A team of KPMG professionals, led by Katarzyna Nosal, Tax Partner, and Oskar Wala, Senior Tax Manager, represented a client before the Supreme Administrative Court ("SAC") in a case of the right to recognize tax depreciation of real estate in a real estate company as a tax-deductible cost, where, for accounting purposes, the company did not make depreciation write-offs on such property, instead valuing it at market value.
These are the first and highly anticipated rulings by the Supreme Administrative Court concerning depreciation matters within the real estate sector. They were rendered following nearly three years of litigation, during which the KPMG team formulated an interpretative strategy for Article 15(6) of the Corporate Income Tax Act and provided comprehensive legal representation for the client.
Dispute matter
The essence of the dispute was the scope of the limit on recognizing tax depreciation as a tax-deductible cost, as stipulated in Article 15(6) of the Corporate Income Tax Act. Pursuant to Article 15(6) of the CIT Act, tax-deductible costs are write-offs on account of the consumption of fixed assets and intangible assets (write-offs) made exclusively in accordance with the provisions of Articles 16a - 16m thereof, however, in the case of real estate companies, write-downs on fixed assets included in group 1 of the Classification may not be higher in the taxable year than the depreciation or amortization write-offs on account of the consumption of fixed assets, made in accordance with the accounting regulations, charging the entity's financial result in this taxable year.
The approach developed by Katarzyna Nosal, Tax Partner, and her team is founded on a literal interpretation of Article 15(6) of the CIT Act. It advances the idea that the limit outlined in Article 15(6) thereof, regarding the treatment of tax depreciation as a tax-deductible cost, should not be applied when a property is classified as on-balance sheet investment real estate and no write-offs, as defined by accounting regulations, are made against the entity’s financial result due to the property being valued at market value. As a result, the real estate company should have the right to recognize tax write-offs as tax-deductible costs. The tax authorities challenged this approach, asserting that even in such circumstances, entities are not entitled to recognize tax write-offs as tax-deductible costs because the balance sheet depreciation amounts to zero.
Currently, the prevailing interpretation in the rulings of the provincial administrative courts is favourable to taxpayers, with the exception of two judgments of 2023. As a result, the real estate market has been eagerly awaiting the Supreme Administrative Court's decision.
SAC’s decision
The Supreme Administrative Court's ruling confirmed that in the examined circumstances, the real estate company is entitled to tax depreciation; however, the court advocated for yet another interpretation of the said regulation. In its oral statement of reasons to the judgment, the SAC noted that the literal interpretation of Article 15(6) of the Corporate Income Tax Act suggests that the limit applies to all real estate companies, including to those that do not classify their assets as fixed assets under accounting regulations and do not make depreciation write-offs against their financial results. In such a situation, according to the Court’s oral statement of reasons, the limit on depreciation is determined by the level of notional write-offs that could be recognized if the asset was classified as a fixed asset under accounting regulations. According to the SAC, the scope of Article 15(6) of the CIT Act is determined based on a literal interpretation of the provisions, as well as systematic and purposive interpretations.
It should be stressed that the SAC’s decision in these specific cases raises our concerns, as despite the Court taking a stance different from the one promoted by the tax authorities, the original, challenged rulings, which completely denied taxpayers the right to tax depreciation, remain in legal circulation. The precise reasoning behind the SAC’s ruling will be detailed in the written explanatory memoranda to the judgments, and it will be of crucial importance to learn how the position outlined in the judgments should be practically implemented.
In our view, despite uncertainties as to the procedure, the rulings affirm that real estate companies also have the right to tax depreciation, even when their properties are treated as investments valued at fair market value. However, determining the value of allowable tax depreciation write-offs must be based on the applicable accounting regulations. This may, in practice, lead to further questions that could be resolved through potential overpayment proceedings. Nevertheless, while awaiting the written explanatory memoranda to the Supreme Administrative Court's rulings, these decisions fundamentally pave the way for adjustments in depreciation and the recovery of overpayment for the years 2022–2024.
Our KPMG Team remains at your disposal for any further information you might require.
How can we assist you?
In light of these developments, we are poised to offer our expert support in determining your eligibility for CIT adjustments through the recognition of tax-deductible depreciation costs, effective from 2022. Our comprehensive services include:
- Conducting an in-depth analysis of your specific circumstances and delivering recommendations for your next steps, including the right to claim CIT overpayment refund.
- Assessing the allowable tax depreciation write-offs available from 2022 onwards,
- Providing representation in proceedings to recover any CIT overpayment.
