The Essence of a Real Estate Company
A real estate company is a specific category of entity distinguished under the Polish tax regulations. It may be either a capital company or a partnership. In practice, it refers to an entity that prepares a balance sheet in accordance with the Accounting Act and meets certain conditions concerning the structure of its assets, in particular, the value of real estate or rights to real estate held directly or indirectly.
Regulations concerning real estate companies were introduced primarily to safeguard the fiscal interests of the state in situations where non-residents derive income from the sale of shares or stock in such companies. In practice, this means additional obligations and risks that should be identified before the transaction takes place.
Definition of a Real Estate Company
Pursuant to Article 4a(35) of the CIT Act, a real estate company should be understood as an entity other than an individual, obliged to prepare a balance sheet under accounting regulations, in which:
a. on the first day of the tax year, and where the real estate company is not an income taxpayer — on the first day of the financial year, at least 50% of the market value of its assets, directly or indirectly, consisted of the market value of real estate located in the territory of the Republic of Poland or rights to such real estate, and the market value of such real estate exceeded PLN 10,000,000 or the equivalent of that amount determined according to the average exchange rate of foreign currencies announced by the National Bank of Poland on the last business day preceding the first day of the tax year — in the case of entities commencing business activity;
b. on the last day of the year preceding the tax year, and where the real estate company is not an income taxpayer — on the last day of the year preceding the financial year, at least 50% of the balance-sheet value of its assets, directly or indirectly, consisted of the balance-sheet value of real estate located in the territory of the Republic of Poland or rights to such real estate, and the balance-sheet value of such real estate exceeded PLN 10,000,000 or the equivalent of that amount determined according to the average exchange rate of foreign currencies announced by the National Bank of Poland on the last business day preceding the last day of the tax year preceding, respectively, the tax year or the financial year, and in the year preceding, respectively, the tax year or the financial year, tax revenues or, where the real estate company is not an income taxpayer, revenues recognized in net financial result — from lease, sublease, tenancy, subtenancy, leasing and other agreements of a similar nature, or from the transfer of ownership of real estate or rights to real estate referred to in Article 3(3)(4) of the CIT Act, as well as from shares in other real estate companies, constituted at least 60% of total, respectively, tax revenues or revenues recognized in net financial result — in the case of entities other than those referred to in letter a.
Practical Aspects of the Functioning of Real Estate Companies
The status of a real estate company is not merely a formal tax classification. In practice, it entails specific obligations on the part of the company itself and the persons managing it. Failure to properly identify these obligations may give rise to tax risks, including tax arrears and, in the most serious cases, even personal liability of individuals.
1. Obligation to Appoint a Tax Representative
One important obligation may be the appointment of a tax representative. This applies to real estate companies that have neither their registered office nor management board in Poland, while at the same time holding real estate or rights to real estate in Poland.
The role of a tax representative is not purely technical. The representative performs certain tax remitter obligations in the name and on behalf of the real estate company. Importantly, the representative may also be jointly and severally liable with the company for tax related to the disposal of shares in the real estate company.
Not every entity may act as a tax representative. The regulations provide for specific conditions intended to ensure that the representative is reliable and able to perform this function. In particular, the representative should:
- have its registered office, management board or place of residence in Poland,
- have no tax arrears (above a specified threshold),
- not have been finally convicted of fiscal offences (within a specified period),
- be authorized to professionally provide tax advisory services or bookkeeping services.
It should be noted, however, that the obligation to appoint a tax representative does not apply to all real estate companies. An exemption may apply, among others, to entities that are subject, in a Member State of the European Union or the European Economic Area, to taxation on their worldwide income, regardless of where it is earned.
2. Reporting Information to the Head of the National Revenue Administration [hereinafter: Head of the NRA].
The information obligations apply to two categories of entities, namely:
1. real estate companies and
2. taxpayers holding:
- directly or indirectly, shares/stock in a real estate company carrying at least 5% of voting rights in the companyor
- all rights and obligations carrying at least 5% of the right to participate in the profit of a company that is not a legal person, or
- at least 5%of the total number of participation units or rights of a similar nature.
These entities are required to submit to the Head of the NRA, by the end of the third month following the end of the real estate company’s tax year (financial year in the case of non-taxpayers), information:
- CIT-N1 (for CIT taxpayers) or PIT-N1 (for PIT taxpayers) on entities holding rights in a real estate company, submitted by the real estate company;
- CIT-N2 (for CIT taxpayers) or PIT-N2 (for PIT taxpayers) on rights in a real estate company and on intermediary entities, submitted by the taxpayers referred to above.
