Property company and tax on divestment of shares in such a company

From 1 January 2021 The Income Tax Act extends the list of sources of income (income) obtained in the territory of the Republic of Poland by taxpayers who do not have their registered office or management in the territory of the Republic of Poland.

A new source of income (income) taxed in the territory of the Republic of Poland for the transfer of ownership of shares (shares) and similar rights in a real estate company was introduced. The purpose of this article is to approximate this regulation and the foreseeable effects of this change on the real estate market in Poland.

Legal status applicable to 31 December 2020

Current In the Act dated 15 February 1992 on corporation tax (hereinafter: the CIT Act) the rules on tax-related matter of transfer of ownership of shares in the company were expressed from under Article 3(3)(4) CIT Act. According to this provision, the taxable persons in question for income (income) generated in the territory of the Republic of Poland Under section 2, revenue from the transfer of ownership of shares in a company, of all rights and obligations in a company that is not a legal person or of the titles of participation in an investment fund, of the mutual investment institution or of another legal person, or of claims resulting from the holding of those shares, of all rights and obligations or of the titles of participation, if at least 50% the value of assets of such a company, a company which is not a legal person, an investment fund, a joint investment institution or a legal person, directly or indirectly, are properties located in the territory of the Republic of Poland or the right to such real estate.

The method of taxation of incomes (revenues) of nonresidents, described in the above-mentioned provision of the CIT Act, although it would seem to be a comprehensive regulation of this matter, was not fully effective in the assessment of the Polish tax authorities.

This was due, for example, to the fact that the entities involved in such entities were often other companies registered in tax havens or tax jurisdictions with which cooperation to enforce claims was difficult.

This confirms the justification for the amending law, where it is clear that enforcement difficulties are one from the grounds for amending the provisions of the CIT Act[1].

Such ownership structure was also often associated with the fact that there were difficulties in detecting the existence of transactions in shares of an entity whose assets were real estate located in Poland.

Issues concerning the place of taxation of shares, shares and similar rights in companies whose assets consist of immovable property are also governed by double taxation agreements that Poland has concluded with other countries. An example can be identified Article 13 mouth.

Agreements between the Republic of Poland and the Federal Republic of Germany on the avoidance of double taxation in the field of taxes on waste and property, dated 14 May 2003 According to that provision, profits from the transfer of ownership of shares, shares or other rights in a company whose assets consist mainly, directly or indirectly, of immovable property situated in a Contracting State or of rights belonging to that immovable property may be taxed in that State.

It should be clarified that the key to the correct interpretation of the obligations arising from this provision is the wording ‘the assets consist mainly, directly or indirectly of immovable property’. The word ‘primarily’ is interpreted as meaning that assets constituting immovable property should represent more than 50%2.

All of these existing provisions, according to the legislature, proved ineffective to enforce the tax liability of taxpayers in connection with the sale of shares in a company whose assets were real estate.

In order to guarantee its right to obtain tax on nonresidents in a more effective way, the legislator decided to extend the range of sources of income (revenues) to which a limited tax obligation in the territory of the Republic of Poland entails.

The existing provisions remain in force, but the legislator has set up a new tax law institution, which once again confirms the complete variation of tax law from other branches of law.

Real estate company – basic assumptions

Under the Act amending the Personal Income Tax Act, the Corporate Income Tax Act, the Flat-rate Income Tax Act on certain revenues generated by individuals and certain other laws, dated 28 November 2020 (Journal of Laws of 2020, item 2123), a new source of income (income) generated in the territory of the Republic of Poland by non-residents was introduced into the CIT Act, namely income (income) from the transfer of ownership of shares (shares), total rights and obligations, titles of participation or similar rights in a real estate company (Article 3(3)(4a) CIT Act[3]).

Legislative under Article 4a(35) The CIT Act presented an extensive definition of a real estate company. Namely, it means an entity other than a natural person required to draw up a balance sheet on the basis of accounting rules, in which:

(a) on the first day of the tax year and, where a real estate company is not a taxpayer of income tax, on first the date of the financial year, at least 50% the market value of the assets, directly or indirectly, represented the market value of the real estate located in the territory of the Republic of Poland or the rights to such properties and the market value of those properties exceeded 10,000,000 PLN or the equivalent of that amount determined at the average foreign currency rate announced by the National Bank of Poland on the last working day preceding first the date of the tax year for start-ups,

(b) on the last day of the year preceding the tax year and, where a real estate company is not a taxable person, on the last day of the year preceding the financial year, at least 50% the carrying amount of assets, directly or indirectly, represented the carrying amount of real estate located in the territory of the Republic of Poland or the rights to such real estate and the carrying amount of such property exceeded 10,000,000 PLN either the equivalent of that amount determined by the average foreign currency rate announced by the National Bank of Poland, on the last working day preceding the last day of the tax year preceding the tax year or the financial year, respectively, and in the year preceding the tax year or the financial year of tax revenue, and in the case where the real estate company is not a taxable person, income tax revenue recorded in net financial result, on the lease, sub-leasing, leasing and other contracts of a similar nature or on the transfer of property the property or property rights in question under Article 3(3)(4), and for shares in other real estate companies, they were at least 60% in the case of entities other than those specified in point (a).

