To Split or Not To Split? A Split Payment Mechanism on the Commercial Real Estate Market in Poland

From July onwards, entrepreneurs in Poland will decide whether to apply the split payment mechanism (SPM). As announced by the Polish Ministry of Finance, entities making split payments will be considered to be entrepreneurs of strong commercial integrity and business professionalism. Experts of tenant-only real estate advisory firm Cresa Poland and tax specialists of Crido Taxand say whether it advisable to make use of the new regulations in their joint review “Commercial Real Estate Tax & Business Digest”.

Cash Frozen

"During a commercial property lease, there is usually a surplus of the output VAT over the input VAT due to low operating costs incurred throughout the lease term. If most tenants decide to use the SPM, landlords will see their financial liquidity effectively decrease," says Michał Borowski, Partner, Tax Advisory Services, Crido Taxand.

The ability of real estate buyers to recover VAT will be crucial when VAT is financed with a bank loan. If a buyer decides to apply the SPM, a VAT refund will be made to a special VAT account. The buyer will have limited access to such an account and will have to submit a request for a VAT payout within 60 days to apply the VAT refund to bank loan repayment.

“Financing banks will not be allowed to establish a collateral (a registered or financial pledge) on the VAT account, and will therefore be less willing to grant loans to finance the VAT in property purchase transactions (banks are already unwilling to grant loans for VAT). As a result, this may lead to increased costs of financing loans for VAT,” says Mateusz Stańczyk, Partner, Tax Advisory Services, Crido Taxand.

Effect on Asset Value

No commercial real estate revaluation will be required if the SPM is applied. In addition, the SPM will have no direct impact on real estate valuation according to both Polish and international standards. Depending on market conditions, this change may, however, be capitalized upon by long-term investors in expected yields and, consequently, indirectly impact on the value of properties valued on the basis of rental income.

“In the case of some companies owning commercial real estate, in particular those receiving rental income, the new approach to VAT settlements will impact on their finances with a resultant effect on their value,” says Urszula Sobczyk, Co-Head of Valuation at Cresa Poland.

The Tenant to Decide

In the new legal environment established following the introduction of the SPM, it is the tenant who will decide how to pay VAT, thereby gaining an upper hand over the landlord. If the tenant chooses to pay rent using split payments, the landlord will see its liquidity deteriorate short-term and slightly lower profitability, assuming that the landlord reinvests money kept in its bank account on an ongoing basis.

“Tenants could opt out from split payments, depending on conditions in a particular market segment and their bargaining power, but in return would expect additional benefits from landlords,” said Bolesław Kołodziejczyk, PhD, Head of Research & Advisory, Cresa Poland.

Investment is a Good Solution

“Entrepreneurs with a weak bargaining position will be hit the hardest by financial liquidity problems. It will concern companies that will be receiving many payments via the SPM and will be effectively forced by suppliers to make traditional transfers,” says Paweł Nowakowski, Head of Capital Markets at Cresa Poland.

Companies owning commercial properties could recover money frozen in VAT accounts by making investments, for example through building upgrading or refurbishment. Payments for investment invoices via split payments will result in a considerable short-term reduction in cash frozen in VAT accounts.

In most cases, the neutrality of financial models applied to analyse projects in terms of turnover tax will not affect profitability ratios of such projects.

“The new regulations may, however, have an impact on investment funds and companies relying on cash-pooling arrangements (a contract on shared financial liquidity management or a contract to consolidate bank accounts within a group of companies) and are likely to limit their access to short-term cash,” said Bolesław Kołodziejczyk, PhD, Head of Research & Advisory, Cresa Poland.

The report available at:



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