Private rental and business

Property rental is becoming an increasingly popular way of making profits or investing in its financial resources. Many taxpayers have doubts as to how they should qualify for the revenue generated by this.

Under the law of 26 July 1991 on personal income tax 1 (hereinafter: u.p.d.o.f.), the revenue of natural persons from the lease can be taxed within the framework two various sources of revenue, namely: 1) non-agricultural business activities, i.e.

revenue sources in question under Article 10(1)(3) u.p.d.o.f.) and 2) a separate revenue source, defined under Article 10(1)(6) u.p.d.o.f. (so-called private rent). The correct identification of the source of revenue is therefore fundamental from a tax point of view, as it determines how the source is taxed.

1. Introduction

In the case of private rental (i.e.

In addition to economic activity, the taxpayer can choose to tax on a general basis, on a tax scale (with rates) 17% from income to amount 85,528 PLN and 32% above that amount), or in the form of a lump sum on recorded revenue (in the amount of 8.5% from revenue to amount 100,000 PLN and 12.5% above that amount).

On the other hand, income from leases in business activities can be taxed on a general basis on a tax scale or a linear tax at a rate 19%.

It should be noted that accommodation services (PKWiU) 55), according to Article 12(1)(2) point (e) Act on 20 November 1998 a flat-rate income tax on certain income generated by individuals[2] (hereinafter: u.z.p.d.), may be taxed with a flat rate on revenue recorded at the rate 17%.

In some situations, taxation in the form of a tax card is also possible. This applies to entrepreneurs who provide hotel services to rent guest rooms and tourist cottages (including meals) if the total number of rooms (including tourist cottages) does not exceed 12 – item 4 Part XII Annex 3 U.z.p.d.

Example

The taxpayer has acquired a housing facility for 400,000 PLN And he started hiring him. Rent is equal to 2,500 PLN A month. The taxpayer bears administrative fees and media costs of 700 PLN A month. During the year, he also incurred expenses for renovation in the amount of 2,000 PLN.

As a form of taxation, he chose a lump sum from recorded revenue, which amounts to 2,550 PLN on a yearly basis (rate 8.5%). If he rented the premises on general terms, he could deduct the costs incurred above (total) from the revenue obtained (total) 10,400 PLN), and depreciation (1.5% per year from quota 400,000 PLN, i.e. 6,000 PLN).

Tax revenue would therefore be 13,600 PLN, a tax at rate 17% – 1,787 PLN. However, it should be taken into account that, in the annual accounts, all revenue taxed on a scale is aggregated.

So if, outside of the rental income, the taxpayer also achieves income from, for example, the employment relationship and together they exceed 85,528 PLN, the tax will be calculated at the rate 32% (above that amount).

In case of settlement of the lease on a tax scale, the property owner may also reduce revenue generated by, inter alia, expenditure on equipment for the premises, its insurance or interest on the loan for the purchase of the premises.

The boundary between the lease concluded as part of business activity and the so-called private lease is extremely difficult to determine. Consequently, there are numerous tax disputes between taxpayers and tax authorities. Taxable persons assume that their lease is so-called a private lease, while tax authorities consider it to be carried on as part of an economic activity. The divergent interpretations of tax law and the divergent jurisprudence of administrative courts do not dispel doubt.

It should be noted that work is currently under way in the Sejm on the amendment of the rules, whereby the flat-rate tax can be applied to both private rental revenues and leases carried out in the context of business activities.[3] . The amendments are intended to increase the attractiveness of taxation in this form and to extend the group of taxpayers who will benefit from it. According to the project, from 1 January 2021 the lump sum on recorded revenue is to be 8.5% from revenue to amount 100,000 PLN and 12.5% from an excess above that amount, including for:

• 1) revenue in question under Article 6(1a) U.z.p.d., i.e. revenues from private rental,
• 2) revenue in question under Article 14(2)(11) u.p.d.o.f., i.e. revenue from leases, sub-rentals, sub-rentals and from other contracts of a similar nature, assets related to business activities, which are also included in the revenues from business activities,
• 3) provision of accommodation services (PKWiU Division 55),
• 4) provision of rental and service services for own or leased properties (PKWiU 68.20.1.).