The key to a proper understanding of the definition of a ‘real estate company’ is that the meaning of the word ‘company’ is very extensive and is not limited to companies within the meaning of the Commercial Companies Code.

A real estate company may be any entity (excluding a natural person) which is required to draw up a balance sheet in accordance with the Accounting Act. According to Article 45(2)(1) Act dated 29 September 1994 the accounting balance sheet is part of the financial statements.

According to Article 46(1) The balance sheet accounting act shall show the asset and liability status at the closing date of the current and previous financial year.

It follows, therefore, that the fact that the definition of a real estate company is fulfilled will be decided not by a legal form, as would be indicated by this first contact with this creation, but the assets of the entity.

Therefore, the designation of such an entity in a situation where a real estate company may be a foundation confirms the previously mentioned difference in tax law from other branches of the law. Civil law institutions acquire new meanings when they start to be regulated by tax law.

Another part of the definition of a real estate company is the distinction between defining elements for start-ups and those continuing to do so.

The starting company will become a real estate company if at first the date of the tax year (possibly the financial year for non-taxable entities CIT), at least 50% the market value of assets, directly or indirectly, constitutes the market value of the immovable property of midwives in Poland or the rights to such immovable property; at the same time, the value of these properties exceeds 10,000,000 PLN.

For other entities, the last day of the year preceding the financial year shall be valid. The balance sheet value of the property or its rights must exceed that date 10,000,000 PLN.

In addition, which is a significant difference from the definition of newly created entities, 60% the revenue was the value of the tax revenue or revenue recognised as a result of that entity in the year preceding the tax year for the lease, sub-rental, lease, lease lease and other rights of a similar nature or for the transfer of real estate property.

first the problem that arises after the definition of a real estate company is that there is no explanation of how the concept of a property right should be understood. It seems the most accurate interpretation would be to assume that the legislators were property and other rights in kind.

However, it is not excluded that decoding this meaning will take the tax authorities years and involve disputes with taxpayers. It is also worth noting that the definition includes a provision concerning indirect ownership of real estate assets located in Poland.

This may mean that real estate companies will be foreign entities holding shares in their Polish subsidiaries.

At the same time, it can be assumed that the definitions set out above indicate that the group of real estate companies will not be numerous. However, it is important to see the problems that arise from the fact that the entity is classified as a real estate company.

Real estate company as income tax payer for the sale of its shares

For a real estate company from 1 January 2021 it will be necessary to monitor the divestment of its shares (shares, total rights and obligations, title of participation or similar rights) by the entity which holds those assets. According to Article 26aa(1) The CIT Act will require the real estate company to pay an advance on the tax on the proceeds of the divestment of this amount 19% by 20. the day of the month following that in which the income arose if:

• 1) the seller is a non-resident or a non-resident in Poland
• or
• 2) the seller is a natural person not resident in Poland
• and

1. the subject of the transaction is shares (shares) giving at least 5% voting rights in the company or in general rights and obligations giving at least 5% the right to participate in the profit of a company not a legal person, or at least 5% the total number of participations or rights of a similar nature in a real estate company.

Please note that this principle also applies if the one entity more than one divestment transactions (shares, etc.), for a period not exceeding 12 months counted from the last day of the month in which it occurred first their disposal if the conditions laid down in that provision are met.

In that case, the real estate company is obliged to pay the advance on the tax within the time limit 20.

on the day of the month following the month in which the sum of voting rights in a company whose shares have been disposed of, or the sum of the total rights and obligations giving rights to participate in profits in a company which is not a legal person, or of shares or similar rights, during the period referred to in the sentence first, at least 5% (Article 26aa(2) CIT Act).

The above provisions make it necessary for a real estate company to continuously monitor whether its shares, etc., have been disposed of. In the event of their disposal, it is necessary to have information on the revenue which the taxpayer has achieved in respect of such a transaction and about its cost of obtaining revenue.

All this is necessary to calculate the tax at the appropriate level. Importantly, the taxable person should, before the date of payment of the tax, forward to the payer the amount of the advance on the tax. The payer is obliged to send to the taxpayer information on the advance payment made in accordance with the established formula.

The rule that carries the most risks to property managers is under Article 26aa(3) CIT Act.

It states that in the absence of information on the amount of the sale transaction by the real estate company, the advance on the tax is set at 19% the market value of the shares sold, the total rights and obligations, the titles of participation or rights of a similar nature.

Consequently, this provision for a real estate company may pose risks associated with the possible tax arrears when a sale of the assets of the real estate company is made and the company itself (and its management or its representatives) will not know about it.

