Changes in real estate tax – maintaining the status quo or a revolution?

This article will answer the following questions:

• How does the new definition of a structure affect the obligation to pay real estate tax?
• How will the method of taxing electrical energy equipment change?
• Which elements of the new real estate tax regulations are the most controversial?

In the last post, we informed about the draft of new regulations governing real estate taxation announced by the Polish Ministry of Finance. The most important (though not the only) of the proposed changes is the update of two definitions – building and structure – whose new wording may translate into higher burdens for taxpayers. Do the new regulations, as announced, actually constitute only a structuring of the existing rules, or do they covertly introduce a revolution in real estate tax?

New definitions of building and structure

Let us remind you: the new definitions proposed by the Ministry of Finance are autonomous and do not contain references to other acts, but they are based on the achievements developed by the Construction Law. 

Definition of building

In the draft act on amendments to the act on local taxes and fees, a building is defined as an object that, together with installations ensuring its use in accordance with its intended purpose:

• was constructed using construction products, 
• is permanently attached to the ground, 
• has been separated from space by building partitions, and 
• has foundations and a roof.

Definition of structure

According to the new definition proposed by the Polish Ministry of Finance, structures are objects indicated in Annex 4 to the Act on Local Taxes and Fees (this is a list of 28 objects constituting different types of structures) together with their installations and equipment (if they constitute a technical and functional whole together with this object). Importantly, however, the definition of a structure also includes: 

• construction parts of equipment that are not part of the structure, 
• construction parts of wind farms and nuclear power plants, 
• foundations for machines and equipment that are technically separate from these machines and equipment, and 
• connections to the building object that were made using construction products.

The Ministry of Finance announced that by introducing new definitions of buildings and structures it wanted to maintain the fiscal status quo, but at this point the draft of the new regulations is already arousing many emotions and there are many indications that the changes will translate into numerous interpretational doubts and possible disputes between taxpayers and tax authorities.

Doubts arising from the draft of new regulations: will taxes increase? 

What is the “technical and functional whole” of a structure?

The first problem of the new regulations, which may significantly increase the burden on taxpayers, is the reference in the definition to the concept of a technical and functional whole. Including it may significantly expand the scope of taxation with real estate tax, as then the tax will be charged not only on the value of the structure itself, but also on the value of the installations and equipment associated with it, which together serve the implementation of a specific economic purpose. The risk that appears with such an understanding of the technical and functional whole is the almost unlimited catalogue of equipment functionally associated with the structure, which may be subject to taxation.

Will we have to pay real estate tax for transformers? 

So far, as a rule, power equipment (such as transformers or switchboards) has not been subject to taxation. However, since the new regulations refer to the concept of a technical and functional whole, this may change. The explanatory memorandum to the draft indicates that transformers, switchboards and accumulator batteries may constitute a technical and functional whole together with the power grid fulfilling a specific purpose and thus be subject to taxation.

Will photovoltaic power plants have to pay significantly higher taxes?

The legislator indicated in the draft regulations that the construction part of wind farms and nuclear power plants will also be considered a structure. However, there was no information on how to treat photovoltaic power plants. At the moment, this is a serious problem for the development of the photovoltaic industry, because with such wording of the regulations, tax authorities will be able to seek to tax photovoltaic power plants in their entirety, and not only in relation to their construction parts. It is therefore not surprising that representatives of this industry have many reservations in this respect. 

How will the use of construction products as a feature of structures expand the scope of objects covered by the tax?

One of the features of the object that allows it to be classified as a structure is to be (unlike the previous premise – erection in the construction process) its construction using construction products. It is worth noting here that the draft itself lacks a definition of “construction products”, and “construction” is a significantly broader concept than the previously applicable “erection”. 

This change means that it will be possible to tax fully prefabricated equipment, the production of which does not involve construction work at any stage of the process, and therefore also to include in the tax objects that were entirely constructed outside their target location.

Why is it worth checking out the extended catalogue of structures? 

Annex 4 to the draft act, which lists types of structures, also includes items that, in certain circumstances, have not been taxed so far – e.g. tent covers. This means that taxpayers should re-examine whether their objects, which have not been subject to taxation so far, will not constitute structures after the new regulations come into force. 

How to interpret “permanent attachment to the ground”?

The draft act also introduces a definition of permanent attachment of an object to the ground, which states that it is such an attachment of a building object to the ground that provides it with stability and the ability to counteract external factors that may destroy it, cause it to move or shift to another place. As can be seen, this is a broad definition that may lead to taxation of objects or technical equipment whose massiveness makes them resist the forces of nature, even though no construction work is necessary to move them.

Is it time to start looking for a tax advisor who specialises in real estate tax?

As you can see, the draft of the new regulations may significantly change the current principles of real estate taxation and increase the number of taxpayers' disputes with the authorities. Currently, the draft act is still in the review phase, which still gives the possibility of changing controversial or imprecise regulations.

We will keep you updated on any changes (favorable or not).

At the same time, we recommend that you take a look now at how the proposed changes may affect your settlements. If you have any questions or need to discuss the topic, we warmly invite you to contact our experts.