The proposed changes are undoubtedly to be assessed positively. In particular, tax payers will benefit from them, who do not incur high costs in connection with the lease of property.

In the case of flat-rate taxation, the tax is levied on the proceeds of the rental and therefore it is not possible to recognise the expenditure incurred as revenue costs.

Until now, however, the lump sum has been reserved for private rental and between property owners and tax authorities have had numerous disputes as to whether the rent they rent is still private or professional.

Once the announced changes have been introduced, regardless of whether the rent revenues will be allocated to the source of ‘private rental’ or to the source of ‘economic activity’, the flat rate of the 8.5% from revenue to amount 100,000 PLN and 12.5% above that amount. According to the same rates, income from the provision of accommodation services is to be taxed.

2. Conditions for recognising the lease as an economic activity

The criterion distinguishing private rental from professional is included under Article 5a(6) u.p.d.o.f. definition of economic activity. Under this provision, economic activity is a gainful activity:

• 1) manufacturing, construction, commercial, service,
• 2) which involves searching, recognizing and extracting minerals from deposits,
• 3) the use of things and WNiP
• – held in its own name, regardless of the outcome, in an organised and continuous manner from which the revenue generated is not included in other revenue from the sources listed under Article 10(1)(1), 2 and 4-9.

Therefore, in order for a particular activity to be considered an economic activity, it must be carried out in its own name by the taxable person and must meet together the conditions: the purpose, continuity and organised nature.

An act in its own name means that an entity operating an economic activity acts as an entity which is legally independent from other entities, and its activities directly affect its specific rights and obligations. The economic nature of the activity indicates that it is geared towards profit.

The possible loss resulting from a profit-making activity does not deprive it of such a character because the intention to achieve income itself is important. The continuous pursuit of the activity means the performance of the activity, in turn, is relatively continuous, unprovoked.

It is connected with the planned nature of the actions and the implementation of the specific objectives. It is not necessary to do business without interruption – it is crucial to repeat certain activities in order to achieve profit.

The continuity of the lease does not prejudge the rent of the property for several years, but the repetition of the measures taken. As regards the structured mode of action, this is a methodical, systematic, structured action, which follows the plan, with the participation of specially selected means of obtaining income[4].

When analysing the definition of economic activity in u.p.d.o.f., attention should be paid to the similarity of the lease made in the course of the activity and the private lease. In both cases, the lease is characterised by a degree of organisation, of a commercial and continuous nature.

Provincial Administrative Court in Gliwice in judgment of 9 December 2014[5] stressed that the rental of real estate is in practice of a continuous nature (i.e. it usually covers a longer period), is carried out in the property owner’s own name and for their own account and, in principle, to achieve income.

Therefore, these elements of the lease agreement are identical to the characteristics of the business activity and, consequently, cannot be of different character. two revenue sources.

Likewise, the NSA in judgment of 22 October 2019[6] He pointed out that the conduct of an economic activity, which is the subject of renting premises, cannot be prejudged by the mere continuity of activities resulting from the substance of the lease contracts, or by a profit-oriented approach, by acting in accordance with the principles of economy (which is a commercial element of the lease) as well as by the management of private assets.

On the other hand, the differentiation criterion may be the feature of organising rents, i.e. taking steps to create and make the market offer attractive by processing (reconstruction) the lease for the purpose of adapting to market demand or carrying out advertising activities in the range of marketing activities.

The Court of First Instance added that the management of private property may also be regarded as acquisition of real estate as capital investments, even for rental purposes, if it does not involve the creation of an organized management structure for such assets and their operation, which is appropriate for companies with the profile in question.

The organisation of the lease may indicate (although not decisive) in particular certain circumstances, such as: compliance with formal obligations for the registration of the entrepreneur, cooperation with professional entities, provision of additional services or a significant number of rented properties or contracts signed[7].

3. Purpose of the taxpayer and objective business considerations

Until recently, the administrative courts held that it was the taxpayer's decision that was crucial in classifying specific revenues for private rental or business activity.

Supreme Administrative Court in judgment of 5 April 2016[8] He pointed out that the intention of the taxpayer itself is decisive for the distinction between the lease on the board of directors of assets not related to economic activity and the lease on the business.

