The "Polish Deal" legislation (the 2022 milestone reform of the Polish tax system) introduced several unfavourable tax regulations for Poland's real estate sector, one of which is a ban on tax depreciation for residential buildings and premises. This restriction has limited the profitability of real estate investments, affecting the plans of numerous investors. However, less than two years after its implementation, the ban has proved less effective than intended. Courts have highlighted that this restriction does not extend to investments in third-party fixed assets that qualify as residential premises and buildings.
Third-Party Assets
Article 16c(2a) of the Corporate Income Tax (CIT) Act restricts depreciation for residential buildings, dwellings, cooperative ownership rights to a dwelling, and rights to a single-family house in a housing cooperative. However, tax authorities have broadly interpreted this provision to include a ban on the depreciation of investments in third-party fixed assets that qualify as residential buildings or dwellings.
A careful interpretation of Article 16c(2a) suggests that it does not encompass "investments in third-party fixed assets." Applying an expansive interpretation to include third-party assets is unwarranted, as this provision serves as an exception to the general allowance for tax depreciation of fixed assets, thereby limiting taxpayers' rights. As such, the provision should be applied narrowly to avoid unintended restriction.
Oversight or Intentional Omission?
The "Polish Deal" provides no explicit rationale for omitting "investments in third-party fixed assets" in Article 16c(2a), leaving it unclear if this was a legislative oversight or intentional choice. Market practice, however, supports the validity of this omission.
For example, recognizing a tax expense of 10% of an apartment's initial value in a year could effectively eliminate income tax on rental income. By contrast, recognizing a 10% tax expense on a fit-out investment in a leased apartment will have a lesser impact. With a lower initial investment value for depreciation, the tax effect on income is less significant, yet tax depreciation still reduces the investor's taxable income without affecting the owner's tax obligations.
Judicial Support for Taxpayers
Courts have stepped in to counter the tax authorities' strict interpretation. In April 2024, a Regional Administrative Court ruled that Article 16c(2a)'s depreciation ban does not extend to investments in third-party fixed assets. This interpretation was further supported by a September 2024 decision from another Regional Administrative Court. As of now, the Supreme Administrative Court has not yet issued a ruling on this specific provision.
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