Will the Minimum Tax Impact on Commercial Property Values and Lease Agreements in Poland?
Several months after a minimum tax on commercial real estate was introduced in Poland, its interpretation is still open to debate. Experts of tenant-only real estate advisory firm Cresa Poland and tax specialists of Crido Taxand have analyzed new tax regulations in their joint review “Commercial Real Estate Tax & Business Digest”.
The minimum tax is calculated on the basis of the value of a building classified as a separate fixed asset, say tax experts of Crido Taxand.
Although it is defined statutorily as an income tax, it is a public imposition related to ownership of a property rather than to income-earning.
“According to the currently most common interpretation, some types of properties are exempt from the minimum tax, including warehouse and residential buildings,” said Mateusz Stańczyk, Partner, Tax Advisory Services, Crido Taxand.
“This, however, is likely to change soon. If amendments announced by the Polish Ministry of Finance come into effect, these regulations will apply to owners of practically all buildings.”
Valuation experts of real estate advisory firm Cresa Poland believe that the minimum tax regulations will have no direct impact on commercial real estate valuations (according to both Polish and international standards) as income tax is not taken account of in the standard commercial real estate valuation model. This tax may, however, affect the cash flow of a special purpose vehicle owning a property being valued.
“No real estate revaluation will be required directly under the new regulations. The new tax may, however, in certain situations have an indirect impact on values of all commercial properties with a resultant need for a property revaluation,” said Urszula Sobczyk, Co-Head of the Valuation Department at Cresa Poland.
Impact of the minimum tax on lease agreements
According to provisions of many commercial space lease agreements, landlords are not permitted to charge the new tax to tenants. Under most leases in Poland, service charges (paid in addition to rent) include all kinds of public impositions related to property ownership and exclude income taxes.
Tenant advisors of Cresa Poland agree that disputes are likely to arise between landlords and tenants where a lease agreement does not specify explicitly who bears income tax. However, a tenant’s interest is likely to be protected if a lease includes a provision on service charges to the following effect: “Service charges shall comprise taxes and charges paid by the Landlord on the Shopping Centre but shall exclude the Landlord’s income tax”.
Where this matter is not regulated in a lease agreement, the minimum tax will be charged to tenants depending largely on the market situation and the bargaining power of a landlord and tenant.
“The minimum tax will have a limited impact on rental rates at most large-scale commercial buildings, particularly those fetching top rental rates, even if this tax burden is shifted onto tenants,” said Bolesław Kołodziejczyk, PhD, Head of Research & Advisory, Cresa Poland. “Commercial real estate developers and investors should start taking account of the minimum tax impact in their business plans.”
Minimum tax and the investment market
According to data of Cresa Poland, nearly all single commercial property acquisition/sale transactions by institutional investors, including investment funds, have exceeded PLN 10 million in the last five years. The minimum tax will be neutral to real estate owners paying a 19% CIT in Poland provided that a building is an asset that generates sufficient taxable income.
“In the case of investors who have so far paid low income tax, the minimum tax will lead to lower asset profitability, which in turn may result in higher yields,” said Jędrzej Suchowolec, Senior Advisor, Capital Markets, Cresa Poland.
Appropriate REIT regulations could improve market transparency.
What is the minimum tax?
The minimum tax, introduced on 1 January 2018, is an income tax on commercial real estate valued at more than PLN 10 million. It amounts to 0.42% p.a. of the initial real estate value (the initial value is not a market value, but a gross real estate value disclosed in tax books). It is the lowest amount of income tax to be paid by an owner of a property used for business operations. The minimum tax applies to properties being fixed assets and classified as retail and service buildings (shopping centres, department stores, standalone stores and boutiques, other retail and service facilities), and office buildings.
The minimum tax has had to be calculated monthly since January 2018 (the first payment was required to be made by 20 February 2018) and amounts to 0.035% of a property’s initial value less PLN 10 million. The minimum tax is credited towards the CIT. As a result, the taxpayer will pay the higher of the CIT or the minimum tax. No minimum tax will be charged on buildings used largely or solely for owner-occupation.
As announced by the Polish Ministry of Finance on 6 April 2018, the following amendments to the minimum tax regulations are being contemplated: exemption of vacant space from taxation; application of the statutory threshold of PLN 10 million irrespective of the number of buildings owned (a single tax-exempt amount per taxpayer, not per building); application of the tax to all buildings except only for residential buildings delivered for occupation under national and local government social housing programs; and introduction of a special clause to prevent minimum tax avoidance.
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Cresa is the world’s largest commercial real estate firm offering its agency services for tenants only. It serves clients through more than 60 global offices. Cresa Poland offers unbiased, independent commercial real estate advice. Its integrated services include conflict-free tenant representation, capital markets, market research and advisory, valuation and design & project management. Cresa Polska is headquartered in Warsaw, with its regional offices in Łódź, Wrocław and Tricity.
Crido provides tax, legal and transactional assistance as well as business consultancy to entrepreneurs. The firm helps companies advance their innovation business by, among other things, obtaining financing from public funds and other available sources. Its dedication and work have received much appreciation. Crido tops the rankings of tax advisors and firms supporting innovation and R+D. At Crido work advisors, not auditors. It is a Polish consulting firm. As a member of Taxand, a global tax organisation, it can also help clients grow their business abroad.