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This article answers the following questions:
- What are real estate companies?
- How did the National Revenue Administration Information Centre change its position on the definition of a real estate company?
- Can an entity acquire the status of a real estate company even if none of its subsidiaries has such a status?
Despite the fact that the provisions regulating real estate companies have not been amended since their introduction into the Polish CIT Act, the interpretation of the Head of the National Revenue Administration Information Centre (NRAIC) changed completely in the space of just a year. In addition, in its judgment of 16 October 2024, file no. III SA/Wa 1771/24, the Provincial Administrative Court in Warsaw contributed to the unfavourable treatment of the regulations for taxpayers.
The new interpretation of Article 4a(35) of the CIT Act expanded the list of entities that are included in the definition of real estate companies, thus increasing the number of entities with additional reporting obligations and, in some cases, with the obligation to pay tax.
The definition of a real estate company pursuant to the Polish Corporate Income Tax Act
In accordance with Polish tax regulations, an entity which is obliged to prepare a balance sheet in line with the Accounting Act is deemed a real estate company if the following conditions are met:
- As at the first day of the tax (fiscal) year, at least 50% of the market value of the entity's assets comprise, directly or indirectly, the market value of real estate (or rights to such real estate) located within the territory of Poland, and the market value of said real estate exceeds PLN 10,000.000. This condition applies to entities which commence business activities.
As at the last day of the year preceding the tax (fiscal) year, at least 50% of the carrying value of the entity's assets comprise, directly or indirectly, the carrying value of real estate (or rights to such real estate) located within the territory of Poland, and the total carrying value of said real estate exceeds PLN 10,000.000, and the revenues included in profit for the year preceding the tax (fiscal) year:
- from lease and sublease agreements (and similar agreements); or
- from the transfer of ownership of real estate or rights to real estate, or from shareholding in other real estate companies,
comprise at least 60 per cent of the total tax revenues or revenues included in profit. This condition applies to other entities.
However, the legislation does not clearly specify how to interpret "assets which indirectly comprise real estate located within the territory of Poland (or rights to such real estate)". As a result, this regulation has raised many doubts among entrepreneurs and ultimately led to a dispute with the NRAIC.
Interestingly, on the basis of the individual tax rulings issued so far, it can be concluded that the NRAIC itself has problems to decide how to interpret the regulations necessary to determine the status of a real estate company.
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How did the position of the National Revenue Administration Information Centre on real estate companies change?
As recently as 2023, the NRAIC took the position that, in order to work out the value of the assets which directly or indirectly comprise real estate or rights to real estate, one needs to account for the carrying value of the assets of the entity recognised in the accounting records of said entity as financial assets in accordance with accounting regulations, in particular assets that are recognised in the separate balance sheet of the entity – such as its shares or participating interest in subsidiaries – where at least 50% of the carrying value of the assets of a given subsidiary comprises directly or indirectly the carrying value of real estate located within the territory of Poland or rights to such real estate.
Such a position was taken e.g. in individual tax rulings of 20 July 2023, ref. no. 0111-KDIB1-1.4010.281.2023.1.AW, of 7 November 2022, ref. no. 0111-KDIB1-2.4010.537.2022.2.ANK, and of 14 March 2022, ref. no. 0111-KDIB1-2.4010.668.2021.1.AK.
Due to the adoption of such a position, when verifying whether an entity is a real estate company, one should examine only the financial statements of that entity, and when calculating whether at least 50% of the carrying value of the assets comprise the carrying value of real estate located within the territory of Poland or rights to such real estate, one only needs to account for the value of the real estate directly owned by that entity and the value of the real estate indirectly owned, understood as the value of assets in the form of shares in such subsidiaries in which 50% of the assets comprise real estate or rights to real estate.
In the individual tax ruling of 2 May 2024, ref. no. 0111 KDIB1 3.4010.54.2024.1., the NRAIC established a new interpretation of this regulation, where in determining the carrying value of the real estate indirectly owned, one should account for the value of all the real estate indirectly owned, i.e. including the value of the real estate owned by subsidiaries, and not the value of the shares of the entity in those subsidiaries.