It is he who decides whether to link certain elements of his property to the performance of his business activity, or to retain them on the board of directors assets not related to economic activity and to return them to e.g. in rent.

In the absence of clear positive rules for the classification of rental income by the legislator one to two competing sources, the decision of the taxpayer itself should be given decisive importance. This position was also divided by the WSA in Warsaw in a judgment of 7 March 2018[9] and NSA in judgment of 11 August 2017[10].

A different view was expressed by the NSA in the judgment of 22 October 2019[11].

According to the Court of First Instance, whether the rent is carried on in the course of an economic activity is not determined by the will or intent of the taxpayer, but by the fulfilment or failure of objective criteria set out under Article 5a(6) u.p.d.o.f.

Among the characteristics defining economic activity, there is no intention of the taxpayer to conduct it.

For this reason, it cannot be assumed that the qualification of income to a particular source, and therefore the binding or non-binding of certain assets to economic activity, would be decided by the taxable person, rather than the objective characteristics of his activities using certain assets.

A similar position is found in NSA judgments of 15 November 2017[12] and WSA in Opole from 26 February 2020[13].

In the light of the above case-law, it can be concluded that it is decisive whether the objective criteria of economic activity have been fulfilled in the circumstances in question and not merely that the taxable person is convinced that the revenues it achieves to a particular source.

If the way in which the lease is carried out indicates the characteristics of the business activity, the rent fulfils the conditions for recognition as an economic activity within the meaning of u.p.d.o.f.

and should be settled on the terms applicable to that activity and not on the basis of the taxpayer's choice as a so-called private rent. This position is reflected in the tax authorities' interpretations[14].

4. Analysis of the case law

In the NSA assessment[15], where the taxable person’s economic activity is classified as a taxable person by the criteria laid down under Article 5a(6) u.p.d.o.f. and at the same time the activities of the taxpayer, despite meeting these criteria, may be included in other sources of revenue (e.g.

rental), the recognition of these activities as an economic activity should be determined by the intensity of the characteristics indicated under Article 5a(6) u.p.d.o.f.

If these characteristics, and in particular the structured nature and continuity of the activities, are clearly greater than in the case of the same activity performed outside the economic activity, those activities should be considered to be economic activity.

It seems that this intensity we can talk about when the number of rented properties is significant. However, there are no regulations in u.p.d.o.f. that would make the rent of the business activity and beyond dependent on the number of rented premises. Certainly, the number of rented properties cannot be crucial in assessing whether we are dealing with a private lease or an economic activity.

The analysis of jurisprudence and tax rulings does not clearly indicate what number of properties we can consider to be ‘significant’. If one is two property tax authorities generally recognise the possibility of accounting in private leases, but with more of them the position presented by tax authorities may be different. It leads to the recognition that the taxpayer owns and rents several properties already constitute a lease in the course of an economic activity.

For example, the WSA in Warsaw in a judgment with 25 August 2017[16] acknowledged to the taxpayer that the lease one, two either third apartments acquired as an investment and placed on the management board of a professional company, is located within the framework of a private lease.

Similarly, he decided the WSA in Warsaw in a judgment with 7 March 2019[17] assuming that the lease one dwellings and two premises in hotel complexes are to be considered as renting assets not related to business activity. In this case, the motives behind the acquisition of the property were important.

The apartment was purchased for children who can use it in the future, while hotel complexes (in different holiday destinations) were purchased with the intention of using it with their family.

However, the Court stressed that the assessment could be different if the taxpayer had acquired more than two premises or two premises in the same village.

It seems reasonable to conclude that the more rented facilities, the more likely it is to assume that the lease is ‘organised’.

Supreme Administrative Court in judgment of 15 January 2019[18] He felt that since the taxpayer owns several premises in partnership with her husband and rents them for residential purposes and in future intends to acquire several new dwellings for their rental, he obtained income from business activities in the area of rental.

The wide range of rental activities indicates that it cannot be conducted differently than in an organized and professional manner.