Moreover, the company may not know about the divestment of its shares until some time has elapsed since the date of the transaction and after a significant deadline for the advance payment. This will involve paying interest.

However, persons managing such a company may not know the value of the transaction. In that case, according to Article 26aa(3) The CIT Act, the advance on tax is set at 19% the market value of the shares sold, the total rights and obligations, the titles of participation or rights of a similar nature.

This provision may give rise to many problems for the real estate company, as it may not be easy to establish the market value of overvalues. In addition, there is a short time to prepare the valuation of the value of the shares sold.

It seems likely that the institution will be more frequently used in such cases voluntary disclosure provided for by the provisions of the Tax Penal Code.

Tax representative for the real estate company

The amendment of the CIT Act concerning the introduction of the real estate company regulations imposed on real estate companies not established in Poland an obligation to establish a tax representative. Article 26c(2) The CIT Act provides that a tax representative may be a natural person, a legal person or an organisational unit not having legal personality if it meets the following cumulative conditions:

1. has its registered office or management office or domicile in the territory of the Republic of Poland;
2. for 24 months months preceding the date of conclusion of the contract had no arrears in taxes constituting the revenue of the State budget, exceeding 3% the amounts of tax liabilities due in individual taxes, the share of the tax arrears being determined in relation to the amount of payments due for the accounting period to which the arrears relate;
3. for 24 months preceding the date of conclusion of the contract, the natural person who is a taxable person and, in the case of taxable persons who are not natural persons, the person who is a partner of a civil or commercial partnership without legal personality, a member of the governing bodies, the person keeping the accounts, has not been definitively convicted on the basis of Act dated 10 September 1999 - Tax Penal Code (Journal of Laws of 2020, items 19, 568, 695, 1106, 2122) for a commitment fiscal criminal offence;
4. is entitled to provide professional tax advice in accordance with the provisions on tax advisory or service bookkeeping in accordance with the accounting rules.

The establishment of a tax representative shall take the form of a written agreement. The Act does not specify precisely when such an agreement should be concluded, but in view of the obligations imposed on the real estate company, it seems the most reasonable that such representative should be established immediately.

The need to establish a tax representative and the requirements imposed on potential representatives are due to the fact that, when such an entity is associated with a real estate company, it will be jointly and severally liable for tax obligations.

At the same time, the Polish tax administration will know the national entity, which will be obliged to pay the tax in case of a transaction on the shares of the real estate company. In this case, the risk of making a transaction without performing obligations towards the Polish tax is significantly reduced.

It is worth mentioning that the penalty for failure to establish a tax representative is a fine of up to 1,000,000 PLN.

However, the obligations described above do not apply to real estate companies which are subject to taxation in the European Union Member State or in any other State belonging to the European Economic Area with income tax on their total income, irrespective of where they are achieved (Article 26c(6) CIT Act).

Information obligations

From 1 January 2021 for real estate companies as well as taxpayers with direct or indirect shareholdings 5% voting rights (possibly equivalent to such a right in other entities), an information obligation was imposed to provide the Head of the National Tax Administration with information:

1. of entities holding, directly or indirectly, shares in that real estate company, all rights and obligations, participation titles or rights of a similar nature, together with the number of such rights held by each of them, in the case of information provided by real estate companies,
2. of the number of shares held, directly or indirectly, in that real estate company, of all rights and obligations, participation titles or rights of a similar nature, in the case of information provided by shareholders of real estate companies. This information must be submitted to the end third one month after the end of the tax year (relatively financial if the company is not a corporation tax taxpayer).

As explained by the Ministry of Finance, this obligation will only arise 2022 Information should be made as per day 31 December 2021, because only from 1 January 2021 provisions on real estate companies entered into force[4]. The provisions do not formulate penalties for not submitting relevant information. Failure to comply with this obligation may result in a criminal offence from Article 80(1) k.k.s., sanctioning non-submission against mandatory tax information within the time limit.

Summary

Introduction to corporate income tax of new tax rules for the disposal of shareholdings in entities called from 1 January 2021 Real estate companies will certainly affect the real estate market in Poland.

However, the number of these entities will not be great (due to the threshold 10,000,000 PLN the value of the property), however, those entities that will be qualified as a real estate company will face a revolution in terms of tax settlement.

When deciding to divest the assets of such a company, it will certainly be necessary to consider whether it would be more tax-friendly to divest the property it owns.

In the management role of such an entity, it will now be necessary to bear in mind the possibility of joint and several liability for tax arrears with the taxpayer who has divested the shares in this entity. This will require constant monitoring of ownership changes in such a company.

In addition, a number of information obligations related to the operation of the company can also be borne out by the managers of such entities. All of these changes aim at combating tax optimization and the possible effective sealing of revenue into the budget.

The real impact of this regulation on the market will not be seen for a while.

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