Investment property and tax expenses
One of the challenges facing real estate companies is the limitation of claiming tax costs for depreciation on real estate, effective from 2022. Sometimes, the only way out will be tax litigation.
Real estate companies in Poland are allowed to take a tax cost for the value of depreciation write-offs on fixed assets included in Group 1 of the Classification of Fixed Assets (buildings and premises, cooperative rights to commercial premises, and cooperative ownership of residential premises) made in a given tax year, but not higher than the value of balance-sheet depreciation (write-offs) made on these fixed assets and charged to the financial results of real estate companies in the same tax year.
Recognition of real estate for balance-sheet purposes
For balance-sheet purposes, real estate companies may treat their properties as investment properties rather than fixed assets.
Depending on their adopted accounting policy, real estate companies may value investment properties at purchase cost or production cost (according to fixed asset valuation principles) or at fair market value. In the first case, real estate companies depreciate investment properties, and depreciation write-offs are charged to other operating expenses. In the second case, real estate companies do not take depreciation write-offs at all, but reflect changes in fair value as of the balance-sheet date, and recognise the effects of the revaluation in other operating revenue or other operating expenses, depending on the change in fair value of investment properties.
Unfavourable line of interpretation by tax authorities
The Polish tax authorities take the view that in the case of recognition of real estate as investment property and valuation at fair value, the balance-sheet depreciation deductions in the tax year are zero, because real estate companies do not depreciate real estate measured at fair value on the balance sheet at all. As a result, real estate companies are not entitled to recognise tax depreciation on such real estate in their tax expenses (individual interpretation of the Director of the National Tax Information Centre of 2 June 2023, no. 0114-KDIP2-1.4010.213.2023.1.MW).
Courts to the taxpayers’ rescue
The uniform case law of the administrative courts indicates that in the case of real estate not recognised for balance-sheet purposes as fixed assets, but as investment property, to which fair value is applied as the method of valuation, and as a result no balance-sheet depreciation write-offs are made on that property, the restriction on recognising tax depreciation deductions as tax costs is not applicable.
The reasoning of the administrative courts is that exclusion of expenses from tax costs should be defined precisely. The purpose of the limit in question was to align tax depreciation deductions with balance-sheet depreciation deductions due to more individualised depreciation for balance-sheet purposes (taking greater account of the expected economic life of the asset without applying statutory rigid depreciation rates and methods), and not to exclude the possibility of taking depreciation deductions as such as tax expenses. If that had been the lawmakers’ objective, they would have explicitly excluded the possibility of depreciation, analogous to the exclusion of the possibility of depreciating residential property. Therefore, the administrative courts resolve in favour of taxpayers the interpretive ambiguity of the limit in question, in accordance with the principle of in dubio pro tributario, holding that real estate companies can fully recognise tax depreciation allowances, even though for balance-sheet purposes they do not depreciate these properties, which are treated as investment properties valued at fair value (e.g. judgment of the Province Administrative Court in Warsaw of 28 March 2023, case no. III SA/Wa 2480/22).
Conclusion
For the purpose of managing tax risks, some real estate companies have either reclassified real estate for balance-sheet purposes from investment property to fixed assets, or switched from fair-value valuation of investment property to valuation under rules appropriate for fixed assets.
However, real estate companies which continue to apply the fair-value valuation of investment properties and have received a negative individual interpretation regarding the tax treatment of depreciation expenses have a chance to secure favourable tax treatment of depreciation expenses by pursuing tax litigation through the administrative courts.
Mateusz Rowiński, Tax practice, Wardyński & Partners
