25 April 2018 saw the publication of a draft bill conferring tax preferences on companies investing in rental properties (a Polish equivalent of real estate investment trusts) and their shareholders. The bill governs matters related to companies investing in real estate (a.k.a. real estate investment trusts or REITs) and their subsidiaries.
In order to be granted the status of a REIT it is necessary to incorporate a joint stock company trading for an indefinite period and have it registered with the Financial Supervision Authority. Obtaining and maintaining the status is contingent on the entity meeting specific statutory criteria, for instance:
- the company’s share capital amounting to a minimum of 50 million zloty,
- shares of subsidiaries comprising a minimum of 80% of the balance sheet value of its assets,
- the company deriving revenue from at least 5 residential properties,
- the balance sheet value of credit and loan liabilities of the company not exceeding 50% of the balance sheet value of its assets.
In order for a subsidiary to obtain the status provided for in the draft bill it will have to comply with several requirements, including:
- its main partner being a REIT holding a minimum of 95% of its shares,
- residential properties comprising a minimum of 80% of balance sheet value of assets,
- revenue from the lease or sale of residential properties amounting to a minimum of 90% of all revenues derived (properties must previously be leased for a period no shorter than a year),
- not holding shares in other companies.
According to the draft the term ‘residential properties’ should be construed as a residential building or a share in such building, a residential unit constituting a separate real property with the land or a share therein, or the right of perpetual usufruct of land or a share in said right related to the building or the unit. The abovementioned definition also comprises:
- facilities providing round the clock care to the disabled, chronically ill or the elderly,
- facilities that cater to the residential needs of students, teachers, course participants, academic teachers and university students, e.g. boarding schools, dormitories, student residences.
The draft also provides for certain income tax preferences. REITs will be able to defer the payment of income tax until the day of paying a dividend to its partners, no later, however, than 12 months after the lapse of a tax year.
Nevertheless, the abovementioned preference will only apply to revenue from:
- the lease of residential properties,
- the sale of residential properties,
- the disposal of shares in subsidiaries,
- dividends and other revenues from shares in the profits of subsidiaries.
Additionally, REITs will have the right to apply the 8.5% tax rate, but only in relation to revenues derived from the lease of residential properties. Depreciation charges for properties held will not be accounted for while calculating the tax base. Considering the above, the Ministry of Finance estimates that the actual effective tax rate will amount to 17.74%.
The preference granted to a subsidiary will mean that income on the lease of residential properties will be tax free, but only in the part that has been disbursed to pay a dividend to a REIT within the statutory terms set out in the draft bill.
Most importantly, revenues derived by shareholders from dividends and other revenues from shares in profits paid out by REITs be eligible to an income tax exemption (PIT and CIT). In addition, when it comes to CIT, such revenues do not increase the value of revenues derived from other sources.
Although at first glance the draft bill might seem beneficial, especially to REIT shareholders, the rigorous conditions that an entity must conform to in order to obtain and maintain the status of a real estate investment trust and its subsidiary might serve as an efficient deterrent for prospective investors.
Tax adviser no. 12670