Where such a position is adopted, there are more obligations with respect to the entity whose status is being checked, as one needs to examine the financial statements not only of the entity itself, but also of its subsidiaries.
Furthermore, what is also unfavourable to companies is the method of calculating whether at least 50% of the carrying value of the assets comprised the carrying value of real estate located within the territory of Poland or rights to such real estate, as in such an instance, one needs to account for the value of the real estate directly owned by a given entity and the value of the real estate owned by its subsidiaries. Such a position was also taken in the rulings of the NRAIC of 7 June 2024, ref. no. 0111-KDIB1-3.4010.270.2024.1.AN, and of 23 July 2024, ref. no. 0111-KDIB2-1.4010.180.2024.2.AR.
The unfavourable judgment of the Provincial Administrative Court in Warsaw. How does the court interpret the definition of a real estate company?
The NRAIC ruling referred to above was appealed against, but the Provincial Administrative Court in Warsaw, in its judgment of 16 October 2024, file no. III SA/Wa 1771/24, upheld the unfavourable position of the National Revenue Administration Information Centre to companies.
The Court assessed that the expression included in Article 4(35) of the CIT Act only points to the carrying value of real estate or rights to real estate as a component of the carrying value of the assets, since it directly points to the value of real estate, and does not provide grounds to include the shares of this entity in its subsidiaries in examining the status of the company as a real estate company.
In the court's assessment, this regulation does not refer to the value of only that real estate which is directly included in the balance sheet of the entity which is checking its status as a real estate company, so the expression "indirectly" should be understood in such a way that the underlying purpose of the statute is to include in the calculation also the value of the real estate which the entity owns via subsidiaries.
The company which appealed against the ruling argued that if the intention of the Polish lawmakers had been to impose such a broad obligation as examining financial statements of other entities, they would have explicitly included such an obligation in Article 4a(35) of the CIT Act. However, the Provincial Administrative Court decided otherwise and held that the mandatory rules may not be interpreted through the prism of an entity's convenience or the operability of its business model.
Whereas regarding the divergences in interpretation presented by the NRAIC and its sudden change of the position taken in individual tax rulings, the Provincial Administrative Court assessed that it could have been of auxiliary importance only if it had involved misinterpretation of substantive law. However, it does not concern a situation where an authority repeats a position which is in breach of the law.
The status of a real estate company can be acquired despite not owning any real estate located within the territory of Poland
In accordance with the assessment of the Provincial Administrative Court in Warsaw, the underlying purpose of the statute which arises from the regulations defining a real estate company is a situation where "the parent company may have the status of a real estate company even though it does not directly own real estate located within the territory of Poland or rights to such real estate".
Following the same logic, the company may, hypothetically, acquire the status of a real estate company even if none of its subsidiaries has such a status. Such an approach seems to be absurd and detrimental to companies and translates to additional reporting obligations for taxpayers.
It should also be emphasised that the Court did not address the method of determining the numerator proposed by the NRAIC, which leads to the value of the numerator (the carrying value of the real estate owned by the entity and its subsidiaries) being higher than the value of the denominator (the carrying value of the assets of the entity).
What happens next?
The first interesting and important matter for entities that are threatened with being deemed as real estate companies is whether the tax rulings favourable to taxpayers issued prior to May 2024 will be amended to adjust them to the position which is, according to the Provincial Administrative Court, "in compliance with the law".
We also have to wait for the judgment of the Supreme Administrative Court; however, if the decision of the court of the first instance is upheld, it may turn out that a greater number of entities will be obliged to fulfil the reporting obligations imposed on real estate companies.
Due to the expanding interpretation of the regulations defining a real estate company, we recommend regularly verifying whether or not an entity has started to be in line with the definition specified in the CIT Act. The same is true for entities which had complied with the established interpretation that changed.
If you have any doubts, feel free to contact RSM experts, who will help you to verify the real estate company status and support you in potential reporting obligations.