3. Tax Payments (tax settlements)
Pursuant to the Article 26aa of the CIT Act, real estate company may be obliged to pay advances on income tax where its shares (stock), all rights and obligations, participation units or rights of a similar nature are disposed of (e.g. by way of a sale agreement). The advance on tax on income from this source is paid at the rate of 19% by the 20th day of the month following the month in which the income arose. The obligation to pay the advance arises if:
- the disposing party is an entity that does not have its registered office or management board in the territory of Poland, or an individual who does not have a place of residence in the territory of Poland, and
- the subject of the disposal transaction is shares (stock) carrying at least 5% of voting rights in the company, or all rights and obligations carrying at least 5% of the right to participate in the profit of a company that is not a legal person, or at least 5% of the total number of participation units or rights of a similar nature in a real estate company.
This mechanism is intended to safeguard the Polish fiscal interest in transactions concerning shares in real estate companies.
It should be remembered, however, that “disposal” is a broader concept than the regular sale transaction. In practice, the catalogue of transactions which potentially qualify as disposal within the meaning of the abovementioned regulations may be very extensive. Therefore, when planning such actions, it is necessary each time to assess their tax consequences.
Selected Practical Issues Related to the Functioning of Real Estate Companies
The regulations concerning real estate companies are complex and, in practice, may give rise to numerous interpretative doubts. These doubts often translate into specific tax risks. Below we indicate selected areas that most often require closer analysis before business decisions are made.
- Methodology for Calculating the Share of Real Estate Value
In practice, one of the significant challenges is determining how to calculate the share of real estate value in the company’s assets. The regulations do not provide clear guidance and to some extent are vague, thus many interpretative doubts continue to arise in this area. This may lead to discrepancies in the approach of taxpayers and tax authorities, and consequently also to disputes.
As a rule, the analysis should take into account both real estate held directly and indirectly. In practice, this means that several analytical and calculation stages need to be performed, i.e.:
- collecting and aggregating data from the separate financial statements of the parent company and subsidiaries in which it holds shares,
- appropriately adjusting the value of real estate, in particular where the interest in a given subsidiary is partial,
- comparing the value of real estate held directly and indirectly with the total value of the assets of the company and its subsidiaries.
It is also worth remembering that the approach to this methodology has changed over time. This can be seen both in individual tax rulings issued by the Director of the National Tax Information and in the case law of administrative courts.
Therefore, the choice of the appropriate methodology should be based not only on the wording of the regulations, but also on current practice of the tax authorities. This is one of the areas where early review may help identify potential risks before they affect reporting or transaction planning.
2. Agreement with a Tax Representative — Why Is It Worth Ensuring Its Proper Content?
If a real estate company is obliged to appoint a tax representative, it is necessary to conclude a written agreement with that representative. However, this should not be treated solely as a formality. The content of such an agreement is of significant practical importance, especially from the perspective of the scope of liability and the manner in which tax obligations are performed.
A well-prepared agreement should clearly define the key principles of cooperation. In practice, particular attention should be paid above all to:
- the scope of the tax representative’s obligations,
- the consequences of non-performance or improper performance of those obligations,
- the rules for remunerating the tax representative, especially where this function is performed by an entity related personally or by capital.
3. Timely Fulfilment of Tax Obligations
For real estate companies, the timely fulfilment of statutory obligations is of key importance. In this respect, attention should be paid to:
- timely submission of information to the Head of the NRA,
- timely payment of income tax in share transactions in which the real estate company acts as an income tax remitter — both for CIT and PIT purposes.
Delays in these areas may lead to tax arrears, penalty interest and, in more serious cases, personal liability. It is therefore worth checking in advance whether the company has the relevant data, appropriate procedures and responsible persons needed to timely fulfill the obligations .
Summary
A real estate company remains a relatively new category under Polish tax regulations. In practice, it involves a number of formal and tax obligations that are not always obvious at first glance. In addition, the manner in which these regulations are formulated and interpreted may give rise to doubts and differences in approach between taxpayers and tax authorities.
Therefore, the proper functioning and management of a real estate company requires not only knowledge of the regulations, but also a practical assessment of tax risks. It is worth identifying them sufficiently early — especially before a transaction, a change in the ownership structure or the end of the tax year.
This article was prepared by MDDP for the ETL GLOBAL Real Estate Group. Visit the group’s dedicated page to learn more and get in touch for further assistance.
