Tax Alert: Landmark court judgments on limiting deductibility of real property tax depreciations in real estate companies

The administrative courts supported the Applicants' position.

The administrative courts supported the Applicants' position.

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The Act of 29 October 2021 amending the Act on personal income tax, corporate income tax, and certain other acts (commonly referred to as the Polish Deal program) brought important modifications to Article 15(6) of the CIT Act. This, however, gave rise to doubts as to whether real estate companies which for accounting purposes present real estate as investments at fair market value and do not make depreciation write-downs thereof, can - for tax purposes - recognise the value of tax depreciation write-downs as tax-deductible costs. On 31 January 2023 and 01 February 2023, a team of KPMG tax advisors obtained favourable judgments (case files I SA/PO 752/22, III SA/WA 1788/22, III SA/ WA 2356/22 and III SA/Wa 2355/22) declaring that the provisions on tax depreciation limits being in force as of 2022 for real estate companies are applicable only where real estate is treated, from accounting perspective, as fixed assets subject to depreciation. Importantly, this limitation cannot be understood in a broad sense, as the tax authorities have tried to demonstrate.

Case merits

The cases at hand related to real estate companies owning fixed assets categorized under group 1 of the Polish Classification of Fixed Assets, buildings in particular.

For accounting purposes, the Applicants recognized the said real estate as “investment property” pursuant to Article 3(1)(17) of the Accounting Act, valued it at fair value, and did not classify it as fixed assets. Consequently, no depreciation write-downs within the meaning of the Accounting Act were made.

In turn, for tax purposes, the real estate has been treated by the Applicants as fixed assets.

In line with the current wording of Article 15(6) of the CIT Act, write-downs of fixed assets and intangible assets (depreciation write-downs) made pursuant to Articles 16a to 16m constitute tax-deductible expenses, with the stipulation that in the case of real estate companies write-downs of fixed assets classified to group 1 of the Classification cannot be higher in a given tax year than accounting depreciation write-downs or write-offs that are recognized in the financial result of the entity for that tax year.

As a result, the Applicants had doubts as to how tax-deductible costs of real estate depreciation write-downs made starting from 01 January 2022 should be recognized for tax purposes. In the Applicants’ opinion, the new regulations cannot exclude their right to tax-deprecate real estate.

Tax authority's position

In the individual rulings issued, the Head of the National Revenue Information Service (NRIS) held that the literal wording of the new provision was unequivocal and gave no grounds for the Applicants to continue making tax depreciation write-downs under the existing rules. In the opinion of the NRIS Director, to determine the limit of depreciation write-downs that can be charged into tax-deductible costs, one must calculate tax depreciation write-downs and compare them against the write-downs calculated according to accounting regulations, keeping in mind that the value of depreciation write-downs that may be treated as tax-deductible costs cannot be higher than the value calculated in line with the accounting law. Consequently, since the companies do not make depreciation write-downs (write-offs) of the owned real estate categorized under group 1 of the Classification (especially warehouse buildings) in line with accounting regulations, they will not be authorized to recognize tax-deductible costs of depreciation write-downs made in line with the CIT Act.

Importantly, the NRIS Director noted that the act amending Article 15(6) of the CIT Act did not provide for any interim regulations. This means that the provision applies to events occurring after 01 January 2022. Since depreciation write-downs are made "on an ongoing basis", the tax and legal effects thereof should be assessed in line with the regulations currently in force.

Position of RAC

In the applications and at the hearings before the Regional Administrative Courts, KMPG tax advisors representing the Applicants argued that the cap on tax-deductible depreciation write-downs corresponding to the value of write-downs made for accounting purposes applies to real estate companies that treat assets included in group 1 of Fixed Assets Classification as depreciable fixed assets for accounting purposes and use the depreciation write-downs to reduce their financial result.

Following this line of interpretation, it may be stated that the above-specified provision applies where the below-specified conditions are jointly met:

  1. the entity operates as a real estate company under Article 4a(35) of the CIT Act,
  2. the real estate company has fixed assets categorized under Group 1 of the Classification subject to depreciation write-downs for tax purposes,
  3. at the same time, the said assets constitute fixed assets under the Accounting Act, subject to depreciation write-downs charging the entity's financial result.

In each case, the administrative courts supported the Applicants' position.

The grounds in favour of the Applicants cited by the Courts are that:

  • Article 15(6) of the CIT Act only applies when real estate is recognized as a fixed asset for accounting purposes,
  • pursuant to the explanatory memorandum to the bill, the purpose of the amendment was to equalize tax and accounting depreciation write-downs, which has not occurred in the analysed cases,
  • the content of Article 15(6) of the CIT Act is very vague, e.g., compared to the provision that prohibits depreciation of apartments for rent,
  • if a provision is to restrict a taxpayer's rights, it must be precise, and any resulting doubts should be resolved in favour of the taxpayer in accordance with the Tax Code.

The judgments are not yet legally binding but give hope for establishing a taxpayer-favourable line of jurisprudence.