7 percent VAT on the full zł. 500,000, thereafter seeking a VAT refund on that part of the investment financed by the aid fund. In short, the end result (in theory) will be the same, though from a practical perspective it means that the tax office will hold funds and will have a two-month period to refund them. It also means that investors will have to come up with more funds up front in order to commence their projects. This will be particularly noticeable and painful on larger, more expensive projects.

While the ministry hopes that not everyone will apply for a refund, thus increasing the budgetary coffers, the question remains if this will simply lead to fewer investors applying for aid funds and, ultimately, fewer investments.

To end on a happier note, at least it appears that summer is finally here. Currently the good weather is tax free (in most places), but enjoy it while you can - who knows what the ministry's plans are for the future!