Legal and tax environment

Poland– a mature legal and tax environment

Originally Published in March 2018

Today, Poland’s real estate market is driven by several new trends, including technology, demographics and environmental protection. However, an equally important trend is the changing tax and legal environment.

The international tax landscape has never evolved so rapidly as it has over the past five years. Poland, as a member of the European Union and Organisation of Economic Co-operation and Development (OECD), follows these international trends and fights cross-border tax avoidance and evasion.

At the end of 2017, Poland was one of the first countries to ratify the Multilateral Instrument. This agreement offers its signatories solutions to close gaps in international tax rules by changing bilateral tax treaties. Also, it implements minimum standards to counter treaty abuse and to improve dispute-resolution mechanisms. Its signatories include countries from every continent and all levels of development. In the long term, the Multilateral Instrument will significantly impact holding and financing structures typically used for real estate investments, by eliminating multi-tier holding structures, offshore jurisdictions and any structures driven primarily by tax rather than business reasons.

Moreover, this year Poland implemented the EU Anti Tax Avoidance Directive which – among others things – limits the tax deductibility of excessive interest costs to the equivalent of 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) per year. These new limitations have already begun to affect Poland’s real estate investment market, which typically has been highly leveraged by bank and shareholder loans.

In view of such significant tax changes that have a direct impact on real estate investment profitability, it is crucially important to obtain the proper tax advice on the most efficient and sustainable holding and financing structures, as well as on the details of the cash flow generated by the investment, which may be affected by new tax regulations.

At the same time that Poland is sealing its tax system and coping with tax evasion – just as other EU countries do – it is working on improving its local tax legislation and administration to upgrade them to the Western standards foreign investors are used to. The Polish government has said that in the next two years it will focus on changing the mindset within the tax administration to one that is more friendly and cooperative toward taxpayers.

These actions are supported by draft tax legislation which will implement binding consultations between a taxpayer and a tax authority either before or after the transaction, as well as an opportunity to request a tax audit to clean up any outstanding tax issues. These changes are expected to come into force in 2019.

Poland is improving its local tax legislation and administration to upgrade them to Western standards that foreign investors are used to.

The direction in which the Polish tax system has been evolving should soon put Poland among the states with mature tax systems, offering not only a significant level of safety and stability, but also ensuring all market players a pay their fair share.

The changes do not focus only on the tax system, but encompass several important regulations in the real estate market.

In recent years, developers have taken more interest in acquiring banked land, not only due to the decreasing number of attractive locations, but also as a result of the Agricultural Structuring Act, which came in force in April 2016, which restricted trade in arable land, even when the plot in question was located in a town. Very often, developers secured their ability to purchase a plot of arable land by signing a conditional agreement for sale of the land before the new act came into force. In one of its recent judgments, the Supreme Court confirmed that the previous legislation is applicable to such transactions.

However, the main reason for land banking is developers’ desire to grow their market share and offer a broader range of services. We watch and take part in a growing number of mergers and acquisitions in the property market, and investors’ appetite for building their presence using this model is growing steadily.

As investors show growing interest in the residential market as well, a positive development was the introduction of institutional leasing in 2017. This regulation was awaited by many, because it increased protection enjoyed by institutional investors in the residential market.

Legislative work on the Real Estate Investment Trust (REIT) Act, a new instrument on the Polish market, has been underway for some time now. Introduction of REITs would allow investments in commercial properties to be made by people who so far have not been able to, due to the capital required. However, the current legislative proposals concerning REIT limit it to the residential market. The present narrow scope of REIT notwithstanding, adoption of the act will permit the establishment of REITs, and in a longer-term perspective may lead to the inclusion of other types of investments.

Even with the uncertainties connected with an ever-changing legal and tax environment, the Polish real estate market is underpinned by increasingly advanced solutions.
Comment by Joanna Wojnarowska, Real Estate Partner at Baker McKenzie and Katarzyna Kopczewska, Tax Partner at Baker McKenzie