In turn the WSA in Gdańsk in judgment with 2 October 2018[19] found the lease 5 business premises. A similar position is found in NSA judgments of 15 November 2017[20] in 11 and 2 February 2017[21] for the rental of premises in buildings located on the ground 14 real estate. However, it should be pointed out once again that the qualification of rental income to a specific source does not depend solely on the number of premises. The whole of the facts of the case will be decisive.

Against this background, the NSA judgment of 13 August 2020[22]. The case concerned a taxable person who worked on a so-called "time", non-business and owns several properties (two residential premises, utility premises and office and storage facilities). The owner pointed out that in the future he could acquire further properties.

In order to minimise the time needed to handle the rental of property, he commissioned external entities to do certain activities related to it (e.g. accounting services). Nor did he rule out that once a rent might become his main source of income.

The Court of First Instance held that since a taxable person places free funds in a real estate, works on a permanent basis and does not intend to make a basic source of income, and at the same time no clear rules have been established indicating how the rent in business differs from the so-called private one, the taxpayer has the right to apply a flat-rate 8.5% rates.

According to tax authorities and administrative courts, the cooperation of the owner of the premises with property managers may also be demonstrated. Unfortunately, there has also been no uniform case law in this regard. Both the view that establishing cooperation with specialised companies does not prejudge business activity[23] and that entrusting the management of a professional entity demonstrates the adoption of a certain form of organisation[24].

5. Private rental while doing business

Until recently, tax authorities have broadly defined the concept of lease as part of an economic activity, including rent after the end of the business or rent of private property, if at the same time the property owner has carried out real estate activities.

However, in recent individual interpretations, the Director of KIS confirmed that the rent of the property could be considered private and taxed at a rate 8.5%, even though the property owner simultaneously conducts economic activities related to the sale and lease of real estate.

The rules do not prohibit taxpayers from simultaneously achieving revenues from both sources.

The Authority stressed that the right to tax the proceeds of the so-called private rental in the form of a lump sum is not dependent on the taxpayer's failure to obtain the proceeds from the rental carried out in the course of business activities[25].

6. Summary

Despite numerous tax rulings and administrative court rulings on the qualification of property rental income as an economic activity or a private lease, the issue has not been resolved explicitly. The provisions do not make the rental income credited to the source in question payable.

10 section 1 point 6 u.p.d.o.f., from the fulfilment of individual conditions, i.e. the number of rented premises, the duration of the lease agreement, the purpose for which the premises are rented, the amount of revenue generated from the lease.

In particular, it does not constitute such an independent condition for the conclusion of lease contracts for short periods (so-called short-term rent).

The method of taxing the proceeds of the lease depends on the entire factual circumstances of the case, and therefore any action taken by the taxpayer, rather than individual elements of the facts.

If a taxpayer rents little property, it does not actively seek tenants, and the lease is not the main source of its income, the income obtained from this lease should be classified as a private lease.

If, on the other hand, the method of carrying out the lease by reason of size, repetition, commercial nature and organisation indicates the characteristics of the economic activity, the rent fulfils the conditions for recognising as an economic activity within the meaning of u.p.d.o.f.

and should be settled on the terms applicable to that activity and not on the basis of the taxpayer's choice as a so-called private rent. It is also important that the taxable person undertakes active activities in the rental of immovable property, while involving measures similar to those of economic operators.

It is also important to know how and for what purpose the rented properties (purchase, inheritance, donation) and whether they were purchased for investment purposes or, above all, to satisfy the personal needs of the taxpayer and his family.

It should be stressed that each case should be considered individually, taking into account the relevant circumstances of the case. Given that the jurisprudence is still fragmented, it is worth considering an individual interpretation in facts which raise doubts.

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Legal basis

• Article 10(1)(3)(6) u.p.d.o.f.,

• Article 5a(6) u.p.d.o.f.,

• Article 12(1)(2) point (e), point 3 point (a) U.z.p.d.

The article comes from the book C.H. Beck Publishing House “The Tax and Balance Sheet Closing of the Year 2020” under the ed. Prof. ed. named Dr. hab. Artur Hołda, https://www.ksiegarnia.beck.pl/19591-podatkowe-i-bilansowe-zamkniecie-roku-2020-artur-holda