Minimum tax on building income
The minimum tax on income from buildings in Poland was reinstated as of 2022, and the reinstatement brought with it a return of interpretive doubts making it difficult for taxpayers to apply the tax. These doubts include whether hotel services are covered by the minimum tax, and whether depreciation deductions on buildings and income from common areas should be factored in when calculating the tax.
The minimum tax applies to buildings which are fixed assets leased, rented, or put to use under another agreement of a similar nature, and the tax is charged to the owner or joint owners of the building. The initial value of the building as determined on the first day of each month as shown in the ledger of fixed assets is deemed to be revenue for the purpose of this tax (or in the month in which the building is first entered in the ledger of fixed assets, the initial value determined on the date the building is entered in the ledger). The tax base is the total revenue from each building in a given month less PLN 10 million. The minimum tax rate is 0.035%. The minimum tax is not due if it does not exceed the income tax advance due for a given month.
Are hotels subject to the minimum tax?
According to the tax authorities, hotel services are similar to rental services, as the main benefit provided in hotel services is the use of a specific part of a hotel building for short-term lodging and to meet accommodation needs, while other benefits provided as part of hotel services are ancillary. Therefore, a contract for provision of hotel services is a mixed contract, but due to the dominant element of the use of a part of the hotel building, it is similar in nature to a rental agreement. For this reason, the tax authorities take the stance that revenue from hotel buildings should be subject to the minimum tax (see individual interpretation of the Director of the National Tax Information Centre of 13 October 2023, no. 0111-KDIB1-1.4010.447.2023.2.BS). A similar position is reflected in some decisions by Poland’s administrative courts (see Supreme Administrative Court judgment of 7 February 2023, case no. II FSK 1717/20).
However, the prevailing line of case law now being formed is grounded in the view that a contract for provision of hotel services is not similar enough to a rental agreement, and these two types of contract involve different areas of economic activity. The principal difference is that the essence of a rental agreement is for the owner to hand over possession of property for the use and enjoyment of the tenant, while the essence of a hotel service contract is to make certain parts of the hotel available for a short-term stay and to provide additional services without the right of the service recipient (guest) to derive benefits from the space. Therefore, under this approach, revenue from hotel buildings should not be subject to the minimum tax (see e.g. Supreme Administrative Court judgments of 4 July 2023, case no. II FSK 71/21, and 12 July 2023, case no. II FSK 372/23).
Do depreciation deductions on buildings reduce the initial value of buildings for minimum tax purposes?
In principle, the subject of the minimum tax is revenue, which is the initial value of the buildings, as determined on the first day of each month and resulting from the ledger of fixed assets.
Some taxpayers argue that the initial value of buildings for minimum tax purposes should be reduced each month by the value of depreciation deductions made in previous months. Such an approach would mean that the initial value of the buildings is variable, meaning that from month to month, the tax base subject to the minimum tax decreases as the taxpayer makes depreciation deductions. In the past, this position was approved by the administrative courts (e.g. judgment of the Province Administrative Court in Warsaw of 17 April 2019, case no. III SA/Wa 1905/18).
However, the tax authorities and administrative courts now take the position that the initial value of the buildings is, in principle, fixed and not subject to depreciation deductions (unlike in the case of an improvement or detachment of a component part). In principle, under the Corporate Income Tax Act, depreciation allowances are calculated on the initial value of a fixed asset without reducing the initial value by the depreciation deductions taken (gross initial value). The initial value is subject to reduction by depreciation deductions taken only in expressly indicated cases, for example in the case of depreciation by the declining balance method. Since the rules for determining the revenue from buildings for minimum tax purposes do not expressly provide for reducing the initial value of the buildings each month by depreciation deductions made in the previous months, it should be assumed that depreciation deductions are irrelevant to the value of the revenue from the buildings subject to the minimum tax (e.g. individual interpretation of 12 October 2022, no. 0114-KDIP2-1.4010.56.2022.1.MR; Supreme Administrative Court judgment of 28 April 2022, case no. II FSK 2173/19).
Are the common parts of the building taken into account for pro rata determination of building revenue subject to minimum tax?
Where a building has been put to partial use, revenue shall be determined pro rata for the occupied area, as a share of the total usable area of that building as of the first day of each month.
In this regard, the position of the tax authorities seems inconsistent. On one hand, in individual interpretations the view can be found that the minimum tax base should not include the common areas, where it is not possible to determine what part of them relates to the rented area of the building (for example, when part of the building is rented out by the landlord and part is used by the landlord as its own offices), which a contrario means that if it can be determined what part relates to the rented area of the building, then the common areas should be included in the minimum tax base—the area of the rented common parts in the numerator and the total area of the common parts in the denominator of the calculated proportion (individual interpretation of 26 April 2019, no. 0111-KDIB1-2.4010.37.2019.1.MS).
On the other hand, the tax authorities point out that if the common areas are not handed over for use under a rental agreement, and this is apparent from the rental agreement (under the facts or future events, no fee was specified for use of a certain part of the common area, e.g. on a percentage basis), then it should not be included in the minimum tax base at all—neither in the numerator nor in the denominator of the calculated proportion (e.g. individual interpretation of 11 September 2019, no. 0111-KDIB2-3.4010.185.2019.2.KK). This position can also be found in rulings by the administrative courts (judgment of the Province Administrative Court in Gliwice of 25 March 2021, case no. I SA/Gl 284/21).
Thus if the common areas are not the subject of rent, and the tenant is only entitled to use the common areas to the extent necessary to use the rented area of the building, and the rental agreement does not provide for a fee for the use of the common areas, then it seems that the common areas should not be included for the purpose of calculating the proportion—not in the occupied area and not in the total usable area of the building. Nevertheless, there is a risk that such a position will be challenged by the tax authorities, due to the inconsistent practice in the interpretations by the tax authorities and the courts.
Therefore, taxpayers should analyse their situation in advance to protect themselves from tax risks arising from doubts regarding the application of the minimum tax on revenue from buildings in Poland.
Mateusz Rowiński, Tax practice, Wardyński & Partners
